Sat Oct 6th, 2007 at 06:29:49 PM EST
Nearly two years ago, the following obscure press release was put out by the US Federal Reserve:
Federal Reserve: Discontinuance of M3 (November 10, 2005)
On March 23, 2006, the Board of Governors of the Federal Reserve System will cease publication of the M3 monetary aggregate. The Board will also cease publishing the following components: large-denomination time deposits, repurchase agreements (RPs), and Eurodollars. The Board will continue to publish institutional money market mutual funds as a memorandum item in this release.
Measures of large-denomination time deposits will continue to be published by the Board in the Flow of Funds Accounts (Z.1 release) on a quarterly basis and in the H.8 release on a weekly basis (for commercial banks).
M3 does not appear to convey any additional information about economic activity that is not already embodied in M2 and has not played a role in the monetary policy process for many years. Consequently, the Board judged that the costs of collecting the underlying data and publishing M3 outweigh the benefits.
There was much gnashing of teeth by assorted conspiracy theorists, myself included, that the Fed was hiding away the canary in the gold mine of monetary policy.
The reason this matters is that the rate of growth of the money supply is (approximately) the sum of the rate of "real" GDP growth and the rate of inflation. So by ceasing to report on the growth of the M3 money supply, the conspiracy theory goes, the Fed is destroying the evidence of any tampering with the inflation statistics and of its own runaway monetary policy (where the money supply is believed to be growing at higher than 10% per year).
Now, a few days ago, for a discussion in an open thread, I pulled this chart from the Wikipedia article on the US money supply.
One feature of the graph caught my attention: that the share of "pure" M2 (savings, money-market accounts and "small" certificates of deposit) is more or less constant but that "pure" M3 ("exotic" money) is increasing its share as the share of M1 (cash or M0 plus "demand" deposits) decreases.
Somewhat perversely, I decided to take the underlying data for the wikipedia charts and rescale the axes. For the top chart I did a logarithmic scale, which shows rates of exponential growth as constant slopes, and for the bottom chart I did a "logit" or logistic transformation.
Apart from what appears to be the presidency of Bush the Father, the growth of the total money supply has been more or less at the same rate for the past 40+ years. If anything, it seems faster before 1988 than after 1992. So this is the first question: can one really see anything anomalous in these charts coreesponding to the dot-com bubble or the recent housing bubble? Can you point to where Greenspan's bubble begins?
Note, however, that the M1 money supply (cash and checking accounts) is the kind of money that "ordinary Americans" actually have, and that has hit an "undulating plateau" since Clinton came into office.
Now look at the shares of the different kinds of money over the past nearly 50 years, plotted on the logistic scale introduced to ET by Luis de Sousa in his Marchetti Curves diary...
Apart from an anomalous "bump" coinciding with the Clinton years, in which cash or M1 recovers "market" share at the expense of "exotic" or "pure M3" money, the last 50 years of US monetary history esentially see a constant share of "pure M2" (savings, money market accounts and CDs under $100K) and a transfer of market share from cash to exotic money, which on this scale actually looks faster in the 1960's than it does today. However, the flattening out of the M1 money supply since the early 1990's has a counterpart in a kink and subsequent significant growth in the share of "pure M3".
In the light of this chart, it seems the Fed is actually right when it claims
M3 does not appear to convey any additional information about economic activity that is not already embodied in M2 and has not played a role in the monetary policy process for many years.
The link between the money supply and inflation, which is behind most conspiratorial thoughht regarding the publication of the M3 figures, is the so-called "monetary exchange equation":
Since it appears that the M2 money supply is constant fraction of the M3 money supply over the past 50 years, it really doesn't matter which of the two is substituted into the monetary exchange equation. So, it doesn't seem to me that the Fed was actually hiding any sort of smoking gun when it decided to discontinue the publication of M3 figures.
Why assume ulterior motives when laziness suffices? Is all the M3 paranoia much ado about nothing?