ODL and M2 aggregates from St. Louis Fed

ODL vs M2 Chart Notes

• Other Deposit Liabilities (ODL see description below), is a monthly average.
• M2 is a monthly measure through February.

A Better Definition of Money

The main difference between ODL and M2 is that ODL does not include currency or retail money market funds.

Currency is accepted at an increasingly fewer number of business establishments and simply cannot be used for very large sized transactions. Retail money market funds never became an important medium of exchange. Both are becoming a far less used medium of exchange.

ODL has the additional advantage that it is the main source of funding for bank loans and investments, making ODL both a monetary and credit aggregate. Friedman would not be surprised that the need to change the best definition of what constitutes money would change over the years. 

The above three paragraphs from Lacy Hunt at Hoisington Management.

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Chart from the Fed's H.8 release, highlights mine

Don't confuse ODL with the Fed's H.6 Money Stock Report line Other Liquid Deposits. 

The Biggest Collapse in M2 Money Supply Since the Great Depression

(Click on image to enlarge)

ODL and M2 aggregates from St. Louis Fed

My ODL numbers do not match the H.8 report because the St. Louis Fed (Fred) uses a Monthly Average calculation whereas the H.8 report is weekly.

The Fed appears to average complete weeks that fall within the month but Fred (the St. Louis Fed download) doesn't. 

ODL is headed for a 6th consecutive decline, every month starting October.

Constraints on Bank Lending

The contraction in money supply coupled with a rise in interest rates has reduced the desire of banks to lend and the desire of businesses and individual to borrow. 

The key constraint on bank lending is not reserves or deposits but rather capital impairment. 

If banks are not capital impaired, they will lend if they believe they have good credit risks who want to borrow. 

Three Bank Failures

Since my last report on ODL, three banks,Silvergate Bank, Silicon Valley Bank, and Signature Bank, collapsed and were taken over by the FDIC because of duration mismatch losses and runs on the banks. 

In addition, losses at regional banks are mounting due to implosions in commercial real estate. 

The bank failures, commercial real estate woes, and recession risk all inhibit lending.

MishTalk Video, What's the Real Risk Now, Is it Inflation or Deflation?

Given the obvious inflationary forces, that may seem like a silly question, but please consider this video discussion: What's the Real Risk Now, Is it Inflation or Deflation?

The short answer is Credit Freezes Are Highly Deflationary. See the above link for details and discussion. 

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