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Minyan Mailbag: Money, Money, Money



Editor's Note: Minyanville is a community of people who share an interest in fiscal literacy. As perspective is an important aspect of our daily routine, we share this exchange with hopes that it adds balance to your process.


Might we discuss money?

Looking a the very excellent "Monetary Trends" release from the Fed of St. Louis, MZM, M1, M2,and the Base are all showing irregularly lower trends (percentage change from a year ago) for the past three or four years.

Percentage change at an annual rate (a more choppy series) are recently well below levels of the past few years for M1, MZM, M2 and M3.

These "pictures" do not square with the often repeated assertion that the FED is force feeding money into the economy.

Would you please advise what definition of money you are using, and where I can obtain better data so that we can be "on the same page"?

Many thanks,
Minyan S.


M3 October growth was 6.4%, certainly higher than GDP growth but there is a major problem with all of these measures of monetary aggregates... they included things that are not money but simply claims on money.

The definitions have changed radically since 1990. You can have M3 growth (because it contains, say, money market funds) that grows simply because of the time value of money. None of these aggregates are PURELY a function of how much money the fed "creates" with the printing press. Therefore, we cannot say it is accommodative on a purely technical basis because we have no idea (and, incredibly neither does the Fed) what precisely "makes up" these aggregates underneath the headline number. They don't have a sense of how the individual components of M3 change relatively. I know that sounds unreal that they don't have a specific idea about which factors "make up" M3 but it is true.

So the Fed's printing press, plus nominal growth of funds like money markets plus plenty of other stuff one has a sense of how much of each of those things affects m3 growth, the Fed just has the ability to measure ALL of them but not their relative share.

Simplistically, the M3 growth number IS big enough (relative to GDP) that it is highly probable that they are still running the printing press and being accommodative, but we cannot determine at all the magnitude of that accommodation. All of the above debate masks the most important observation and insight: it is that the RELATIVE accommodation is what we should be watching.

The Fed indeed may be taking less accommodative action (running the press less vigorously) and that has the effect of "tightening" while still, on an absolute basis, running the presses. That is the key point here: a slowdown in the growth of accommodation has a similarly negative effect on financial speculation and marginal economic activity because it chokes off all the economic activities that rose up on the back of that easy credit.

I studied these monetary aggregates seven ways to Sunday and can tell you they are near impossible to get any good information on them and, more importantly, get any insight from them on nominal economic activity. That was exactly the reason I turned to something real: a real data series with an actual correlation with statistical confidence to other data series like industrial production, financial markets, etc. That is the money AMS stuff we watch weekly. From this Austrian money definition, we see what the TOTAL liquidity situation is: the Fed, commercial banks, and commercial/consumer debt appetites. That is the thing we care about, everything else is conjecture and false measures.

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