Here’s a chart about M1 for Euro-zone (or narrow money if you prefer) the least loved of all monetary aggregates. The last few years it has been dubbed more or less irrelevant by some researchers. Well, I happen to disagree. And the following picture, always in my opinion, is deeply troubling.
This is the most sensitive monetary aggregate to tightening by central banks, since it is comprised in a large part by non-interest bearing currency. So, when a central bank starts tightening M1 growth rates start plummeting and vice versa.
As we can see from the chart, after ECB started easing back in 2008 M1 started increasing rapidly, though at about 4/2010 with no tightening in sight, growth rates of M1 started falling again.
Currency in circulation is the most liquid component of M1 and is mainly held by households to finance consumption expenditures. Increased currency holdings could be induced by low interest rates too.
Some could think that, wait ECB has started tightening now. The thing is that this fall in M1 growth rates has started almost a year before ECB started tightening. Outstanding stocks of M1 have been flat for many months now, something witnessed only in the midst of tightening cycles before.
With interest rates at historically low levels, the fact that M1 has been flat for that long speaks volumes about the momentum of households’ final consumption expenditure…