Wednesday, September 19, 2007

What is M3 and Why Do You Care?

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Let me preface this by saying that, unlike Greenspan I do not enjoy laying in the bathrub reading economic discourse. That said, in retrospect an interesting thing happened a last year - the disappearance of the M3 measure from government statistics. Stay with me - it gets interesting.

An interesting article I picked up just by surfing the net; which in times like this makes one feel very much a conspirisy theorist.

First what is M3?

So what is M3? To understand what M3 is one needs to know what M1 and M2 are as well.

M1 - Money supply that includes all coins, currency held by the public, traveler's checks, checking account balances, NOW accounts, automatic transfer service accounts, and balances in credit unions.

M2 - Money supply that includes M1, plus savings and small time deposits of depository institutions, overnight repos at commercial banks, and retail mutual fund money market accounts.

M3 - Money supply that includes M2, plus large time deposits, repos of maturity greater than one day at commercial banks, institutional money market accounts and Eurodollar deposits of US banks held at foreign branches and at all offices in the UK and Canada.

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More interesting - why is M3 suddenly gone?

Some of the reasons we have seen floated around are as follows:
  • History has shown that only failing economies e.g. Soviet Union keep data secret (Financial Sense - Toni Straka - Unpleasant M3 Trend, November 12, 2005). An interesting premise and a theme we saw woven amongst a number of writers is that they have something to hide. The claim is that the Fed should be transparent and by not publishing the number the Fed now lacks transparency.
  • The end of publishing of M3 in March 2006 coincides with the start of the Iranian Oil Bourse. The premise here is that the with the oil bourse trading in Euros there will be a rush out of US$ into Euros and that M3 could drop sharply. A sharp drop in M3 would of course presage a recession as falling M3 is a characteristic of weak economic periods.
  • M3 is a measure of inflation in the economy. A somewhat unproven rule of thumb is GDP + inflation = M3. Will be able to properly measure inflation going forward if we don't know what M3 really is.
  • We are about to enter a period of hyperinflation and by eliminating M3 we will not know how much liquidity the Fed is pumping into the system. Remember the Fed doesn't really print money it is the banking system that expands money supply. But the Fed influences it through open market operations. We will have to watch daily Fed repo action very carefully irrespective of whether they are going to publish Repos (RPs) as noted in the bulletin above. The Fed doing repos puts money into the system and the Fed doing reverse repos takes money out of the system. Of course as well this is the exact opposite of the collapse in M3 premised with the oil bourse above.
  • Further on the theme above a period of hyperinflation would occur as the Fed tries to save us from a collapsing housing market and softer consumer demand. The Fed adds more and more liquidity to the system to stave off a sharp economic decline. By not publishing Repos (RPs) as noticed in their bulletin above the Fed again is hiding what they do on a day to day basis. This will make it difficult for both currency traders and equity traders to know what the Fed is up to.
  • The conclusion is that the Federal Reserve will be hiding a debasement of the US$.
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Now keep in mind the source of this article is a gold bug, but when you read an article published in 2005 in retrospect - it makes one think.... also if you google m3 or what is m3, you will see a lot of very similar articles.

Keep in mind this article was written on November 10, 2005 - and listen to what the 'bears' are saying today. Sounds eerily similar....

Long M3 disclosure

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