Q&A With Lacy Hunt on Money Supply


I asked Lacy Hunt at Hoisington Management for comments on M1, M2, and M3. In a series of emails he expressed his thoughts on money supply.

Q&A With Lacy Hunt

M1, FTHO, Currency 2021-01

Mish: Lacy, what what do you make of the Surge in M1 Money Supply?


I focus entirely on M2 and have not looked at M1 for years.

Federal Reserve Credit and the monetary base increased by 64% and 37%, respectively, on a yearly average basis in 2020. Due to weak loan demand and frail capital position of the depository institutions, M2 increased 19.4%, on a yearly average basis.

Reserve requirements have been eliminated. Hence, the only regulatory restraint on the depository institutions is the liquidity coverage ratio, but this only applies to the large banks or those with heavy foreign exposure. Hence, for 2020, there was no effective regulatory constraint.

The depository institutions were simply not in position to utilize their deposits at the Fed to acquire additional assets even though the Fed has amended the Liquidity Coverage Ratio (LCR) to include Treasury holdings. The LCR will not be a factor in 2021 unless dramatic changes occur that I do not expect.

Thus, as long as the Fed purchases $120 of Treasury and agency paper, there will continue to be a first round increase in M2, but no second round increase. The increase in M2 will remain inactive, resulting in the excess liquidity trapped in the financial markets.

Emphasis was Mine.

Mish: Did you have any use for M3 that the Fed stopped publishing? 

Lacy: The value of M2 versus M3 has been an empirical question for me.  Both are explained by complex functions but the one for M2 is far more stable. This empirical finding has made M2 the preferred monetary aggregate. I have revisited this issue several times and the empirical results have continued to favor M2. 

Mish: Thanks Lacy 

End Discussion

That is a synopsis of several emails. I changed no words but did add emphasis. 

My question on M3 was in response to these Tweets. 

Reconstruction of M3

Despite the Fed halting publication of M3 it is easy enough to partially reconstruct as I did above.

Wikipedia Money Supply Discussion notes M3 consists of  M2 + all other CDs (large time deposits, institutional money market mutual fund balances), deposits of eurodollars and repurchase agreements.

The Large Time deposits lag by a month so in my chart I used the November number for December as well.

Except for eurodollars, the rest is easy enough to add together. 

Investopedia notes "Eurodollars are U.S. dollar-denominated deposits at foreign banks or at the overseas branches of American banks. Because they are held outside the United States, eurodollars are not subject to regulation by the Federal Reserve Board, including reserve requirements."

Thus, eurodollars have nothing to do with either euros or dollars. The term was invented before the euro came into existence. 

It's even more confusing because eurodollar futures are not a measure of the supply of eurodollars but rather the implied interest rate on eurodollars. 

I do not know how to estimate the actual supply of eurodollars, so I don't. 

Investopedia needs to update its discussion. The Fed eliminated reserve requirements. 

Investopedia M3 Errors

The Investopedia Discussion of M3 contains a number of errors. 

  1. Because of its shortcomings, M3 has since been eclipsed by money zero maturity (MZM) as a preferred measure of the money supply. 
  2. Since 2006, M3 is no longer tracked by the U.S. central bank, the Federal Reserve. The Fed did not use M3 in its monetary policy decisions even before 2006. However, the Federal Reserve Bank of St. Louis and some other sources still publish M3 figures for economic data purposes. As of December 10, 2020, M3 for the United States was $18.81 trillion.

I dispute statement 1 as a nonsense opinion. M2 is the widely used measure of money supply. 

Point two is clearly wrong. The St. Louis Fed posts M3, but if you look at the chart you will see it is M2 or nearly the same as M2. 

Historical M3 was way higher than $18.81 trillion in December as my chart shows. The St. Louis Fed chart of M3 is garbage.

St Louis Fed Blog M1 Errors

In researching this post I came across this question on the FRED Blog: What’s behind the recent surge in the M1 money supply? dated January 11, 2021.

Curiously, the writers for the St. Louis Fed do not yet know the Fed ended reserves.

"The Federal Reserve requires banks to hold reserves against checkable deposits," says the author, incorrectly.

What's Behind the Surge in M1 Money Supply?

Please reconsider my post What's Behind the Surge in M1 Money Supply?

Official Announcement

With little fanfare or media coverage, the Fed made this Announcement on Reserves.

"As announced on March 15, 2020, the Board reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions." 

The St. Louis Fed not only missed a key point on reserves, the rest of the article is also highly questionable.

My conclusion:

"The Fed's balance sheet tactics are the key driver of M1, not people moving money into or out of checking accounts, not Biden, not the rich jumping ship, not real estate taxes nor any of the other claims tossed around."

After I wrote that position on January 7, 2021, I discovered this New York Fed Liberty Street article discussion.

Please consider What’s Driving Up Money Growth? by the Federal Reserve Bank of New York. 

M1 growth is highly positively correlated with the growth in reserves generated by Fed asset purchases. The reason for this is simple: Reserves held with the central bank are assets for banks. As the Fed expands reserves, banks must either sell other assets (keeping the overall level of assets unchanged), issue more liabilities or equity (expanding the level of assets), or some combination of the two. 

The Liberty Street article is from 2012. It still holds true. 

Be Careful of What You Read

This stuff is complicated enough already. Errors in widely read places, especially the St. Louis Fed Blog don't help. Be careful about what you read. 

Lacy's comments on M2 and excess liquidity remaining trapped ring true. He finished "You are a good friend. I prepared this explanation for you."

Thanks Lacy!

What About the Euro?

Inquiring minds may also be interested in A Reader Asks: Why is the Euro So Strong?

Those are my thoughts, not Lacy's.


Comments (31)
No. 1-14

“Federal Reserve Credit and the monetary base increased by 64% and 37%, respectively, on a yearly average basis in 2020. Due to weak loan demand and frail capital position of the depository institutions, M2 increased 19.4%, on a yearly average basis.”

Wow...just wow.


Well, at least we have some explanation. For those of us who lack a deep understanding of how central banks operate, it’s good to know that it’s related to the Fed asset purchases.

It’s easy to get spooked by big moves on charts......but we all know the Fed expanded the heck out of it’s balance sheet.....and so now we know that moves the needle on M1, and not some behavior on the part of the bank-run fearing public.



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And even that doesn't preclude incoming.


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United States has only sequenced 753


Hi Mish. Good stuff. I do have a question. I am a bit baffled as there was a lot of money moved into checking and savings accounts this year. So much I wonder where it came from? I doubt people were keeping in their mattress. I was reading the latest FDIC insured banks quarterly report. Net deposits increased at the fastest pace ever this year. Deposits into FDIC banks increased by 2 Trillion this year alone. It was a record. Needless to say, the total deposits increased from about 14.2 trillion to 17 Trillion in one year in FDIC monitored banks. The advisory board is not concerned about banks capital positions in paying out dividends because of the huge influx of deposits.

I don't know who deposited this money though. They did not say. They did say they are uncertain how long people/businesses will keep these extra deposits in the bank but they stated the growth in deposits was because of economy security. They also did notice a big drawdown on lines of credit. So maybe at this time businesses were drawing down lines of credit and depositing cash instead of making payments from cash.

Chart 8 shows deposit growth surged in response to the economic uncertainty in March. Deposits rose by 1.2 trillion dollars in first quarter from the previous quarter. On an annual basis, deposits grew by 13.3 percent, the largest year-over-year growth rate ever reported by the Quarterly Banking Profile.


OT: Liz Cheney will vote to impeach.


M3 Money And Components graph - Don't see a trace for overnight repos. There's only 4 traces and no grey trace.


What's happening with eurodollars matters. Jeff Snider (quoted above) postulates that eurodollars are contracting faster than US domestic M2 dollars is expanding. Ultimately, eurodollars play a huge role in dollar markets (i.e. basically ALL the dollars held outside the USA).



P N O - I do not believe any of the things you mentioned mattered much if at all.

Because of Sweeps, money would show up in M2, not M1.

There is a component that is not swept likely because it cannot be.
Read the NY Fed discussion for an explanation.

There is something about the expansion of the Fed's balance sheet that makes that expansion ineligible for sweeps.

I believe but am not positive this may be related to interest on excess reserves even though all reserves are excess reserves because there are no reserve requirements.

I did not include this in my post because I am unsure of it.


Much of the 2020 M2 increase was due to companies exercising their revolver credit lines for fear that lenders would cut them off. That money is just sitting in savings as a safety valve in case those companies need it. It isn’t growing the economy by circulating.



I believe something in that mess relates to M1
I could be wrong
So I did not post it


Is there data available for euroeuros? Or is that proprietary?

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