bart
08-22-08, 06:33 PM
M3 and inflation, deflation & ideology
The recent news from Lombard Research about "the biggest one-month fall since modern records began in 1959" in M3 could easily have been misunderstood and misinterpreted. M3, by the way, is simply the most inclusive measure of total money supply (excluding any credit measures) that exists. To add some broad perspective, here's a weekly M3 chart which includes an annualized 13 week rate of change line (in light blue).
http://www.nowandfutures.com/images/m3b_13week.png
As can easily be seen, the drop is not at all that large since a very similar and actually slightly larger drop happened just last year.
Additionally, drops have been much larger drops where M3 has been contracting at almost a -5% rate in various short periods in 1991, 1992, 1993 and 1994. It has also been below zero in the early '70s, early 1987, 1998, 1999, 2000, 2002 and 2003.
Is it significant and important? Yes... but in reviewing all the times that it has happened in the last 38 years of weekly Fed and reconstructed data, there isn't much that can be concluded that we don't know already. Those periods were ones of recession or slow growth or world financial crises or housing recoveries, or bubble tops or even U.S. financial crises.
(Chart since 1970 for the curious - http://www.nowandfutures.com/images/m3b_13week_long_term.png )
More important though is what it doesn't say, and especially what some bloggers and others who have a questionable understanding of M3 and other money measures have not been saying (or even outright avoiding due to ideology issues or vested interests, etc.).
Here's the chart that most clearly paints the story with both M3 and M2, and why they can be so useful. The obvious way that M2 and M3 track with inflation, as measured by CPI-U with corrections from John Williams of shadowstats.com, is unmistakable.
http://www.nowandfutures.com/images/m2m3_cpi_money_supply.png
The simple view and truth is that we're in an inflationary cycle, similar to the '70s, and real deflation is extremely unlikely in the foreseeable future.
A key though is what M2 is currently doing. It has been close to flat for some time while M3 is still growing, again in a similar manner as 1968-70 or 1974-75 or even 1999-2000. So its quite likely that, barring black swans, we'll see inflation dropping some in the short to intermediate term future.
Also note that neither M2 nor M3 tell anywhere near the entire story. There are many other ways to look at money supply and its effects on inflation and investing.
One quick example is M1, which some use as an inflation or deflation hint. Its true that M1 is expanding now, but when a certain monetary element called sweeps is added back in to help ensure that M1 is being compared and defined on an apples-to-apples basis, M1 plus sweeps has actually declining for a while now.
Hopefully, now that my opinions have been clearly stated and an additional important chart has been clearly linked to M3, certain bloggers and others will no longer mis-represent my views and opinions about M3 as they have been doing for months, regardless of my comments and requests.
The recent news from Lombard Research about "the biggest one-month fall since modern records began in 1959" in M3 could easily have been misunderstood and misinterpreted. M3, by the way, is simply the most inclusive measure of total money supply (excluding any credit measures) that exists. To add some broad perspective, here's a weekly M3 chart which includes an annualized 13 week rate of change line (in light blue).
http://www.nowandfutures.com/images/m3b_13week.png
As can easily be seen, the drop is not at all that large since a very similar and actually slightly larger drop happened just last year.
Additionally, drops have been much larger drops where M3 has been contracting at almost a -5% rate in various short periods in 1991, 1992, 1993 and 1994. It has also been below zero in the early '70s, early 1987, 1998, 1999, 2000, 2002 and 2003.
Is it significant and important? Yes... but in reviewing all the times that it has happened in the last 38 years of weekly Fed and reconstructed data, there isn't much that can be concluded that we don't know already. Those periods were ones of recession or slow growth or world financial crises or housing recoveries, or bubble tops or even U.S. financial crises.
(Chart since 1970 for the curious - http://www.nowandfutures.com/images/m3b_13week_long_term.png )
More important though is what it doesn't say, and especially what some bloggers and others who have a questionable understanding of M3 and other money measures have not been saying (or even outright avoiding due to ideology issues or vested interests, etc.).
Here's the chart that most clearly paints the story with both M3 and M2, and why they can be so useful. The obvious way that M2 and M3 track with inflation, as measured by CPI-U with corrections from John Williams of shadowstats.com, is unmistakable.
http://www.nowandfutures.com/images/m2m3_cpi_money_supply.png
The simple view and truth is that we're in an inflationary cycle, similar to the '70s, and real deflation is extremely unlikely in the foreseeable future.
A key though is what M2 is currently doing. It has been close to flat for some time while M3 is still growing, again in a similar manner as 1968-70 or 1974-75 or even 1999-2000. So its quite likely that, barring black swans, we'll see inflation dropping some in the short to intermediate term future.
Also note that neither M2 nor M3 tell anywhere near the entire story. There are many other ways to look at money supply and its effects on inflation and investing.
One quick example is M1, which some use as an inflation or deflation hint. Its true that M1 is expanding now, but when a certain monetary element called sweeps is added back in to help ensure that M1 is being compared and defined on an apples-to-apples basis, M1 plus sweeps has actually declining for a while now.
Hopefully, now that my opinions have been clearly stated and an additional important chart has been clearly linked to M3, certain bloggers and others will no longer mis-represent my views and opinions about M3 as they have been doing for months, regardless of my comments and requests.