Whenever I graph M1 at FRED, it zig zags. I have just been taking that in stride, not really thinking about why it looks like that.
For my recent “inflationary big one” article, I charted demand deposits, which exhibit the zig zag pattern. So I finally decided to think through why the graphs look like that.
Since the zigging and zagging happen on a monthly scale, I figured it had to do with workers’ paychecks. For example, at the start of a period businesses pay workers with checks, and a lot of the workers literally “cash their paychecks.” So demand deposits go down, and currency held by the public goes up. Then during the course of the month, as the workers spend their cash, currency holdings go down while demand deposits go up.
Yet if this were the explanation, I would have expected the charts of currency and demand deposits to zig and zag in opposite directions, which doesn’t seem to be the case:
So is my theory right, and FRED’s aggregate of “Currency Component of M1” counts currency held in the hands of the public and in bank vaults? (In that case, it wouldn’t move around when being shuffled from the workers into bank holdings.) Or is my theory wrong?