The Real Reason Why M3 is Abolished
I have so far not commented on one of the strangest developments in the world of statistics-how the Federal Reserve have decided that the M3 measure of money supply will be "discontinued" without saying why . Since they came with no explanation there have been lots of speculation as to why they did it.
It certainly wasn't because the Fed Governors on aprioristic essentialist grounds decided M2 better reflected true money supply. Nor was it because M3 correlates less with GDP and financial market activities than M2, in fact it usually correlates more.
So why did they do it ? Hard money writers have offered a variety of possible reasons, but I think it all comes down to one thing: M3 have during the last few years increased more than M2. Just like the Fed and pro-administration pundits makes sure to focus on whatever consumer price measure increases the least (currently the "core" PCE deflator), the Fed wants people to focus on a money supply measure which increases less.
We can see that during the latest year, M3 increased 8.4% versus only 4.8% for M2. This discrepancy is not new, as during the last 10 years, M3 increased at a average annual rate of 8.2% versus 6.3% for M2. These numbers really say everything we need to know about the Fed's motive.
Comments (15)
I'm not sure how money supply is all that relevant in the age of electronic money. My paycheck is electronically deposited, my taxes are electronically done, and many of my purchases are done electronically. Where is the money supply for that?
Now, I understand how increasing the money supply fuels inflation. But that applies to paper money. The problem here in the 21st century is that the money supply is becoming less and less relevant as electronic money starts to dominate economic activity.
Published: January 15, 2006 2:51 AM
No, money supply apply to all form of money, not only paper money. In fact, paper money only represent a tiny part of all total money in circulation.
When a bank open a credit line at the FED, the FED create money out of thin air and "deposit" it on the account of the bank. In this case, it's a money creation of electronic money.
Bank : "Hello FED guys, I want money"
FED : "ok, how much you want ?"
Bank :"10 millions $"
FED :"ok, no problem, I just write it on your account"
Bank :"That's so cool to be able to get so cheap money...."
Published: January 15, 2006 3:58 AM
Also, to manipulate the reference interest rate of the money, the central bank make intervention on the short term money market. They create money out of thin air, and sell it on the market in order to lower the market interest rate of money to the rate they want.
Published: January 15, 2006 4:04 AM
Put another way, electronic cash represents represents a claim to wealth just like any other form of cash. To increase claims to wealth relative to real wealth only results in cheapening the claims regardless of form.
Published: January 15, 2006 7:41 AM
But the Fed did give a reason. Its not like the M3 stats were supossed to be released one day and they just didn't appear. The Fed announced the discontinuation and said they were doing so because of the cost of collecting the data. You may believe them or not but they were not silent on the matter
Published: January 15, 2006 7:53 PM
Steve,
Although your paycheck is transferred to you electronically, it sits in your bank account as a demand deposit. Demand deposits are part of the M1 money supply, which includes currency, traveler's checks and demand deposits.
Price inflation can be caused by increasing not only the currency but especially by increasing demand deposits through open market operations.
Published: January 15, 2006 8:57 PM
Mr. "Guy who reads fed releases", exactly where can you find that Fed press release where they say they discontinued it because of data collection costs (complete BS btw)? In the announcement that I link to none of this is said and on the Fed's list over all press releases I can't find anything either.
And, Steve, electronic money is as much money as paper money. In fact the data that will be "discontinued" is only data over electronic money, whereas statistics over paper money will continue to be issued.
Published: January 16, 2006 9:18 AM
I don't know where the press release is, but the prudent investor has a good post on the cost savings, a whopping $1.5 million or .00000699% of their budget
http://prudentinvestor.blogspot.com/2006/01/discontinuance-of-m3-will-save-fed.html
This is like a person who makes $100k a year being concerned over a 70 cent candybar purchase.
Published: January 16, 2006 1:01 PM
The Fed has the ability to make thing worse for working class but not better. Why? Because the international value of the dollar is set by the international markets, not the Fed. In other words, the govt can make the system less efficient but not more efficient.
The rich class (old money)? Nothing has harmed them since the Russian Revolution.
Published: January 16, 2006 1:34 PM
The sad thing is most Americans couldn't tell you what the M3 numbers are. They don't understand their banking system. They can tell you all about their favorite football team or race car driver, but they are clueless to the most important system that exists in their lives.
We will all end up paying for this stupidity for many years to come.
Published: September 18, 2007 9:28 AM
The only kind of money the Fed should be interested in is the money the Fed itself issued. Paper dollars and Federal funds are issued by the Fed, backed by the Fed's assets, and if necessary, can be retired by the Fed. Checking account dollars issued by Bank of America, savings account dollars issued by Wells Fargo, credit card dollars issued by Mastercard, Disney dollars issued by Disney, etc., are the liabilities of the firm that issued them. The quantity of these "derivative dollars" does not affect either the Fed's assets or the Fed's liabilities, so it does not affect the value of the Fed's dollars. The Fed therefore has no reason to be interested in the quantity of private moneys that have been issued.
Please Google "real bills doctrine" before posting any knee-jerk Austrian reactions to the above.
Published: September 18, 2007 11:23 AM
to mike sprawl.
you seem quite intelligent and like you know what you are talking about, so i will ask you the following and since it is now the subject of this blog feel free to email me at jonathanvines@hotmail.com if you would be so inclined.
i believe i understand how the fed gives out loans but they seem to only for 14 days from what i can gather, how does money perminatly enter the market?
Published: December 8, 2007 6:35 AM
All increases in the money supply fuel inflation, both in the short and long run (the full effect isn't felt for quite a bit) - just as all increases in the money supply distort the productive stages of the economy, causing imbalances and setting off economic cycles - the larger the relative increase in the money supply, the bigger the boom and subsequent bust.
The Fed deciding to stop measuring M3 shows the extent of their actions to harm the economy in the long term. If you look at the growth over the last 25 years, you can see that M3 doubled in the first 15 years, and more than doubled (almost 2 1/2 times) M3 in the last 10 years it was measured.
Which shows just how inflationary, and unbalancing to the overall productive structure of the economy, the Fed has become.
Published: January 8, 2008 1:42 AM
If you follow a chart of the growth of M1, M2, M3 moving simultaneously you can see how increases in M2 and M3 have later translated into increased in M1, and M2.
It stands to reason that when a CD and other large time deposits expire, some will be re-invested, but even the small percentage that moves into M1 and M2 is enough to become an unpredicted or unforeseen inflationary factor, if M3 isn't in the equation at all. So inflation at M3 will show up in some proportionate way in M2 and M1 somewhere down the line. (looking at a chart, about 2 to 5 years).
But maybe the Fed doesn't need that because they are not really able to manage what's happening, anyway, with all they do already... we still have economic chaos.
Published: February 24, 2008 3:30 AM
If you follow a chart of the growth of M1, M2, M3 moving simultaneously you can see how increases in M2 and M3 have later translated into increased in M1, and M2.
It stands to reason that when a CD and other large time deposits expire, some will be re-invested, but even the small percentage that moves into M1 and M2 is enough to become an unpredicted or unforeseen inflationary factor, if M3 isn't in the equation at all. So inflation at M3 will show up in some proportionate way in M2 and M1 somewhere down the line. (looking at a chart, about 2 to 5 years).
But maybe the Fed doesn't need that because they are not really able to manage what's happening, anyway, with all they do already... we still have economic chaos.
Published: February 24, 2008 3:39 AM