For the week ending August 11TH, money supply grew by $7.0 billion to $7,728.1 billion (as measured by M2 on a seasonally adjusted basis). Since the week ending March 24th seasonally adjusted M2 has only increased by approximately 0.35% which means that M2 continues to grow at a rate of less than 1% per annum. The Federal Reserve continues to confirm that since March, 2008, their favorite economic bird has been the monetary hawk. After adjusting for inflation, money supply continues to shrink at a rapid pace.
Shrinking real money supply has the following macroeconomic implications:
- Slowing inflation;
- Lower economic activity;
- Strengthening dollar; and
- Credit rationing.
Economists Play A Game of Pretend By Publishing Data That Doesn’t Exist
Many so-called “prominent economists” in the United States and Great Britain were late to understand Federal Reserve monetary policy and are now covering up their past incompetence by making up data and presenting it at as both authoritative and accurate. The issues surrounding the destruction of money supply as result of the credit crisis were obvious but often ignored during the second half of 2007 and the first half of 2008. Despite having the Great Depression’s monetary history as a guide, many economists that were critical of Federal Reserve policy in the international media didn’t bother to think before talking. These economists didn’t understand that the Federal Reserve’s emergency liquidity facilities were designed to prevent a wholesale destruction of the monetary base and that once money supply was stabilized, the Federal Reserve could their current hawkish stance.
Now, those same economists who blew it earlier in the year are making up for lost time by fabricating M3 statistics. These economists want their paid subscribers to believe that they can calculate U.S. M3 and predict future policy despite the fact that on March 23, 2006 the Federal Reserve stopped publishing M3 and several of the monetary components that are necessary to calculate M3. In its press release disclosing the discontinuance of M3 the Federal Reserve stated:
“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.”
According to Federal Reserve, it doesn’t use M3 for policy making, doesn’t collect the data necessary to calculate M3 and doesn’t even want to spend the money to calculate M3 just in case it becomes valuable in the future.
So, what are the expert economists saying when they “calculate M3” and publish graphs that show its exact movements over the last 12 months? I think that there are two choices. Either they (i) are making up both data and analysis out of thin air or (ii) have supernatural powers that allow them to divine data that doesn’t exist and then act as a modern day Merlin when they predict the future.
My vote is that they’re making up data and analysis and we should not listen to them.