As for velocity, well, vortex is a good metaphor. I stand by my statements that US fiscal policy is geared to consolidate and add value to fiat in the top 1%. The domestic market will be squeezed of every penny earned. Psychology trumps data in predicting what makes the worm turn. Every time.

Diversity is the key to economic and political evolution.

As the quantity theory indicates, the money supply will track changes in nominal GDP pretty closely: M = (1/v)*PQ. If you graphed nominal GDP you would probably mostly see the trend growth rate too, but that doesn't mean recessions don't happen (do a plot of the yearly growth rates of the series instead of the series itself).

As for the so-called "Greenspan bubble" I think it is mostly just a myth if you mean bubbles are caused by excessively low interest rates and too-rapid money creation. For example, US house prices started diverging from previous trends in 1995, at a time when Greenspan was actually raising interest rates. Greenspan can be blamed instead for trying to get a little more mileage out of a weak recovery by stupidly telling people to take out ARMs a couple of years ago.

The real culprits are IMHO financial deregulation and exploding income inequality, the combination of which channels ever more funds to increasingly exotic investments in search of higher returns. Real interest rates were on average lower before 1970 than they have been since, and we didn't have these kind of asset bubbles developing.

M3 is most tightly connected with very large transactions, and therefore driven more by activity in capital markets than by changes in income flows.

A loss of correlation between changes in M3 and changes in GDP therefore seems to imply that there has been a loss of correlation between activity in capital markets and income transactions.


Utsukushikereba sore de ii

This leads to two problems. First, no one seems to know how much of this complex money exists and second, the Fed has no way to control it. Changing the reserve requirement for banks does nothing if the financing isn't going through banks.

In addition there is a bigger presence of foreign players in the US economy. We are now seeing the flip side of the days when Citibank could destabilize a South American country. Now China can do the same thing to the US.

The forgotten lesson from1929 is that highly leveraged deals always end badly.  

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---- Daily Landscape

What I see is that as a technical measure, M3, is as the Fed suggests, no more indicative than M2.

However, the changes in M3 indicate something and I think it was ChrisCook that drew my attention to it.

Money supply has been increased, but not so much through the old way, which was central bank action, rather by financial deregulation (as TGeraghty also notes.)

The key issue here is that if you sit down with:

a) M1 and M2
b) Interest rate decisions

you will happily conclude that inflation has been low because inflationary pressures are low. This allows you to ignore the "asset bubble." Incidentally, this kind of round robin of measurements probably plays into the "core inflation" debate too.

It's only when you look at M3 that you get an explanation for the "asset bubble."

Do I think the Fed did it on purpose?

No, I don't think that these figures are politically important enough to bother with in that way.

Do I think the result of de-emphasising the M3 number is to help people pretend to themselves and others that "there is no asset bubble and no inflationary consequences thereof."
Almost certainly...

See The ECB's definition of euro area monetary aggregates

"Ce qui vient au monde pour ne rien troubler ne mérite ni égards ni patience." René Char