Unpleasant Trend - Fed Counters By Stopping Release of M3 Money Supply Data

Saturday, November 12, 2005

I am beginning to lose my respect for the Federal Reserve. At a time when money supply (link to Wikipedia) has been exploding and weekly figures provide a nasty experience week after week, month after month, the Fed put out a short, flat notice last Thursday, saying that it will discontinue publication of M3 figures after March 2006. Such a step may fit in the policy of the current Bush administration but certainly not a supposedly independent central bank.
M3 is the most important money aggregate for economists, analysts and Fed watchers to get an idea at what speed the (electronic) printing press is running. The European Central Bank (ECB) honors this set of data with a special press release every month. So much about transparency.
Money Supply M3
GRAPH: Recent M3 figures are certainly unpleasant and worrisome. M3 has been growing at an annual rate of 7.5 percent or double the most recent rate of GDP growth (subject to a revision.) Since Bush took office money supply M3 has risen by 40%. The Fed prints it and the government spends it as can be seen by growing government participation in growth numbers.
I am still shocked and in a state of disbelief that gives place to being disgusted about the new style. What will be next? Discontinuation of industrial production figures below zero? The consumer price index (CPI) being treated as a national secret once it rises above 5% despite all hedonic adjustments? Torture threats against people insisting to get the whole picture?
US Investing Will Become A Fly By Night Adventure
No! First comes the discontinuation of more important data releases. No more repo data, no more Eurodollar data, no more large time deposits. Investing will become a fly by night adventure.
From the Fed website (saved locally for later reference):
On March 23, 2006, the Board of Governors of the Federal Reserve System will cease publication of the M3 monetary aggregate. The Board will also cease publishing the following components: large-denomination time deposits, repurchase agreements (RPs), and Eurodollars. The Board will continue to publish institutional money market mutual funds as a memorandum item in this release.
Measures of large-denomination time deposits will continue to be published by the Board in the Flow of Funds Accounts (Z.1 release) on a quarterly basis and in the H.8 release on a weekly basis (for commercial banks).
Take note that only publication, but not calculation of these figures will be discontinued. I strongly hope that Ben Bernanke will revise this decision, being an economist who knows that sound research can only be done on the basis of data.
Looking back into history economic data was only kept a secret in failing economies, e.g. the Soviet Union.
As this data is published by the board of governors of the Fed every one of their words will have to be scrutinized most carefully in the future and tested for credibility. Words are easy, but I prefer hard data. No prudent investor will navigate his funds through a foggy world but lie at anchor below a clear sky, meaning: elsewhere.
For further information read "If it weren't that cheap to print them greenbacks" and "M3 and public debt hit record highs." Once you read this you may be in the mood to read "US AAA rating - how much longer?" The lack of transparency at the Fed got discussed in this post.
UPDATE I: Mark Thoma had a post on November 3, discussing "The Declining Role of Money In Monetary Policy." He says that the Fed cannot control two variables (the monetary aggregate and interest rates) with their single tool, the Fed funds rate. As Dr. Thoma focuses on the shift of importance from M1 to M2 and does not cover M3 at all I am left with another conundrum. Take note of his graph though. It shows that the additional contents of M3 have been growing over the years, reaffirming me in my view that M3 is the one to watch as it has become easier for investors to shift funds and money market funds have seen above-average growth in the last decade.
Also of note is that the ECB tries to control both variables with the single tool of overnight rates. I am left with the conclusion that monetary policy is so complicated that not even central banks with their large research teams are sure what to do to guard the value of fiat money. How easy was that in the times of a gold standard...
In Europe M3 growth is the most intensely watched number and I feel safe with M3 as it has been a good indicator for true inflation trends. Or to say it oversimplified: deduct GDP growth from M3 growth and you should arrive at true inflation. Juggle this equation and M3 minus inflation should give you GDP growth which in the current situation would be 7.6% minus 4.7% and voila we get GDP growth of 2.9% at the end of Q3 2005. As it is 2 AM here in Austria I have not backtested these number games. Go ahead if you feel challenged on a Sunday evening and correct me in comments.
UPDATE II: If you are in the mood for further speculation why M3 data will not be published anymore jump to this lively discussion at PeakOil and judge yourself what could make sense. I will look into my Palgrave as soon as possible, hoping for the ultimate auhtoritative explanation. I have also contacted the Fed and look forward to their answer. But I feel honoured that the discussion at PeakOil interconnects M3 secrecy with my so far most read post "Iranian Oil Bourse Could Kill The US Dollar" which will be continued with a follow-up soon. Check back at this blog for it.
UPDATE: In order to follow the whole M3 saga which will probably not end with the explanation from the Fed read the subsequent posts
M3 - There Is Always A Funny Side To A Sad Story
M3 - Deafening Silence In The MSM - And The Federal Reserve
Fed Wants To "De-Emphasize The Role of M3"
Fed Says US M2 Resembles Eurozone M3
ECB: M3 Slows A Bit, Gold Sales Continue - Worldwide Interest in Burial Of US M3
M3: This Is What Bernanke (And Others) Have To Say
Discontinuance Of M3 Will Save Fed 0.00000699% Of Income
US M3 Growth Exploding In Line With Oil Prices


Anonymous said...


This graph shows the higher rate of increase of M3 compared to M2 and notice that in 1971 before we withdrew from Bretton Woods, M2 and M3 were the same.

16 October, 2010 04:59
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