The Return of M3
November 21st, 2006This is a good one! Print paper. Print paper based on that other batch of paper. Then print more paper on that other, other batch of paper. Call this ponzi scheme the “the global economy.”
Actually, don’t even print the paper. That consumes too many resources and corporations and governments need to show a “green” image now. Appearances are important! (If we pulped all the trees on the planet, would that produce enough physical paper to print out all the “paper”?) Just make up symbols in a computer system, update the numbers associated with them in real time and call those “paper.” Oh sure! Brilliant!
But what about that pesky M3 number? That’s a biggy. Rather than trying to squeeze 10 pounds of shit into a 5 pound bag, They just dropped a curtain over the entire mess and assumed everyone would get bored and look away. Sure enough, mostly, everyone did.
Mostly…
Via: Big Picture:
In light of all this excess cash sloshing around, we wondered what M3 might look like if it were still being reported.
Wonder no more: We have located 2 separate sources for the reporting of M3. The first is Nowandfutures.com. As this article discusses, recreating M3 from publicly available data was relatively easy to do (to 5 nines accuracy).
As the chart below shows, M3 is alive and well and growing significantly…
…
Why is this significant? Well, M3 is growing quite rapidly, with the annual rate of change now over 10%. Prior to the announcement of M3’s demise, its growth was in the range of 3 – 7%.
Anytime a government agency stops reporting about their goings on, it should raise a few eyebrows. Now we see what happened once the reporting of M3 was killed — that measure of money supply spiked much higher — a rate of change that’s even greater than 10%+.
Funny how we alter our behavior when we think no one is watching what we are doing, isn’t it?
…
This is a classic case of “ignore what they are saying, because what they are doing is speaking so loud:” While the Federal Reserve has been reporting rather flat money supply growth in M2 (blue line), in reality they have been dramatically increasing the cash (red and blue line) available for speculation.
Hence, that sloshing sound you heard. They have been providing the fuel for the rally, the huge M&A activity, the explosion in derivatives — even the eye popping Art auctions are part of the shift from cash to hard assets. It is just supply and demand — print lots of lots of anything, and that thing becomes increasingly devalued. It works the same for cash as it did for Beanie Babies.
Related: PLUNGE PROTECTION TEAM ACTIVE, SEC TO SLASH MARGIN REQUIREMENTS TO 15%
Related: The Eerie “Bid” in the Equity Markets
Research Credit: West
A man named John Williams also tracks quantities like M3 on his Shadow Government Statistics site:
http://www.shadowstats.com/cgi-bin/sgs/data
Kurt
The DIDMCA became law on March 31st, 1980. Considering the paucity and nature of the comments in the financial press, the revolution and disastrous implications of this Act clearly are not recognized. The Act created the legal framework for the addition of 38,000 more commercial banks to the 14,000 we already had, and in the process, the abolition of 38,000 intermediary financial institutions. The intermediary financial institutions effected were the nation’s savings and loan associations, mutual savings banks, and credit unions. Trust companies and stock savings banks have been commercial banks for many years.
Commercial banks, as contrasted to intermediaries, are credit and money creating institutions. The intermediaries are credit transmitters. Savers (contrary to the premise underlying the DICMCA in which CBs are assumed to be intermediaries and in competition with S&L’s, etc.), never transfer their savings out of the commercial banking system (unless they are hoarding currency). This applies to all investments made directly, or indirectly through intermediaries. Shifts from time deposits (TDs) to DDs within the CBs, and the transfer of the ownership of these DDs to the S&Ls, involves a shift in the form of bank liabilities (from TDs to DDs), and a shift in the ownership of DDs (from savers to S&Ls, et al). The utilization of these DDs by the S&Ls has no effect on the volume of DDs held by the CBs or the volume of their earning assets. The reverse process, which is called “disintermediationâ€, has the opposite effect: the intermediaries shrink in size, but the size of the CBs remains the same.
In the context of the commercial banking system lending operations it is only possible to reduce bank assets and DDs by retiring bank-held loans. The saver-holder might use his funds for the payment of a bank loan, interest on a bank loan for the payment of a bank service, or for the purchase from their banks of any type of CB security obligations, e.g., bank stocks, debentures, etc.; or an increase in CB capital accounts through the retention of profits; or by the nonblank public increasing its holdings of currency; or by transferring DDs into (TDs).
Lending by commercial banks is inflationary. Lending by intermediaries is non-inflationary. The lending capacity of the intermediaries is limited by the volume of actual voluntary savings put at their disposal. In contrast, the lending capacity of the member commercial banks of the Federal Reserve System is limited by the volume of legal reserves put at their disposal by the Federal Reserve Banks in conjunction with the reserve ratios applicable to their deposit liabilities as fixed by the Board of Governors of the Federal Reserve System. For the nonmember banks the lending capacity at any given time is limited by the rate of expansion of member bank credit since the member banks still hold the major volume of commercial bank assets.
Commercial banks do not loan out existing deposits (saved or otherwise), or the owners equity or any liability item. When commercial banks grant loans to, or buy securities from, the non-bank public, (which includes every institution and every person except the commercial and the reserve banks), they acquire title to earning assets by the creation of NEW money (demand deposits) somewhere in the banking system.
From the standpoint of the individual commercial banker, his institution is an intermediary. An inflow of deposits increases his bank’s clearing balances, and probably its legal reserves – and thereby it’s lending capacity. But all such inflows involve a decrease in the lending capacity of other banks, unless the inflow results from a return flow of currency to the banking system, or is a consequence of an expansion of Reserve Bank credit.
The source of time deposits to the commercial banking system is demand deposits, directly or indirectly via the currency route or through the banks undivided profits accounts. The financial intermediaries are the customers of the commercial banks. Money flowing to the intermediaries actually never leaves the commercial banking system as anyone who has applied double entry booking on a national scale should know. And why, from a systems standpoint, should the banks pay for something they already have. I.e., Interest on deposits? From the standpoint of the commercial banking system, CBs would be more profitable, if our legislators got the commercial bankers out of the savings business. The effect of allowing CBs to “compete†with MMFs and other intermediaries has been, and will be, to reduce the size of the intermediaries – reduce the supply of loan-funds (available savings), increase the proportion, and the total costs of CB time deposits.
CB disintermediation is not, and has not been, predicted on interest rate ceilings. Disintermediation for the CBs can only exist in a situation in which there is both a massive loss of faith in the credit of the banks and an inability on the part of the Federal Reserve to prevent bank credit contraction, as a consequence of currency withdrawals. The last period of disintermediation for the CBs occurred during the Great Depression, which had its most force in March 1933. Ever since 1933, the Federal Reserve has had the capacity to take unified action, through its “open market powerâ€, to prevent any outflow of currency from the banking system.
Disintermediation for the intermediaries-S&L, MSB, CUs, MMMFs, etc., is predicated on their loan inventory (and thus can be induced by the rates paid by the commercial banks); earning assets with historically lower rate and longer term structures. In other words competition among CBs for time deposits has: 1) increased the costs and diminished the profits of commercial banks; 2) induced disintermediation among the “thrifts†with devastating effects on housing and other areas of the economy; and 3) forced individual banks to pay higher and higher rates to acquire, or hold, funds.
The monetary authorities of the Federal Reserve System, through their control over the volume of Reserve Bank credit, and the reserve ratios applicable to member bank demand and time deposits (and Eurodollar borrowings) can control the size and rate of expansion of the nonmember banks – as long as the member banks hold a substantial majority of all commercial banks assets. Since 1942, money creation is a system process. No bank, or minority group of banks (from an asset standpoint) can expand credit (create money) significantly faster than the majority banks expand.
Under the Act the legal reserves of the member banks remain the same, namely, balances in the Federal Reserve banks plus vault cash. Nonmember banks, S&Ls, MSB, and CUs ultimately (after eight years) were subject to uniform reserve ratios as these pertain to size of institution and type of deposit. But there is this important difference in reserve asset requirements: The nonmember banks can hold a part of their legal reserves in the form of interbank demand deposits (IBDDs) in correspondent member banks; the S&Ls, as IBDDs in the Federal Home Loan Banks; and the Credit Unions, as IBDDs in the National Credit Union Administration Central Liquidity Facility. Presumably in order to prevent the pyramiding of reserves, the Act requires all institutions holding these particular IBDDs to redeposit the funds in Federal Reserve Banks. Unfortunately, pyramiding will not be eliminated unless the Fed imposes a 100 per cent reserve ratio on these accounts. But the Act specifically exempts all except correspondent member banks from any reserve requirements.
There is no possible way for the Fed to get a “handle†on the money supply unless it has (and properly exercises) direct control over the volume of legal reserves, and the reserve ratios, of all money creating institutions. This the Act does not provide. The legal reserves of all money creating institutions should consist of directly held balances in the Federal Reserve banks – that and that alone. This was the original definition of the legal reserves of member banks in the Federal Reserve Act of Dec. 23, 1913 – (Owens Glass Act) and it is still the only viable definition (pre-1959 requirements pertaining to assets).
In due course, under this Act, our means-of-payment money supply (now designated as M1A by the Board of Governors) will approximate M-3.