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Revisiting the M3 Contraction

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Why commentators don't agree.

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Many have been writing to ask how the chart and commentary in M3 Contraction - The Future Is Now can possibly be correct. Here is the chart and a snip of text once again for convenience. The key sentence below is in bold.

The Telegraph is reporting that the contraction in the US money supply points to a Wall Street crunch ahead.

"The US money supply has experienced the sharpest contraction in modern history, heightening the risk of a Wall Street crunch and a severe economic slowdown in the coming months.


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Data compiled by Lombard Street Research shows that the M3 ''broad money" aggregates fell by almost $50 billion (£26.8 billion) in July, the biggest one-month fall since modern records began in 1959. 'Monthly data for July show that the broad money growth has almost collapsed," said Gabriel Stein, the group's leading monetary economist.

"On a 3-month basis, the M3 growth rate has fallen from almost 19 pence earlier this year to just 2.1 pence (annualised) for the period from May to July."

This is below the rate of inflation, implying a shrinkage in real terms.

Questions about that chart have been in comparison to charts of M3 on Now and Futures and ShadowStats.

Before we look at the charts, let's address the alleged "contraction." I myself wouldn't have chosen to use that word, but I can explain where it comes from. Read the last sentence in the excerpt above: The contraction is in "real terms." "Real" means inflation-adjusted, and "inflation-adjusted" means via the CPI or PCE deflator.

Sheeesh. Had enough? I hope so. So let's look at some charts:

Now and Futures

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Shadow Stats

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So which chart is correct?

The correct answer, most likely, is all 3. Now and Futures and ShadowStats are looking at year-over-year comparisons, while the first chart is presumably a comparison of 3 months annualized vs. the prior 3 months annualized. There is merit to both methods.

As for the difference between the second and third charts, Now and Futures offers this explanation:

John Williams monthly reconstruction of M3 is here. Ours tends to be more volatile and averages slightly higher than his, partly because it's weekly and partly because of our minor differences in calculating the Eurodollar component of M3 and repos.
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