Money supply reporting is broken up between transaction money and savings money. Transaction money is available for transactions. Savings is not. Savings is inert. Sequestered. Imprisoned.
The purple line is savings. The blue line is transaction money. Actually it is the turnover of transaction money. Both are rates of change from one year ago.
The turnover of transaction money means that in a given period of time a dollar will be spent x number of times. The more times the better. Five dollars spent once in a week is the same as one dollar spent five times in a week. Turnover represents the stock of money times the turnover.
When money flows out of savings it flows into transaction money. When money flows into savings it flows out of transaction money. It is easy to see in the chart the inverse nature of these money flows.
In the early 90s there was a massive outflow of savings into transaction money where it flowed into dot com companies. Flowing there was investment, which is much better than flowing into consumption. Thus there was a great economic boom. Until everyone realized the economic boom was false. Then they started flowing what money they had left in their transaction money accounts back into savings accounts. This resulted in a great crash, both in the economy and the stock market.
Then the next cycle came along and there was a great outflow from savings into transaction money that then went into buying houses. Flowing there was investment, which is much better than flowing into consumption. Thus there was a great economic boom. Until everyone realized the economic boom was false. Then they started flowing what money they had left in their transaction accounts back into their savings accounts. This resulted in a great crash they called the great recession.
In our most recent cycle, savings has been slowly flowing into transaction money as seen on the right side of the chart. The problem, one I cannot prove, is that many people have limited savings with which to flow out of into transaction money and what transaction money there is goes to consumption. Additionally, it was thought that by increasing the wealth of some people via something called QE, which is magic only nobody wanted to call it that for fear of being considered superstitious, but we all secretly know, these fewer people would flow their money from savings to transactions. The problem is the wealth is mostly an increase in the value of their house and the value of their stock holdings as opposed to actually having more money. That is called the wealth effect. It means these fewer people should flow more money from their savings to their transaction accounts. These fewer people didn’t do it. They deny knowing anything at all about some damn magic.
So here we are, suffering from their failure to believe.