The Truth, And Lies, About The M3 Money Supply

Ambrose Evans-Pritchard, notorious inflationist, is out with his latest hit-piece-disguised-as-news-article wherein he discusses the supposedly alarming downward trend in US M3 money supply growth.

The M3 figures - which include broad range of bank accounts and are tracked by British and European monetarists for warning signals about the direction of the US economy a year or so in advance - began shrinking last summer. The pace has since quickened.

The stock of money fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6pc. The assets of insitutional money market funds fell at a 37pc rate, the sharpest drop ever.

"It’s frightening," said Professor Tim Congdon from International Monetary Research. "The plunge in M3 has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly," he said.

Frightening, yes, I am sure. But is the drop in M3 money supply really the culprit as far as why the US is not recovering properly?

Mr Congdon said the Obama policy risks repeating the strategic errors of Japan, which pushed debt to dangerously high levels with one fiscal boost after another during its Lost Decade, instead of resorting to full-blown "Friedmanite" monetary stimulus.

"Fiscal policy does not work. The US has just tried the biggest fiscal experiment in history and it has failed. What matters is the quantity of money and in extremis that can be increased easily by quantititave easing. If the Fed doesn’t act, a double-dip recession is a virtual certainty," he said.

Mr Congdon said the dominant voices in US policy-making - Nobel laureates Paul Krugman and Joe Stiglitz, as well as Mr Summers and Fed chair Ben Bernanke - are all Keynesians of different stripes who "despise traditional monetary theory and have a religious aversion to any mention of the quantity of money". The great opus by Milton Friedman and Anna Schwartz - The Monetary History of the United States - has been left to gather dust.

Oh please! How truly original for Mr. Evans-Pritchard: we'll just print out way out of it! Nevermind the fact that Japan, too, has engaged in massive QE as a monetary compliment to its fiscal policy insanity. And if you've followed Evans-Pritchard on the whole eurozone crisis, you know by now that he has called for massive money-printing and QE there, too, because the EU "must" be saved. He just never seems to get to explaining why the EU must survive, and how debasing the EU's currency actually accomplishes that goal.

Anyway, Evans-Pritchard and his infatuation with expanding money supplies are not really the point of my post-- the veracity of Evans-Pritchard's claim about M3 shrinking, is. And on that count, one anonymous blogger over at "Stock Psychology" has some harsh words for Evans-Pritchard and his claims:

The claim of a shrinking M3 can not stand the scrutiny of logic and fool even a three year old child. The US Treasury Department has been conducting bi-weekly treasury auctions of unprecedent and astronomical amounts. The treasury auctions never fail. There are always willing buyers bidding for the US treasuries at pathetically low, almost zero yields.

Regardless who those misterious US treasury buyers are and why they are buying at such low yields, any one who buys US treasury must tender US dollars to buy the treasuries. The money tendered must be US dollars in one form or another and hence must be part of the circulating M3 of US dollar.

If the total M3 is shrinking, where does the spare money come from that buys the US treasuries? Coming out of thin air? And where does the money go once they are tendered to the US treasury Department? Vanish into thin air again? A shrinking M3 makes no sense at all.

Now where does the idea of shrinking M3 come from? Read the history of M3b here. Notice that the FED stopped publishing statistics of M3 as of March, 2006. So there is no longer any official data on M3 after March, 2006. Any M3 number we see after the FED stopped publishing it, are NOT official numbers, but mere the guess work of private parties. These unofficial M3 numbers, or M3b, thus may not be accurate.

This post is getting long enough, but if the fact that M3 numbers are no longer published peaks your interest, you can read the full treatment and learn the "fatal mistake" the author has uncovered by looking at the full post here.