Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

M3 Contraction


My macro analyst and I just hung up the phone with Brian Reynolds, having an intense conversation about the current drop in M3. What sorry folk we are on Christmas Eve!

M3 is the broadest measure of the country's money supply. It includes savings and time deposits, currency in circulation, and money funds. M3 has dropped $120 billion in the last three months. The rate of change has only turned negative twice before in the last 40 years: 1969 and 1992, so this is a momentous occurrence.

A reduction as described by Brian in money funds does not necessarily reduce M3: money flowing out to buy existing stocks and bonds is returned to the system by the sellers of the stocks and bonds.

One way the money can leave the system is for money funds to be used to purchase new treasury debt: as the deficits have grown, the treasury has issued new debt. This has certainly occurred, and has allowed the process to occur with little increase in yields, but probably does not explain the entire drop in M3.

Another way is for capital to actually flow out of the country by, for example, purchases of non-dollar denominated bonds. Still another would be an overall contraction of debt, either by paying it down, delinquencies, or write-offs. Any of these the Fed does not want to see happen in the middle of an expansion.

A final way would be if the Fed actually reduced the money stock, something they have direct control over by stopping the printing presses. This is not occurring as the change in the money stock is still positive.

So this is not the end of the story and the story is significant. We are not sure exactly what is going on, but it is huge. In a debt based society, it is crucial for liquidity to continue to expand as the interest on the debt requires financing.

One other note: on December 13 Congress passed Patriot Act II. One of the amendments has given the Department of Justice under Ashcroft the authority to track sales and purchases of gold. For those of you that do not know it, the Federal government under FDR disallowed all sales, purchases, and holdings of gold.

Happy Holidays!

< Previous
  • 1
Next >
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

Featured Videos