Bernanke flooding economy with money v.M3 returns

[motivez]

Last year, we lamented the passing of M3 reporting. This broadest of money supply measures had shown a discomforting increase in liquidity, far greater than what M2 was revealing.

At the time of the M3 announcement, we suspected the Fed was attempting to cover their tracks, disguising an ongoing increase in money supply and an unstated "easing" in Fed bias. Since that time, we have learned: the Treasury Department was also adding liquidity -- a duty they have assumed, in part, in addition to the same performed by the Fed. Indeed, based on the credit growth data Doug Noland published last month (October Credit Review), it appears that the Fed has – despite increasing interest rates – actually eased over the last two years.

In light of all this excess cash sloshing around, we wondered what M3 might look like if it were still being reported.

Wonder no more: We have located 2 separate sources for the reporting of M3. The first is Nowandfutures.com. As this article discusses, recreating M3 from publicly available data was relatively easy to do (to 5 nines accuracy).

As the chart below shows, M3 is alive and well and growing significantly. (A longer term M3 chart can be found here).

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M3 January 2003 to present
click for larger graph

Source: Now and Future

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Why is this significant? Well, M3 is growing quite rapidly, with the annual rate of change now over 10%. Prior to the announcement of M3's demise, its growth was in the range of 3 - 7%.

Anytime a government agency stops reporting about their goings on, it should raise a few eyebrows. Now we see what happened once the reporting of M3 was killed -- that measure of money supply spiked much higher -- a rate of change that's even greater than 10%+.

Funny how we alter our behavior when we think no one is watching what we are doing, isn't it?

What makes this particularly egregious is that the broadest measure of Money Supply that is still "officially" reported -- M2 -- and its been flat for 2006 (as my pal LK likes to remind me all the time).
Have a look at this chart:
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M2 versus M3 Money Supply Growth

Source: Shadow Government Statistics
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This is a classic case of "ignore what they are saying, because what they are doing is speaking so loud:" While the Federal Reserve has been reporting rather flat money supply growth in M2 (blue line), in reality they have been dramatically increasing the cash (red and blue line) available for speculation.

Hence, that sloshing sound you heard. They have been providing the fuel for the rally, the huge M&A activity, the explosion in derivatives -- even the eye popping Art auctions are part of the shift from cash to hard assets. It is just supply and demand -- print lots of lots of anything, and that thing becomes increasingly devalued. It works the same for cash as it did for Beanie Babies.

Its not just the increase in Money Supply that should be concerning to investors -- its the misdirection about it. If Money Supply matters so little, as Fed Chair Bernanke has been out explaining to anyone who will listen, why pray tell has the Fed been working those printing presses overtime?
Given M3 increases, its no wonder the European Central Bankers laughed at the suggestion.
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William McChesney Martin, Jr., Fed Chair from April 2, 1951 to January 31, 1970, famously described the role of Central Banks thusly: "The job of the Federal Reserve is to take away the punch bowl just when the party starts getting interesting."

It seems the present Fed is not only NOT taking the punch bowl away -- they are spiking it with alcohol. I am not looking forward to the hangover that's to follow . . .

The Big Picture: The Return of M3

Can some of the econ crew explain what this means exactly in terms of the economy, especially as we move forward with the housing market like it is, etc..

I understand more cash = devalued currency, but why would he be doing that? What benefit from his economic perspective does this have for our economy? What downsides exist?

[hsmith]

jesus fuck 7%

[motivez]

The article says in excess of 10%.. but can you elaborate on what it means exactly?

[6SpeedTA95]

First off let me give definitions of the M1, M2 and M3...

M1 is liquid currency. Cash in our bank account that we can write checks against, if you go get travelers checks those are M1. Basically money available RIGHT NOW if you need it.

M2 is M1 plus personal savings accounts as well as deposits on time (there's a limit here but I can't remember what it is, 25,000?), also money market accounts are typically viewed as M2 funds.

M3 is M2 + M1 but it also includes deposits over the M2 time deposits limit (again I can't remember what this is). It includes foreign bank accounts owned by US citizens (not sure if there's country restrictions here) as well as monies that might not be in US currency in those accounts. It also includes liabilities owed to businesses and people, I think insurance claims for example are included in this M3.

My definitions may not be spot on, I'll try to find some in a bit...

I think what the fed is trying to do is probably quite simple. He's trying to curb inflation while not infringing on the money supply of the nation. By raising interest rates you tend to curb spending that requires a loan and you can also encourage saving. This can also increase the value of the dollar.

Increasing the money supply without adjustments to interest can have the opposite affect. People beging spend money, even money they dont have, inflation can and usually does go up and goods become cheaper to export to other countries which can have a good affect on the economy.

I think the value of the dollar is at a pretty good median with regards to demand for US products while at the same time providing us, US citizens with great purchasing power on a world scale. I believe the fed is simply trying to balance inflation, purchasing power for americans and trade by using two seemingly opposite economic levers.

[6SpeedTA95]

This isn't bad

How much is the per capita money supply in the U.S.?

[Ardentfrost]

He's a keynesian economist (I mentioned this when he was first appointed, and even said to expect him to do exactly this).

Keynesian economics - Wikipedia, the free encyclopedia

What gets me is that everytime I see him or read about him (Bernanke) talking, he mentions Milton Friedman, but Friedman was a monetarist. He did a good job of forcing Keynsians to adjust their theories back in the mid-1900's, but it's still some fucked up shit that he claims his methods are backed by Friedman and whatnot. Friedman wouldn't back up methods that are designed to redistribute money.

I'm so sad that I share the same hometown as Bernanke What a disgrace.

[6SpeedTA95]

He's not in any way a full keynesian, he's taken some bits from him though.

[6SpeedTA95]

Whats the problem with increasing the money supply? Why does this upset you ardent?

[Ardentfrost]

Besides devaluing the dollar and GDP WEALTH-WISE (damn Keynesians equating money with wealth), it falsely stimulates spending domestically. This causes an immediate boost in the economy (which you'll see and be claiming success over in the next couple years), but ends with a backlash in the form of a depression when our falsely increased economy gets basically pimp-slapped by the global market. If we HAVE to have a government controlled monetary system, then their changes have to be slight and slow, which is what Greenspan was quite good at. This makes the ups and downs a lot less dramatic which will end up hurting a lot less.

[6SpeedTA95]

Originally Posted by Ardentfrost

Besides devaluing the dollar and GDP WEALTH-WISE (damn Keynesians equating money with wealth), it falsely stimulates spending domestically. This causes an immediate boost in the economy (which you'll see and be claiming success over in the next couple years), but ends with a backlash in the form of a depression when our falsely increased economy gets basically pimp-slapped by the global market. If we HAVE to have a government controlled monetary system, then their changes have to be slight and slow, which is what Greenspan was quite good at. This makes the ups and downs a lot less dramatic which will end up hurting a lot less.

Yea I agree with all of that. Temporary increases in the money supply while rates rise will not bring on a depression and will probably hold the dollar value fairly steady as I explained above. If this 12% increase continues for a couple years we will definately have a problem but its far to early to say the guy is bombing the economy on us.

[Ardentfrost]

And Bernanke is quite Keynesian. I don't even know what a "full Keynesian" would be classified as since they have adjusted their methods a number of times over the past 100 years.

[Ardentfrost]

Originally Posted by 6SpeedTA95

Yea I agree with all of that. Temporary increases in the money supply while rates rise will not bring on a depression and will probably hold the dollar value fairly steady as I explained above. If this 12% increase continues for a couple years we will definately have a problem but its far to early to say the guy is bombing the economy on us.

I guess a .com miracle could happen and delay it

All I'm saying is that with these monetary policies, an immediate bolster occurs, but it does not last. The piper must be paid. We'll all take advantage of it when it's up, for sure, but we'll also all be back here complaining (and probably blaming whatever president is in power at the time) when it comes back down.

[6SpeedTA95]

Originally Posted by Ardentfrost

I guess a .com miracle could happen and delay it

All I'm saying is that with these monetary policies, an immediate bolster occurs, but it does not last. The piper must be paid. We'll all take advantage of it when it's up, for sure, but we'll also all be back here complaining (and probably blaming whatever president is in power at the time) when it comes back down.

I personally think its a good idea so long as its not carried out for more than 5 consecutive quarters. Keep in mind that this has been going on for about 6 months perhaps even less, so I see no reason to get worked up at this point. If we're sitting in the same spot come June or July we'll have our tit in a ringer for sure.

[Ardentfrost]

Originally Posted by 6SpeedTA95

I personally think its a good idea so long as its not carried out for more than 5 consecutive quarters. Keep in mind that this has been going on for about 6 months perhaps even less, so I see no reason to get worked up at this point. If we're sitting in the same spot come June or July we'll have our tit in a ringer for sure.

I don't know how you can give it a straight up number like that (when you say 5 consecutive quarters).

And it's not like I'm just now being grim about this I've been saying the same stuff since he's been appointed and I'm sure will continue to say the same stuff.

[Ardentfrost]

Originally Posted by Thorgrim

Liberal economics triumph again

Please, both liberals and conservatives are on this particular economic band wagon because it gives them more power. The fiat monetary system has been in place for a while, this is just the first time such a dramatic policy has existed.

[6SpeedTA95]

Originally Posted by Ardentfrost

I don't know how you can give it a straight up number like that (when you say 5 consecutive quarters).

And it's not like I'm just now being grim about this I've been saying the same stuff since he's been appointed and I'm sure will continue to say the same stuff.

I was basing it on average quarterly economic growth and an average growth in money supply of 9%/quarter over 5quarters and a 3.6% economic growth/quarter over the same 5 quarters. Thats how I came up with that

edit: just FYI that represents a real monetary expansion of about 8% over the course of 15months which for a short period of time is not catastrophic.

[Ardentfrost]

Originally Posted by 6SpeedTA95

I was basing it on average quarterly economic growth and an average growth in money supply of 9%/quarter over 5quarters and a 3.6% economic growth/quarter over the same 5 quarters. Thats how I came up with that

lol, ah It's a prediction, gotcha.

[6SpeedTA95]

Originally Posted by Ardentfrost

lol, ah It's a prediction, gotcha.

see edit

why the hell are we winking so much?

[Ardentfrost]

Originally Posted by 6SpeedTA95

see edit

why the hell are we winking so much?

b/c you think I'm hawt