Friday, July 31, 2009

Does the way we transfer money indicate a turn in the economy?

Since 1987, the volume of transactions on FEDWIRE have consistently exceeded the volume of transactions on CHIPS. This is not necessarily unexpected. FEDWIRE handles, according to the Comptroller's Handbook one-third of its volume as federal funds transactions and one-fourth of its activities as securities transactions. Another significant source of transfers are those between Federal Reserve Banks, which would naturally include certain mortgage funds. Naturally, the volume of these transactions probably should be higher. On the other hand, CHIPS primarily deals with foreign-exchange transactions (nearly 1/2 of the dollar value. Another 1/3 of the dollar value is Eurodollar placements.

See Chart showing Number of Transfers

However, over time, the value of these transactions has changed. Consider that in 1987, the amount transferred on Fedwire was slightly higher than that transferred via Chips.

From 1987 until 1998, the amount of money transferred via Chips exceeded that on Fedwire by a maximum of 28.51% difference in 1994. Beginning in 1995, however, the amount of money transferred on Fedwire began inching closer to that on Chips, and in 1998 exceeded the amount of money transferred on Chips. After 1998, the amount of money transferred on Fedwire has exponentially grown reaching a high in 2008 of a 32.61% differential; the only two years in which the growth pattern was not consistent was 2006 and 2007, and even then, the differentials were the third highest differential (2006) and the seventh highest (2007) of the years between 1988-2008.

As we look at the numbers, I can't help but notice the date similarities to the current economic crisis. For example, consider the following graph provided by Planet Money on the economic crisis charting debt from 1999-2008:

From 2000 to 2003, government borrowing steadily rose, followed by a short decline through 2008, when it suddenly spiked. During that same period, Business lending acted inversely: declining from 2000 to 2003; rising from 2003 to 2007; and suddenly nose-diving in 2008. In fact, in their post titled Charting Debt, the planet money guys point out that early in 2008, Americans simply stopped borrowing.
In another chart, in their post titled Chart: Inflation, not the flu, we see other similarities:

Between 2004 and 2007, we see a drastic drop in inflation. However, beginning again in 2008 and through 2009, we see a drastic rise.
This is what I am wondering. Can we make conclusions about the future of our economy by the way we transfer money now. That is, are the types of transactions reflected on Fedwire and Chips the types of transactions that give us a barometer of the economy. Moreover, is there a healthy balance of reciprocal relationship between the two -- does a substantial amount of transference on one wire service lead to high chances of inflation and higher government spending, with lower consumer activity. A few unknowns in this quest:

1. Are there funds that in certain years appear on Chips that in the last few years have appeared on Fedwire because of the type of transaction. One category of these transactions might be if foreign investment shifted from currency exchange to securities. If so, this might suggest that the way we invest foreign money does matter for the way the economy functions.

2. Are there institutional issues that have resulted in the changes and can we segregate the institutional issues from the non-institutional issues in the rise and drop of value transactions between the two wire services. For example, we know that the institutional controls for lending were significantly more lax between 2000 and 2007. This might explain a high proportion of funds on Fedwire during that period of time.

I am curious for other thoughts -- institutional or economic that might show a correlation between the current economy and the future economy.

Marc (MLR)

No comments: