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).

>

M3 January 2003 to present
click for larger graph

M3b_1

Source: Now and Future

>

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: 

>

M2 versus M3 Money Supply Growth
M2m3

Source: Shadow Government Statistics

>   

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.

~~~

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 . . . 

>

UPDATE: November 21, 2006 4:05pm

Our M3 discussion was picked up by WSJ’s MarketBeat:

Money (That’s What I Want)
David Gaffen
WSJ,  November 21, 2006, 12:55 pm
http://blogs.wsj.com/marketbeat/2006/11/21/money-thats-what-i-want/

>

Sources:
M3 b, repos & Fed watching: Is M3 1 really gone?
April 25, 2006
http://www.nowandfutures.com/articles/20060426M3b,_repos_&_Fed_watching.html
http://www.nowandfutures.com/key_stats.html

Alternate Data Series
Shadow Government Statistics
Nov 19, 2006    
http://www.shadowstats.com/cgi-bin/sgs/data

Credit Bubble Bulletin, Financial conditions
Doug Noland
October 13, 2006
http://tinyurl.com/ymq8on

Category: Data Analysis, Economy, Federal Reserve

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

69 Responses to “The Return of M3”

  1. Europe? Did I hear you right? I’ve always thought you guys should get out a bit more often, but does this mean it’s gonna happen?

  2. Mike M says:

    And most people are duped into believing there is little to no inflation. It’s running at 10% per year!

  3. Craig says:

    “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.”

    THINK about this statement…….

    Increasing cash supply while moving to HARD ASSETS.
    Is this so we don’t notice the shift in currency in asset classes? We all know corrections redistribute wealth….
    Are they preparing for a market/currency correction by buying hard assets and moving away from cash?

    Those who survive any market correction need to be aware that their cash ain’t nothin’ but trash when devalued by supply.

    If BIG FISH are buying hard assets, (which have inherent value less volatile than cash) perhaps we should all be thinking this way…..

  4. Idaho_Spud says:

    Looks like BB is practicing what he preaches.

    “Deflation: Making sure it doesn’t happen here”

    As an economic dilettante, I have a question: If there is a 10% annual expansion of the money supply and GDP is growing at 0.8% to 1.6% (depending on whose spin you prefer), does that mean that actual monetary inflation is 8.4 to 9.2%?

    If we are actually in a recession this quarter, is real monetary inflation rate higher yet?

  5. Macro Man says:

    So the Fed is printing money and then giving it to people to put on time deposit? Is it really that simple? Surely a more realistic argument is that the proceeds of the US current account deficit, which in yesteryear accrued to primarily private sector agents, is now being financied by the Asian and Middle Eastern public sector. So whereas in the past, the proceeds from the deficit were earned and spent by, say, Toyota and Sony, the proceeds are currently being accrued by the PBOC, BOK, SAMA, etc. These guys put the money on deposit (thereby inflating M3), then eventually spend the money on Treasuries and Agencies.

    So the issue is not that the Fed is jamming the economy with liquidity, but that the Fed has lost control of monetary policy and broad money growth, an even more disconcerting prospect…

  6. Bob_in_ma says:

    I don’t see where anyone actually explains the significance of this. What exactly is increasing? Institutional money funds? Eurodollar accounts?

    That would have made a much more informative column, rather than simply feed the conspiracy theorists….

  7. Mike M says:

    Idaho Spud,

    Actual inflation is 10%. This is inflation. Most people focus on price inflation, which is based on prices of a basket of goods and services. This basket is tinkered with, and adjusted probably to look more favorable (lower). Not all monetary inflation ends up in prices. But that money will end up somewhere, perhaps an inflated stock market, housing market, whatever.

    The Fed should focus on low monetary inflation. Instead they put the focus on price inflation. This is a scam.

  8. na says:

    Ok,

    The Fed cannot control M3 growth. They just can’t do it. That’s one of the reasons they stopped reporting it. I agree it was a suspicious move but if you understand what’s in M3 you realize it cannot be curbed or expanded by the Fed.

    The only aspect of M3 the Fed controls is the repurchase agreements.

    Everything else is handled by Wall Street.

    So this amazing expansion in credit is not due to a power the Fed has but the lack of power the Fed has.
    It’s just banks coming up with creative lending & new financial products.

    At least that’s my understanding of it.

  9. Sailorman says:

    “So the issue is not that the Fed is jamming the economy with liquidity, but that the Fed has lost control of monetary policy and broad money growth, an even more disconcerting prospect…”

    This sounds very plausible to me – who knows nothing about M3 or economics. Are treasuries and dollars held by foriegn central banks counted in M3?

  10. Macro Man says:

    Sailorman

    Treasury and Agency holdings would not be counted in M3, but time deposits and eurodollar deposits are. A lot of the reserve assets, when first accrued, are slapped on deposit until they can find a more permanent home…..by which point even more dollar FX reserves will have been accrued to take the placing of the maturing time deposits. China by itself is accruing $20 billion a month in foreign exchange reserves, of which maybe $13 billion would be kept in dollars.

  11. wcw says:

    Quite right, MM: that the Fed and the Treasury have little or no control over money growth is disturbing enough without having to believe in a conspiracy. Petrodollar recycling and Chinese reserve growth probably account for a good chunk of what’s going on. “Bretton Woods II” is alive and well, in other words.

    This explains why I range from 50-100% hedged out of US$ and do not mind when I take losses on those hedges.

  12. erik says:

    this market has walked a benevolent line for the past few weeks. my feelings are that the party ended yesterday for mr.market. i see the writing and have changed my posture. november 07 spx puts on-sale at a brokerage near you.

  13. jill says:

    M2 report from last Friday:

    This week marks the eighth consecutive week of growth in M2, now the longest period of continuous expansion in the last three years. The last eight weeks have resulted in $102.6 bil of growth in M2, around 36% of the total growth for 2006. Over this period, the average weekly growth rate is more than double the 2006 average.

  14. tjofpa says:

    2007: Chinese year of the Pig.
    Gold bars on sale for 175 yuan/gram

    2002: CHinese year of the Sheep.
    Gold bars on sale for 92 yuan/gram

    …a compound annual inflation rate of 13% for all to see.

    “Anytime a government agency…”
    Sorry, but I must take issue with this statement. I mean, really?

  15. James says:

    There are three distinct factors that are helping make the credit cycle go much longer and much further than anyone thought possible.

    1. Foreign purchases of US assets are effectively creating a backstop bid for assets that the private sector would never touch. Agencies (backed by suspect collateral), Treasuries. If the dollar gets too weak intervention will take place.

    2. CDS and securitization are allowing credit risk to be extended to the riskiest of all borrowers. Anyone can speculate in high risky bonds because they can buy a CDS to hedge there exposure. Everyone wins in because the issuer collects the premium and the buyer believes he is protected from default on the bonds.

    3. Moral Hazard. The genius fed has intervenied so many times to prevent a market collapse that everyone knows they are going to come to the markets rescue. The fed has been blackmailed by the credit markets.

    Thus, the markets continue in this relentless search of profits by lending to worse and worse borrowers. However, when the music stops things will go get out hand quickly.

    LBO’s are doing deals at 9.5 ebitda and junk bonds are yielding 7.4 percent vs over 8 last year. At some point the music stops and all the bad credit that has been written will be repriced and I assume many hedge funds that are offering cds will be overwhelmed and the buyers of protection will find that there really isn;t enough insurance going around.

  16. scorpio says:

    thank you, barry, for poking around and doing the hard work. until you are further rewarded by Mr Market, let enlightenment be its own reward. i thought they stopped publishing M3 in time to flood the markets for the election (also, somewhat less self-interested: to ameliorate the housing contraction), and this confirms it. but question: what can stop them? if Bernanke wants to keep printing money for life, does that mean the market in fact does grow to the sky? i understand the guy has an overwhelming fear of Depression, but does that mean he can throw all professional and historical discretion to the wind? are there no grown-ups left? anywhere? Schwab’s giving me 5% for cash. i want 10%. cash.

  17. winjr says:

    Macro Man wrote:

    “So the issue is not that the Fed is jamming the economy with liquidity, but that the Fed has lost control of monetary policy and broad money growth, an even more disconcerting prospect…”

    I agree that this assessment is more likely the correct one.

  18. algernon says:

    Barry,

    My understanding is that the Fed’s charter directs them only to buy short-term Tres. with their freshly created money. To wit, they cannot legally increase M3 without increasing M2.

    Furthermore, can you spend M3 without its being converted to M1 or M2?

    I think the M3 growth is coming from Asian banks & petro recyclers buying our long-term Tres debt.

  19. James says:

    I dont think so. Read Doug Nolands article below Barry’s post above. He has spent the most time examining the credit system.

  20. DavidB says:

    The fed can control M3 because it works off the money multiplier. All they have to do is raise reserve requirements and the banks can’t multiply to such a high degree.

    The ratio of the gears is what matters.

    Thanks for ‘outing’ this Barry. The fed has been lying like this and the lap dog Main Stream Media has bought and sold their ‘rate hike/rate slash’ propaganda for years being more than complicit in helping the fed sell that garbage to the public. This is another example of the fed saying one thing to the public and doing something else behind the scenes. In the real world we call that fraud and the rest of us go to jail for it. Not those at the private banking institution called the fed.

    I hope America has enjoyed her 10% dilution in purchasing power. Real money folks call it a stealth tax hike because that is exactly what it is. A tax on people’s cash via dilution of their purchasing power. The effect may not be felt until that money comes flooding home from overseas but it will be felt eventually.

    I hope more media folks get the courage to stand up like Barry does. People need to be educated. Watch your back though Barry. That truly is a dragon’s tail you are whacking away at

  21. wyler says:

    . . . the issuer collects the premium and the buyer believes he is protected from default on the bonds. . .

    Excellent post, James. One question, though: What metrics does the buyer use to form the belief that he is protected — are there FICO or AMBest equivalents for the CDS buyer?

  22. L'Emmerdeur says:

    James, I believe you have hit that nail right on the head. Its a like a game of musical credit chairs, only there’s about three chairs and dozen players.

    I believe this is the reason we are seeing so many massive mergers in the banking and related industries. They know the day the music will stop is close, and they are positioning themselves to be classified as “too big too fail” by the government.

    I’d also like to point out that the explosion of M3 began during the first years of the Clinton presidency – at least fiscal irresponsibility is non-partisan.

  23. Bob A says:

    and from Minyanville

    Ultimately, an unforseen and uncontrollable financial accident will ripple through our financial system and wash ashore all the sins of our uber-leveraged asset economy. “However, no one knows the day or hour when these things will happen, not even the angels in heaven or the Son himself.* Only the Father knows.” (Matthew 25:36).

  24. James says:

    The whole system has distorted risk taking to a level that has never been seen before. Governments have no idea how to allocate resources. Does anyone think Communist China can allocate anything properly? What is scary is that no one and nothing is safe in this system and at some point its going to collapse. Fil at Minyanville is correct.

  25. sam says:

    people forget that fed not controls rate, makes a coupon pass/does repos, but also the REGULATOR for banks.

  26. Bernanke flooding economy with money v.M3 returns

    ast 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 o…

  27. Macro Man says:

    How is the Fed supposed to control how many dollars the PBOC happens to buy this month, and whether those dollars go into demand deposits (M2), eurodollar deposits (M3), Treasuries (not counted in money supply), or are converted into euros and placed on deposit (thereby accruing to European M3.)

  28. Mr. Beach says:

    It seems as if some of the liquidity is popping up in Chinese stocks.

    I have been tracking and own shares in two: China Mobile (CHL) and China Life (LFC).

    Both stocks have been on a stunning tear all year.

    CHL has gone from about $23 to $43. This company has a market cap of $172 billion. That is more than GOOG.

    LFC has gone from about $30 to $95. This company has a market cap of $64 billion.

    I am stunned and wondering whether I should take my profits off the table.

    Are these Chinese stocks a bubble driven by liquidity? Or are they driven by fundamentals? Any opinions?

  29. Estragon says:

    Macro Man – Quite so.

    “Various special factors have also contributed to the observed instability. For example, between one-half and two-thirds of U.S. currency is held abroad. As a consequence, cross-border currency flows, which can be estimated only imprecisely, may lead to sharp changes in currency outstanding and in the monetary base that are largely unrelated to domestic conditions”

    http://www.federalreserve.gov/boarddocs/speeches/2006/20061110/default.htm

    No need to invoke black helicoptertheories. BB himself pretty much admits the monetary base is currently unmeasurable, which by extension means it’s unpredictable and uncontrollable. I think I’d feel safer with the black helicopters!

  30. Polly Anna says:

    I think the actions of Hammerin’ Hank Paulson are largely understated in this assessment, BTW. He supposedly only took the job if Bush would return power to the treasury, and according to other articles the Treas has been doing its own liquidity plays.

    I actually read an interesting fringe-y thing from Henry Liu about how Paulson is going to pump everything up and then orchestrate a crash so that rates can be cut way low again (saving the ARM resettees) creating a shortened recession that will be recovering just in time for 2008. Any takers? :)

    Incidentally, in that scenario Ben Bernanke is Hank Paulson’s lapdog who basically causes the crash by implementing a rate hike that no one is expecting.

  31. bodanker says:

    >> The fed can control M3 because it works off the money multiplier. All they have to do is raise reserve requirements and the banks can’t multiply to such a high degree. <<

    DavidB, it’s been said before: M3 includes Eurodollar deposits, which the Fed’s reserve requirements have no authority.

    Well said Macro Man and Estragon.

  32. Bob A says:

    I do not think the Paulson’s of the world are losing much sleep over ARM resettees. But they very well might orchestrate a crash with the net result being more wealth transferred from average Joe to the mega rich. Way more money to be made that way than from preventing a hit the banks might take from loan losses.

  33. Oil Shock says:

    Thats why I believe there could be recession in the future, but no deflation. I believe inflationary end game for the dollar is in play, dollar devaluation will accelerate in the coming months and years.

    Great post.

  34. The Return of M3

    This is a good one! Print paper. Print paper based on that other batch of paper. Then print more paper on that other, other batch of paper. Call this ponzi scheme the the global economy.
    Actually, dont even print the paper. That co…

  35. Polly Anna says:

    Hi Bob A….sorry, that was a bad paraphrasing on my part.

    In mentioning the ARM resettees I meant that an orchestrated crash which had to be answered with something close to ZIRP would alleviate some of the pain brewing in housing, not just ARM resets specifically. The scenario also mentions that it would help clean up some of the derivatives problems with which Paulson is supposedly very familiar with via GS.

    Your point about the mega-rich ending up with more money is well taken and, most likely, certain :)

  36. Max says:

    Barry has made a ridiculous statement:

    “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.”

    The “red and blue” line is the M3 – M2 + institutional deposits, jumbo CDs, and repos, and eurodollars. Would Barry be so kind as to explain how exactly the fed “printed” these things, please?

    Paul Krugman once said that a loony goldbug will always find a way to blame the fed for something, since the trends in M1, M2, and M3 are often divergent.

  37. James says:

    Doesn’t matter. Credit Growth is still exploding and therefore we are still in an inflationary period. The last time money was tight was sometime in 2000-02 when it went to 3 percent. The fed may be tight but the willingness of foreign governments to continue to to purchase larger and larger amount of bonds is certainly helping to stabilze things. Im pretty sure Japan stopped buying in the first half of this year, but when yields started getting around 5.30 again they came back in. There economy is in a perpetual decline because of an aging population and outsourcing. Ring any bells.

  38. Zmetro.com says:

    Inflation on the Way?

    Barry Ritholtz: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…

  39. blam says:

    Two sides to the same argument . The Fed is pumping liquidity or the Chinese are pumping up liquidity. The central problem for me is that SF government is intervening in the markets to such a degree that the entire concept of a “free and efficient market” is bullshit.

    We pat ourselves on the back and pay lip service to the “efficient” allocation of resources and the “free market” blah, blah, blah. The whole thing is a manipulated mess and I think there is sufficient evidence to suspect that the friends of george/dick are up to their ears in it and so is the Fed. If they were interested in doing anything about it all they would have had to do is tack on a surprise baby step 25 bp.

    So what were saying is the Chinese, shieks, Japanese, Koreans, et al are controlling the money supply in the US, creating and sustaining inflation and asset bubbles, so they can tighten their death grip on industrial production by manipulating the forex exchange rate while maintaining extreme barriers to entry. Okay. Good, I thought maybe Barry was wearing a tin foil hat there suspecting the Fed or Treasury.

  40. Rich_Lather says:

    Good post, Barry. I hope you touch on this some more.

  41. donna says:

    The Bush family and friends program prefers to steal its money off the books…

  42. Zephyr says:

    Hmm… So what you are saying is that it is actually a kaleidoscope of simultaneous conspiracies…

  43. Zephyr says:

    Perhaps Oliver Stone could use some of these posts as the basis of a new conspiracy movie… Was the Kennedy assassination connected to this M3 conspiracy by chance?

  44. Hapsburger says:

    M3 tracks M2 pretty closely through say June 2005, then the two series disconnect.

    What event/action would have casued this?
    What is the significance of the sudden increase in liquidity?
    What would cause the M3 and M2 to re-connect (i.e is there a point at which they must begin reverting)?
    What would be the significance of this?

  45. jagmohan swain says:

    As I had commented before on this blog Fed knows the demon they have created in the shape of housing bubble and also know that they must continue to have easy monetary policy to save it.Tight monetary condition would reduce the housing demand at a time when over supply is already bringing this market to it’s knees.Imagine what would happen to this market if demand falls off a cliff due to tight monetary condition.But what the Fed seeks to avoid is exactly what they would end up facing.No one cares if they are raising Fed rate or not what’s important is are they curbing the credit growth.Credit forms the demand and if that isn’t reduced then inflation would continue to run.A typical recession where the credit growth is curbed causes the bond yields to fall but what about a recession that will happen despite huge credit expansion? Shouldn’t that cause the bond yields to rise ? So my take is bond market has or will top here and and the rise in yield will end up hurtiing the housing market even more.Fed might try to intervene directly in the long end bonds to keep the yields low, but Fed research shows that such intervention may have very limited impact and may end up hurting the dollar eventually.

  46. Spectator says:

    There’s no conspiracy, but the net result is just as bad. As with socialism this is a failure of ideas more than of individuals. Although, Greenspan stands out as one who knew full well – the analogy that’s been made with Pontius Pilate is interesting.

    Our smart central planners, er bankers, are here to save us from the inequities of the business cycle. What harm could a little liquidity here or there cause? The trouble is it cascades. Like the need for bigger lies often needed to conceal previous lies, larger liquidity infusions are needed to hide prior typically misplaced liquidity.

    This could go on for a long time. Takes a while to bankrupt a strong country such as this. But let’s not kid ourselves that this is helping in any long term sense.

  47. BKE says:

    Good commentary on this thread, from Macro Man, Sam and Estragon, Polly Anna… others

    To summarize:

    M3 is out of the Fed’s hands.
    Fed power comes from repos and regulations.
    Treasury influence is growing quickly, like the recent repurchases it made.
    Asian/Petrodollar Recycling Main M3 driver.

    I would add:

    JPY carry trade is alive and well. Check out JPY money aggregate growth and Yen weakness during this ramp.

    Fed recently relaxed margin requirements for some new liquidity providers in the system: hedge funds.

    Finally, the “printing press” analogy doesn’t help us understand the chaotic mechanics of the system. We’re not talking about Zaire.

    Macro Man: Maybe you ought to trim some of those vertical movers.

  48. DavidB says:

    Our smart central planners, er bankers, are here to save us from the inequities of the business cycle. What harm could a little liquidity here or there cause? The trouble is it cascades.

    They love the cascade especially since it is the banks that get to play with the money long before the rest of us even get a look at it.

    It is an amazing coincidence that the fed is usually all for the inflation ‘game’ until it gets to wages. Then miraculously it becomes a ‘problem’. It seems the big boys never want the ones who are footing the bill for all this to benefit from the scam and so higher wages almost always triggers a crackdown. For what good would an inflationary environment be if we all were to benefit from it? You can’t call it a cartel and a hidden tax then can you?

  49. James says:

    I hope the fed isn’t stupid enough to push M3 up in order to offset a housing bubble. They’re policies helped cause the bubble and meddling in order to prevent something bad from happening will just make it worse. Where is Milton Friedman? Too bad he passed away.

  50. Macro Man says:

    BKE

    I believe that the extent of the yen carry trade is vastly overstated by man commentators. The IMM position represents trend followers who are short yen because it has traded so poorly. Real money investors are, if anything, long yen on aggreagte if the various surveys (Merrills, Russell/Mellon) are to be believed. Hedge funds are more mixed; discretionary guys are long yen, quant guys short. The only people who really have the carry trade on in size are the Japanese themselves, and in my view this simply represents a sensible asset allocation to riskier assets now that the economy has normalized.

  51. Pierce Rosebud says:

    Russia’s GDP grew by 6.8% in January-October 2006

    - Inflation was 0.4% in the first 20 days of November in Russia and 7.9% this year so far

    - Russia’s monetary base will grow 16-24% and money supply will expand 19-29% in 2007

  52. Our technological base is in the process of an expansion that is unprecedented in human history.

    Clean Heat and electrical energy in unlimited amounts will produce a large economic boom, and an increase in the money supply will be a side product of this expansion.

    The negative affects of Inflation occur only when there is a productive capacity unable to meet demand. Our capacity to meet demand is accelerating every moment of the day, for a large number of reasons based on the combined technologies that are now available to us.

    .

  53. Rumple Stiltskin says:

    What does the economy have to do with MP3s?

  54. 5th of November says:

    What do you expect from this gov’t? This is the same group that rountinely violates our Constitutional rights.
    They violate the 1st Amendment by caging demonstrators and banning books like “America Deceived” from Amazon.
    They violate the 2nd Amendment by confiscating guns during Katrina.
    They violate the 4th Amendment by conducting warrant-less wiretaps.
    They violate the 5th and 6th Amendment by suspending habeas corpus.
    They violate the 8th Amendment by torturing.
    They violate the entire Constitution by starting 2 illegal wars based on lies and on behalf of a foriegn gov’t.
    Messing with M3 is one of their minor crimes in progress.
    Support indy media.
    Last link (unless Google Books caves to the gov’t and drops the title):
    America Deceived (book)

  55. robert Bolske says:

    Yup, the feds say there is no inflation,, but when it comes to groceries,, we the little people pay hard earned cash,…

    They on the other hand, print up the money,, then send the butler to buy their milk, cheese, butter and eggs.. As a result, they can’t feel any economic pain,, therefore , there must not be any..

  56. Silverbug says:

    I think I hear helicopters warming up
    in the distance. hehe

  57. Rasmus says:

    This reminds me of that episode of “In Living Color”
    when one of the brothers in prison is trying to spell
    the word CONSPIRACY but he can’t spell the whole
    word so he winds up saying
    C-O-N-SPIRACY several times.
    C
    O
    N
    SPIRACY.
    Try saying it out loud. It’s funny.

  58. Flder says:

    Could we devalue the dollar externally and hold the value internally? e.g. every buck outside of the USA is now worth a nickel, and every dollar inside the USA is still worth a buck?

  59. jagmohan swain says:

    Greenspan and Bernanke both belong to the same school of thought in the sense that they beleive in dealing with the aftermath of an asset bubble through lose monetary policy.It’s true that Bernanke in his
    speech talked about dropping money from helicopter but in practice what he really meant, as I see it, is to have lose monetary policy to deal with a deflationary economy.So now that housing problem is real their approach is two pronged.Interfere in bond markets and keep the credit growth steady to keep the yields low
    and stabilize housing demand,Low yield translates to low mortgage rate and low mortgage rate means demand
    remains steady.It’s vitally important that it remains so to avoid any major disaster in housing market due to
    demand dry up.To pacify the market’s inflation fears they raised the interest rates but allowed the credit
    growth to continue.Shadow statsics and M3 figure suggests real inflation is much higher than the official
    figure and rightly so While many beleive Fed is going to cut rates to juice the economy I feel currency
    market is already putting the Fed under pressure to raise interest rate.They may or mayn’t raise interest rates
    they certainly in no position to cut it as that would bring the dollar under some real hammering.Currency market is
    clearly pointing that dollar is being devalued due to excessive printing, never mind the official inflation
    figures.Is that the reason they stopped publishing M3 to fool the currency market?

    Another substitute to dropping money from helicopter is buying S&P futures, buying the mega cap component
    stocks in dow jones.Reason is very clear roughly some 40-50% households have a stake in stock markets and most
    of it is indexed( Through index funds,retiremnt funds,most retirement funds are.indexed or assets invested in
    mega cap stocks).Certainly bloated retirement funds can substitue for any wealth loss due to housing
    equity drawdown.

    So the effect of all this lose monetary policy is pressure on the dollar.Fed has to either save the economy or
    let the dollar go.It’s clear they are trying to save the economy while trying to talk up the dollar.

    It’s interesting to note that while currency markets are beginning to see thru the Fed smokescreen bond markets are still deluding themselves over a slowing economy while completely putting a blind eye at the real inflation.It would be interesting to see what happens when this realization would dawn upon the bond market.

  60. Marc says:

    $ is about as good as paper toilet, no more gold backing since 1971, soon will not even be the world currency anymore because of the loss of confiace on that empire-like wanna be that you have became. You will have to buy OIL like everyone esle and not by just printing more paper toilet.

    Iran will drop $, China is dropping their reserves, soon everyone wil start to dump the $$$ fiat currency and the crash will follow very hard.

  61. Budster says:

    Skyrocketing M3 is a manifestation of the debt bubble, the bubble to end all bubbles. As long as we can continue to make more debt, we’ll be fine. But one day…

  62. Flow5 says:

    The DIDMCA of March 31st 1980 laid the basis for converting our means-of-payment money supply from M1 to M3. It provided the legal framework for the addition of 38,000 commercial banks and the abolution of 38,000 financial interemediaries.

  63. hastings says:

    it occurs to me that a crash in the dollar is not as likely as all that… given as stated (above somewhere?), 50% of US$ float is held by the other players….(my fx account is in US$)…I would use this money to buy more US$ whenever the price warrants my invention…and at 100:1 gearing that could effectively alter any short term flow. True if I wanted to crash the system I suppose I could do that…but I hold all these dollar assets….
    in my banking system….which allows me to inflate or expand my own economy….BrettonWoods? My question really is: What’s in it for any of the players to cash out of one game only to have to cash in to another? And all the time with the same faces at the table! Just stop showing me the M3 month after month after…please! The Chinese only have 2 trillion… that’s 2 thousand Chinese billionaires… and that’s not that many.

  64. Flow5 says:

    The U.S. had a net liquidity deficit in every year since 1950 (with the exception of 1957), up to 1976 (when the private sector contributed its first trade deficit ) these deficits were exclusively the consequence of excessive U.S. government unilateral transfers to foreigners (re: foreign policy – solely our far flung military bases and personnel). During all this time the private sector was running a surplus in all accounts: merchandise, services and financial. The Vietnam Ten-year War administered the coup d’etat to our gold bullion standard. By 1968, in an effort to keep the dollar at the $35 par, we had exhausted nearly two thirds of our monetary gold stocks, or approximately 700 million ounces to about 260 million ounces.

    If this all it took to take the dollar off the gold standard, then we are in dire straits.

    Joseph Stiglitz of Columbia University (prominent war statistician), using CBO basic assumptions, calculates the Middle East wars will ultimately cost 1.27 trillion.

    How much is that in barrels of oil? Answer = 21,166,666,667 billion barrels @ $60.00/barrel
    http://tonto.eia.doe.gov/dnav/pet/pet_move_imp_dc_NUS-Z00_mbbl_a.htm

    2005 imports/barrels/year = 3,695,971,000 barrels. = 5.72 years supply of imported oil @ $60.00/barrel (at same consumption rate, i.e., 3,695,971,000 barrels/year)

    And give an Iranian a loaded AK 47, and he’s thinks he’s hit the lottery. His yearly salary is less than cost of his gun. That’s what’s Jihad is all about, defence against poverty. For Allah or a will? So what incentive do they have to stop the war?

    Large federal deficits cause an increase in the demand for loan funds, and because of the inflationary impact of the deficits, a decrease in the supply of loan funds. This follows from the fact that increases in the deficits will be almost entirely attributable to increases in defense spending. Defense spending adds nothing to civilian productive capacity or to the supply of goods available in the marketplace. And the magnitude of the deficits $116 billion for Iran/Iraq, ($784 billion for DOD), qualify as war economy budgets (31% of net stock of federally financed physical capital (1)). Unless the payments gap is filled by foreigners, the deficits require the controls dictated by a war economy. Bush’s solution?…substitute cuts in medicare and medicaid ($550 billion last year) – as a means to prosecute the war.

  65. Don says:

    It seems to me the US is heading for a really big reality check in the not too distant future when all the debt is finally collected. All the fancy talk can hide fiscal irresponsibility only for so long. It cannot be that the stupendous cost of a war of convenience and unbridled debt spending some day does not come back to haunt us.
    If the Federal Reserve keeps adding to the money supply to the tune of about 10% a year there is no way to keep up this effort indefinitely. Some time there have to be real-world consequences. For the real costs of the war now in progress it should have been possible to have a robust and responsible fiscal policy that would have been of tremendous benefit to the American people and, by consequence, the world.
    Are we to really believe the whole financial world is so mortally sick with cynicism that they don’t care who gets stiffed with the bill as long as they get away with making obscene profits?

    Monkey boy should never have been voted into office. You can talk about all your fancy market parameters all you want, what it boils down to is that he is not going to take the rap for his atrocious policies and their effect on the people he swore to protect.

  66. TraderBrian says:

    The games that are played are amazing. If you read The Creature from Jekyll Island, you’ll find that at least one real conspiracy has been successfully pulled off. Problem is, those doing it have continued to get better at it. Oh yeah, and let’s not forget Congress’s role in all this. They have the wonderfully comfortable position of hiding in their numbers without a single figurehead as a scapegoat – except the president, of course.

  67. Flow5 says:

    To date there have been 2 conspiracies. 1) Commercial banks pressed regulators to allow them to pay interest on their deposits, i.e., REG Q ceilings, then removed them. CBs (systems context) create new money when they make loans, they do not loan out savings. CBs have only those deposits the FED allows them to create via open market operations. Using interest rates CBs try to steal each others deposits, but the loan pie remains the same. The result of this policy was the beginning of Stagflation in the early 60′s.

    The transfer of savings to the S&Ls, Mutual Savings Banks (thrifts) does not reduce the size of the CBs. It results only in the transfer of ownership within the CB system. The thrifts were the customers of the CBs. I.e., the source of time deposits to the CB system is demand deposits, directly or indirectly via currency or the banks undivided profits account.

    Money flowing to the intermediaries actually never leaves the CB system as anyone who has applied double-entry bookkeeping on a national scale should know. And why should the CBs pay for something they already have? interest on deposits?

  68. Rosie says:

    These comments have been invaluable to me as is this whole site. I thank you for your comment.