ECB: M3 Slows A Bit, Gold Sales Continue - Worldwide Interest in Burial Of US M3

Tuesday, November 29, 2005

Money supply growth has for the first time this year slowed in the Euroarea. According to a press release from the ECB, M3 growth slowed to 8.0% (8.4%) percent while M1 continued its upward trend at an accelerated pace of 11.2% (11.1%).
The marginally slower trend is still running at the highest levels seen since the inception of the Euro in 2002. Only 12 months ago M3 accelerated at an annual rate of comparatively moderate 5.8%. Money supply growth has its roots in accelerated credit expansion. In Europe both consumers and governments took out more loans again. Credit to governments expanded at an annual rate of 1.9% (1.4%) in October while consumer loans grew at an annual rate of 9.3% (8.9%).
ECB president Jean-Claude Trichet and his chief economist Otmar Issing have been warning for several months that money supply growth is the biggest threat to price stability next to rising energy prices. The ECB will hold its next meeting on Thursday and market participants expect a 25 basis point increase in the leading overnight rate to 2.25%. A 50 basis point hike cannot be ruled out though. Trichet has signaled that the rate hike might be a one-off event and the ECB would not engage itself in series of hikes for the time being.
Central Banks Worldwide Show Interest in Fed's Silent M3 Burial
Readers of this blog were the first ones on the globe to get the news earlier this month that the Federal Reserve will discontinue the publication of (runaway) M3 data. This decision created an uproar not only in blogosphere but raised eyebrows in high places too. Bloomberg reported a week ago that even the National Association of Business Economics (NABE) was surprised by the silent burial of M3 data, one of the longest running data sets collected by the Fed.
"It doesn't seem they reached out very far to get user feedback on the discontinuation of the series," said less than enthusiastic Maurine Haver, president of Haver Analytics and chairwoman of the NABE to Bloomberg reporter Caroline Baum who left her own question marks unanswered in the story.
Looking at my web statistics the interest in US M3 data spans the whole globe.
Central banks, governments and treasuries from Australia, South Africa, Germany, Switzerland, Canada, Thailand, Luxembourg, New Zealand, Israel, France and several more are all following every tidbit of information about the efforts of Alan Greenspan's Fed to protect the world from the broadest monetary aggregate. So do the EU Commission, the IMF, the World Bank, the International Finance Corporation (IFC), the International Labor Organisation (ILO) and the OECD
, not to speak of my countless new readers in many well-known banks and Wall Street firms which all have helped to boost my audience significantly.
This contradicts the arguments of St. Louis Fed economist Dick Anderson who was qouted in the Bloomberg story as following. "It's tough to argue that tax money should be spent collecting data that no one looks at," he said.
I guess it's also tough to argue that tax money is spent on a war - begun under false pretenses - that the majority of the US population does not want anymore.
Shortening the Iraq war by one day only would more than cover the cost of collecting M3 data for the next 100 years. Unfortunately we can be confident that the man in the White House does not have a feeling for getting priorities right. Is it unfair to say that Bush probably knows more about (the gas-guzzling Hummer) H3 than M3?
It is almost ironic that the Fed employs economists to write studies like "Improving Public Disclosure In Banking" while it walks off into the opposite direction itself.
The lack of domestic interest in the issue is obviously seen differently abroad, in economies that have experienced hyper-inflation in one or more periods of their history.
And let's not forget; it is mainly foreign central banks supporting the Bush administration's spending spree with their continued buying of US Treasuries. I think it is safe to assume that creditors will only show up at the Treasury's auctions when they have a complete overview of the (rapidly declining) state of American financial affairs.

Hyper Inflation in Germany 1923

PHOTO: Germany had started inflation on purpose in order to inflate its way out of war reparation payments that were seen as overdone by the German industry. At the end of this process - that naturally ran out of control - it was cheaper to burn the billions then to buy firewood for it. This led to mass unemployment and in the end made the murderous ascent of Hitler possible. An empire went under within 3 decades.
Having read a book on "German Monetary and Credit Policy 1914 - 1963" by Rudolf Stucken, I for my part have learned that exploding monetary aggregates were a most reliable indicator of what was to come. Germany's money supply ballooned ahead of the times of hyper-inflation when a Reichsmark inflated to a rate of 4,200,000,000:1 to the US dollar.
Sure, as there were no credit cards and no electronic money around in the 1920's and therefore no M3, this applies to M1 and M2. But then again, today's ECB would not honor M3 data with the only regular monthly press release of the watchdogs of European price stability.
Of note is also that gold started its bull run exactly on the day the Fed announced the burial of M3. See also the previous post for more context about the gold price and inflation.
Reporting on the issue will continue.
Euro Members Sold Gold For 149 Million Euros Last Week
Three European central banks kept selling in the bull run of gold last week. According to the latest weekly consolidated financial statement of the Eurosystem they sold gold for an amount of 149 million Euros last week, bringing the position gold and gold receivables down to 148.659 billion Euros.
Russian president Vladimir Putin meanwhile is believed to be quite annoyed about the fact that the Russian central bank has leased out 377 of the 500-ton gold treasure of the country. Gold mining being an important sector of the Russian industry he sees this action, which brings only paltry returns of a few million dollars p.a., counterproductive to his goal of ramping up the gold sector. See also the post "Russia To Double Gold Reserves, Boost Mining."
This could result in a major squeeze of gold short-sellers.
ECB Study On Banks' Exposure To Hedge Funds
If you still want more to worry about I refer you the this ECB study: "Large EU Banks' Exposures To Hedge Funds" (pdf). This is certainly a more worthwhile read than the latest monthly bulletin (pdf) of the ECB where the summary is mainly a rehash of the last speeches of Jean-Claude Trichet. The most interesting part about the money supply worries has been discussed already in the post "ECB Very Worried As M3 Growth Is Risk To Price Stability."

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