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Right, I meant "explains" in the sense that it proves (to some degree) that there is some kind bubble existing.

Might it be better phrased as M3 signifies that there is asset bubble, despite denials issued on the basis of M2?

by Metatone (metatone [a|t] gmail (dot) com) on Sun Oct 7th, 2007 at 05:02:06 PM EST
[ Parent ]
But M2 is growing at the same rate as M3. The important feature is that M1 is flat, and is a decreasing share of the money supply. Looking at what constitutes M2, other than savings accounts, only the relatively wealthy can afford to park their money in time deposits, let alone money-market accounts which have rather high minimum balances (in the tens of thousands of dollars). And in the US currently people are more likely to have a credit than a savings account. You have to have a lot of cash to have a sizeable balance on your savings account.

So the ratio of M3 (or M2) to M1 is a measure of wealth inequality, and that has been getting steadily worse since 1960's, except for the Johnson and Clinton Presidencies.

We have met the enemy, and it is us — Pogo

by Migeru (migeru at eurotrib dot com) on Sun Oct 7th, 2007 at 05:21:01 PM EST
[ Parent ]
In the sense that we're now dealing with two very different kinds of money circulating in different environments under different political and economic rules.
by ThatBritGuy (thatbritguy (at) googlemail.com) on Sun Oct 7th, 2007 at 05:37:25 PM EST
[ Parent ]
Just because M2 and M3 are growing at the same rate doesn't make them the same thing. What I'm suggesting is that the increase in absolute terms of M3 has a significance in understanding asset inflation.

Bruce McF suggests that M3 is the product of the asset bubble, which is fair enough. My point is that the value of taking M3 out of the public eye is that it removes this thing that is potentially an indicator of the asset bubble from the public vision.

M2 is also growing, but the mechanism for that is more easily explained in ways related to other fundamentals and as such doesn't act as a signifier of an asset bubble the way M3 might.

Maybe I'm not making any sense, I'm too tired to clarify this now, I'll try to remember tomorrow.

by Metatone (metatone [a|t] gmail (dot) com) on Sun Oct 7th, 2007 at 06:47:18 PM EST
[ Parent ]
... income loop:
Looking at what constitutes M2, other than savings accounts, only the relatively wealthy can afford to park their money in time deposits, let alone money-market accounts which have rather high minimum balances (in the tens of thousands of dollars).

An important part of the income loop is the provision of short term finance for operating capital ... sales of materials or stock on terms of 60 or 90 days net, the finance of the wage bill, etc.

The decline of the M1 component of M2 seems highly likely to be tied to the decline of cash and checks in total consumer purchases compared to credit and debit cards. The reduction of the average time that money is residing as cash between withdrawal and purchase, or in the checking account between writing the check and the check being covered, would seem to imply that  money in the income flow spends a larger share of its time in the firm sector, and that would imply an increase in the M2 ex M1 component relative to the M1 component.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sun Oct 7th, 2007 at 07:31:36 PM EST
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Is M2 growing at the same rate as M3, or M2 ex M1 growing at the same rate as M3 ex M2?

If M3 ex M2 is growing faster than M2, then it is indeed at least compatible with growing financial wealth faster than incomes are growing ... and while there are various scenarios where that could happen, an asset bubble is one of the most straightforward.

M2 rather than M2 ex M1, since high income nations passed heavy reliance by retail and commercial enterprises on overdraft lines of credit decades ago ... M1 on its own doesn't directly indicate much about the total liquidity of the system.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sun Oct 7th, 2007 at 08:27:29 PM EST
[ Parent ]
It is M2 ex M1 growing at the same rate as M3, and M3 ex M2 growing faster than M2.

I have to admit this is beginning to make my head spin.

We have met the enemy, and it is us — Pogo

by Migeru (migeru at eurotrib dot com) on Mon Oct 8th, 2007 at 01:14:49 AM EST
[ Parent ]
Don't M2 ex M1 ... just M2.

M1 was certainly distinctly money before WWI, and at least in the US, even in the 50's many retail and commercial enterprises relied heavily on overdraft lines of credit, leaving a substantial distinction between cheques and saving accounts ... but today, whether the wage bill is coming out of retained earnings or is financed, it spends very little time in the cheque account of the employer, making the distinction between M1 and M2 mostly useful for tracing out things like how hard banks have to work to get deposits into CD's and other lower-reserve accounts in order to free up the reserves to issue loans.

So M2 as a percentage of M3, M3 ex M2 as a percentage of M3, and M1 as a percentage of M2 as a secondary indicator of what's going on.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Mon Oct 8th, 2007 at 04:58:34 AM EST
[ Parent ]
Or in other words, M3 growth could be an indication of asset bubble.

How often the M3 statistics were published? Once per quarter? Wouldn't it be interesting to see the M3 numbers just before and after the August crisis? Do we have enough information to tell M3 dynamics after March 2006?

I see the ado not so great (no greater than cool down responses). It is still suspicious that routine information is not provided. Is it the "voodoo trick" of Bush administration to allow any crazy things happening as long as the M2/M3 aggregates grow "historically"?

As the financial market got decoupled from banking, it seems important to follow the money aggregates. As so much electronic money is generated by leverage loans and exotic finance, without any collaterization in GDP growth, why wouldn't it be informative how much money is chasing "limited" assets?

Won't we come across a phase change even with "normal" growths of M3? Can we get comparable statistics from the 1930's?

by das monde on Mon Oct 8th, 2007 at 12:41:10 AM EST
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