- The Big Picture - http://www.ritholtz.com/blog -

The Return of M3

Posted By Barry Ritholtz On November 21, 2006 @ 6:01 am In Data Analysis,Economy,Federal Reserve | Comments Disabled

Last year, we lamented the passing of M3 reporting [1]. 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 [2] — 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 [3]. As this article discusses, recreating M3 from [4]publicly [4]available data [4] 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 [5]).


M3 January 2003 to present
click for larger graph

M3b_1 [6]

Source: Now and Future [7]


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 [8]

Source: Shadow Government Statistics [9]


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. [10], 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) [11]
David Gaffen
WSJ,  November 21, 2006, 12:55 pm


M3 b, repos & Fed watching: Is M3 1 really gone?
April 25, 2006

Alternate Data Series [9]
Shadow Government Statistics
Nov 19, 2006    

Credit Bubble Bulletin, Financial conditions [12]
Doug Noland
October 13, 2006

Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2006/11/the-return-of-m3/

URLs in this post:

[1] passing of M3 reporting: http://www.google.com/search?hl=en&lr=&c2coff=1&q=site%3Abigpicture.typepad.com+m3&btnG=Search

[2] also adding liquidity: http://bigpicture.typepad.com/comments/2006/11/us_treasury_dep.html

[3] Nowandfutures.com: http://www.nowandfutures.com/

[4] recreating M3 from : http://www.nowandfutures.com/articles/20060426M3b,_repos_&_Fed_watching.html

[5] can be found here: http://www.nowandfutures.com/images/m3b_long_term.png

[6] Image: http://bigpicture.typepad.com/.shared/image.html?/photos/uncategorized/m3b_1.png

[7] Now and Future: http://www.nowandfutures.com/key_stats.html

[8] Image: http://bigpicture.typepad.com/.shared/image.html?/photos/uncategorized/m2m3.gif

[9] Shadow Government Statistics: http://www.shadowstats.com/cgi-bin/sgs/data

[10] William McChesney Martin, Jr.: http://en.wikipedia.org/wiki/William_McChesney_Martin,_Jr.

[11] Money (That’s What I Want): http://blogs.wsj.com/marketbeat/2006/11/21/money-thats-what-i-want/

[12] Credit Bubble Bulletin, Financial conditions: http://www.prudentbear.com/archive_comm_article.asp?category=Credit+Bubble+Bulletin&content_idx=59196

Copyright © 2008 The Big Picture. All rights reserved.