Can M3 be Saved?

I always find it curious when a good source of public data gets cancelled by an administrative source.

Mass layoffs were the first victim, killed by the White House in 2003.

Next came the proposed ending of funding for a Census Bureau survey on the economic well-being of U.S. residents — a move decried by both the left and the right.

But the most egregious and unwarranted cancellation of a data source has been the Federal Reserve plan to end M3 reporting. It struck me that Ben Bernanke’s defense of this was the first blot on his tenure as new Fed Chair.

Its a clean historical data series. Its accurate, not seasonally adjusted, not hedonically altered. There is really no good reason to cancel this.

For a nation that is capable of scrapping together 100s of millions of dollars for an Alaskan bridge to nowhere, it is ridiculous that an important measure of money supply will no longer be reported, ostensibly as a cost cutting measure.

Puh-leeze. That’s tough to believe, especially when we look at M3.   

M2_v_m3
Its no coincidence that M3 has been soaring in advance of its impending death: Jim Picerno observes that "The broadest measure of U.S. money supply — the so-called M3 — has less
than a month to live, but its swan song continues to be one of growth,
and growth that’s notably higher relative to that of M2, the official
replacement for the doomed series."

As the Federal Reserve data makes clear, M3 is growing at a much faster pace than M2 — which  has a time-lag and contains no "electronic" money.

Given the current account deficit, and any structural risks to the US dollar, as a fund manager, I want access to more and not less information. 

>
Its not too late to save M3: Congressman Ron Paul is
sponsoring a bill that will require the Fed to continue to monitor and
report M3. This bill will need your support.

You can contact the congressman at:

Ron Paul
Washington, DC
203 Cannon House Office Building
Washington, DC 20515
Phone Number: (202) 225-2831

A historically clean, accurate data source is a terrible thing to waste . . .

022806

>

Related links:

US FED discontinues reporting M3 data    http://en.wikipedia.org/wiki/Petroeuro#US_FED_discontinues_reporting_M3_data

The End of M3 Reporting?
http://bigpicture.typepad.com/comments/2005/11/the_end_of_m3_r.html

M3 DEATHWATCH
http://www.capitalspectator.com/archives/2006/02/m3_deathwatch.html

Where Do All Those Numbers Come From?    http://www.econbrowser.com/archives/2006/03/where_do_all_th.html

Money Supply and the End of M3
http://bigpicture.typepad.com/comments/2005/11/money_supply_an.html

Historical M2 vs M3
http://bigpicture.typepad.com/comments/2005/11/historical_m2_v.html

Chart of the Week: M1, M2, M3 Money Supply Components
http://bigpicture.typepad.com/comments/2005/11/chart_of_the_we_2.html

DOES M3 MATTER?
http://www.capitalspectator.com/archives/2005/11/does_m3_matter.html

M3–THE FINALS DAYS   
http://www.capitalspectator.com/archives/2006/01/m3–the_finals.html

M3 Reporting: Whats The Big Deal?
http://www.safehaven.com/article-4170.htm

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What's been said:

Discussions found on the web:
  1. kharris commented on Mar 6

    You have misrepresented Bernanke’s argument for killing M3. It is not merely a money saving effort. Bernanke said that M3 has lost its correspondence to other macro variables. Fed economists aren’t able to make good use of it, so they intend to stop building the series. Can you show that M3 does, in fact, have some current value as a predictive tool?

    There is the obvious problem that M3 might again become useful as a predictive tool, but that we can’t know that if the series is no longer published. However, the same could be said for various monetary aggregates the Fed has created along the way.

  2. Barry Ritholtz commented on Mar 6

    Thats what he said in response to a Congressional question: Its an expensive process to gather the data, and an administrative burden on those who participate.

  3. B commented on Mar 6

    Thanks for that info. I use M3 anecdotally and am suspicious of its removal from public view.

    If anyone wants to email the Congressman, I copied what I just sent so that you don’t actually need to type anything. Just put your name into his email form and past this letter.

    His email address is at the link below.

    http://www.house.gov/paul/contact.shtml

    Honorable Representative Paul,
    I am sending this quick note indicating my support to save the M3 data feed provided by the Federal Reserve. As an individual investor, I find the use of this information invaluable in my analysis of the economy and various markets. There is no reason I can see where no longer publishing such a simple calculation is of any significant cost savings. In fact, to the contrary, I can find many reasons why people who don’t have strong beliefs in our liberties might restrict such information.

    Sincerely,

  4. cm commented on Mar 6

    kharris: It does have value as an indicator and a predictor. Apparently some don’t like what it indicates and predicts.

  5. scorpio commented on Mar 6

    wow. i had not heard anything about this. dumbstruck and actually a little frightened. did u see fleckentstein’s post today over on MSN? cites some fellow Williams who’s got a piece using true historical methods (B.G., bef greenspan) for calculating inflation (8% on his terms) and unemployment (12% by his calculation). this is bad bad bad

  6. B commented on Mar 6

    I think the cat is out of the bag. The Fed knows inflation is bad and likely has well before we did. Why else, with a core rate not exceeding 2% would they have raised interest rates 300 times or whatever it is with no end in sight. Lehman just raised their FF estimate to 5.5%. Each month it goes higher. We all like to goof on the Fed but there’s alot of brain power in their research organization. We now know they knew a bubble was alive in well in the late 90s equity markets regardless of what they said. Many of the faces we see are relatively political appointments and they aren’t going to say anything to rile markets.

    Ok, how about this question. Everyone hammers the Fed for moving from an equity bubble to a housing bubble. I have too. So, post 2000 and post 9/11, the economy was on life support and no jobs were being created. That’s the positive spin on the state of the economy then. So, given the dual mandate of the Fed, what would the Greenspan haters have done? Let the economy pop? Start a significant deflationary trend? Cause significant instability? It was only after they basically made rates close to zero and cut taxes that the economy actually gained traction. So, if they had not acted as they did, would all of you even have a job?

    Next major stop for ten year rates is likely 6.4%. So, from the time this bull market started till now, long rates are up 50%. If we get to 6.4%, that’ll be 100%ish. From the October 2005 low, they are up 20%. And we’ve likely seen peak earnings. All of those equity valuation models need to be recalculated. Market is likely 20+% overvalued as a best case scenario. ie, Using the metrics the perma bulls use.

  7. Mike commented on Mar 6

    In 1993 the White House did discontinue the info on mass layoffs; however, I have been receiving this information regularly from the BLS for at least the last four years.

  8. Lynn Gray commented on Mar 6

    The BLS still produces the MLS (mass layoff statistics) program. It is true that BLS (as well as many state partners in the program) wished to see MLS discontinued as opposed to other programs. As political pressure was asserted to keep the MLS the BLS has recently cut other products in both quality and quantity. Among these are the local area unemployment statistics program, occupational employment statistics, and quarterly census of employment and wages.

  9. kharris commented on Mar 6

    Barry,

    I sat here and watched Bernanke testify. I’m pretty sure that he said what you say he said, but that he also said M3 no longer provides the sort of correspondences to other macro variables that it once did. The two points, together, make a reasonable argument. Simply arguing that M3 is expensive to collect would be weak, but he didn’t stop there.

    CM,

    You say M3 still has value, but Bernanke says it doesn’t. He is in charge (unless Congress jumps on him and tells him to track M3). If you wanna take the guy on, you have to do better than simply assert that M3 has value. I don’t really have a dog in this fight, but in my original response, I did use the word “show”. You have merely asserted.

  10. kharris commented on Mar 6

    Specifically, Bernanke said that “the costs of collecting and processing the underlying data were judged to exceed the benifits.” That is “because M3 has not been actively used in the formulation of US monetary policy and, at least within the Federal Reserve, has not been found to have much value for economic forecasting.”

    This can be found in a letter from Bernanke to Senator Bunning from last November (see http://online.wsj.com/public/resources/documents/bernankebunning11212005.pdf), but as I recall, is very similar to what Bernanke said in his latest monetary policy testimony when questioned by Congressman Ron Paul.

  11. scorpio commented on Mar 6

    kharris: how can u prove M3 doesnt have predictive or coincident value? only if like the G-man and Bernie u assume away inflation. in fact the 8% annual increase in M3 since 2001 is more consistent with what i believe to be real inflation (assets, etc). that’s why they want to get rid of it. it shows the lie

  12. Joel commented on Mar 6

    M3 is the broadest measure of the money supply. M3 is growing and has been growing very quickly for a couple years now. The federal reserve is the only institution legally allowed to expand the money supply. More dollars in circulation causes inflation (this point should be obvious).

    The second point is that since the beginning of time governments have tried to print more money and the US federal government is no different. The federal reserve has every reason to try to hide the inflation that they are causing.

    The conclusion is that it is very reasonable to be very suspicious of anything Bernanke has to say and especially suspicious of the Federal Reserve removing possible evidence as to how much they have expanded the money supply.

  13. David commented on Mar 6

    I am more interested in the Adjusted Monetary Base , and I cannot find it any longer on the St Louis Fed site. Can anyone tell me the story?

  14. algernon commented on Mar 6

    I believe the Fed cannot legally effect M3 without going through M1 & M2 to do it. To wit, they only buy & sell short-term debt.

    But isn’t it fascinating that M3 is growing so much faster than its buiding block M2? Is this the effect of the Asian central banks? They buy our long-term debt.

    Isn’t it of interest when Asian central banks are countering the monetary restraint of our Fed? Especially of interest to our Fed?

  15. Jordan commented on Mar 6

    I agree with “B.” The cat is starting to come out of the bag with regards to inflation. Look at the M3 growth over the last few months. Annualized, its over 10%! We are on the road to hyperinflation under helicoptor Bernanke.

  16. algernon commented on Mar 6

    On the other hand, can you spend M3 without converting it to M1?

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  18. Idaho_Spud commented on Mar 7

    “Pay no attention to that man behind the curtain”

    Frank Morgan, The Wizard of Oz

  19. kharris commented on Mar 7

    Kash at Angry Bear goes into the M3 issue, noting that there are conspiracy theorists, and also pointing out BR’s post here, without managing to point to the conspiracy theories which abound here. The nice thing about Kash’s post is that he actually looks at what makes up M3, and what changes in financial market activity have led to the swelling of non-M2 components of M3. That is to say, he tells why M3 is rising faster than M2. He also makes the point that –

    “Economists who study and practice monetary policy have found that M3 has been of no empirical value for a long time. It’s easy to see why, even to the untrained eye. ”

    Scorpio,

    Saying that M3 says what you want it to say does not amount to evidence that M3 has objective value. What we want is non-circular rejection of the null hypothesis.

  20. c commented on Mar 7

    Aye, the non-circular argument, the one where the conclusion is not hid in the premise as opposed to the circular one where it stands out shamelessly and we all shout the locutioner down with “Tautology, Tautology”.
    That terrible burden of collecting M3 data that the admirably cost-cutting Bernanke is keen to address, is obviously significant beyond measure. But we should anyhow –just to put this issue in perspective, no? [How much are we saving here? A post chairman speaking engagement fee? A week’s tour of these engagements? ]
    Last thing, if a data series has no predictive value, is it worthless or does it have some historical significance?

  21. Baldy commented on Mar 11

    Does not M3 also include bank repos (repurchase agreements)? Some have discussed this issue. ALSO, a search of the Fed site for M3 finds them saying there is a correlation with….HOUSING prices. Kind of funny (in a tragic way). I have a love/hate relationship with the Fed, but this idea is a real stinker.

  22. bling commented on May 9

    A simpler explanation might be: perhaps one man in a million is one too many.

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