Back in March of 2006 I told you the U.S. Government was hiding something and that something was the growth in the money supply as measured by M3.
Back then the Federal Reserve tracked and published the money supply measured three different ways– M1, M2, and M3.
Each of these three money supply measures track slightly different views of the money supply.
The most restrictive, M1, only measures the most liquid forms of money; it is limited to currency actually in the hands of the public. This includes checking accounts travelers checks, and other deposits against which checks can be written. Of course the money supply is much bigger than that. What about savings accounts?
M2 includes all of M1, plus savings accounts, time deposits of under $100,000, and balances in retail money market mutual funds. But if you have money in a money market mutual fund would you consider that money? Of course so there is M3.
M3 included all of M2 (which includes M1) plus large-denomination ($100,000 or more) time deposits, balances in institutional money funds, repurchase liabilities issued by depository institutions, and Eurodollars held by U.S. residents at foreign branches of U.S. banks and at all banks in the United Kingdom and Canada.
But then for some “unknown” reason the U.S. Government stopped tracking that number. Supposedly to save money (yeah right). See our article Good-Bye M3 for the full story.
So why is M3 important? Because the money supply controls how much inflation we have. See the article Inflation Cause and effect for more information.
One would have hoped that the disappearance of such a useful and telling indicator of fiscal responsibility would have been met by a public outcry. And that in a Democracy that outcry would have resulted in the Government reinstating the tracking of M3.
But unfortunately, that did not happen. The news media barely mentioned the issue and the public remained blissfully ignorant and politicians could now inflate our currency virtually unseen.
But the free enterprise system stepped in and took up the slack where Democracy failed. Along came John Williams of “Shadow Government Statistics” and he is calculating and publishing the current M3 Money numbers.
Now of course these aren’t “official” government M3 money supply statistics anymore but if you ask John, he will tell you his estimate of the M3 numbers are less subject to fudging than the government numbers anyway.
So we will be updating and providing you with John’s M3 money supply numbers right here.
Current M3 Money Supply Commentary
As you can see from the chart below, M3 Money Supply actually began shrinking beginning at the end of the first quarter of 2008. Resulting in an economic contraction just in time for the election. (Hmm…)
Since then M3 has actually gone negative. What caused this massive contraction in the money supply? Basically, banks aren’t loaning anywhere near as much money. In other words unless you are a great credit risk (i.e. you don’t actually need the money) you won’t be able to get a loan.
History tells us that, this is precisely what triggered the “Great Depression” no money available from the banks to grease the economy.
This puts the money supply under extreme pressure to contract. All of this is very deflationary.
In August 2008, (before the crash) I said, “Now you might think a little deflation will help counteract all the inflation we’ve had lately. And yes that it will. But unfortunately, as we see in the article Inflation and Recession high inflation rates, followed by a contracting money supply, is the perfect recipe for recession or even depression… Unfortunately, based on the money supply, at the moment it looks like we are crashing down.”
The impact the economy feels depends on how much the money supply contracts or more precisely at the speed that the rate of increase slows. This is very important…
The economy is like a drug addict. First the money supply increases by 1% and the economy gets a nice buzz. But the next time it takes a 2% increase to get the same buzz and before long it takes 10%, 12%, 15%. And then if the rate of increase drops back to “only” 9% the economy goes into withdrawal and tanks.
That is exactly what we saw in 2008, we saw a progressively higher rate of increase in the money supply and then a drop down to “only 9%” and we saw banks and insurance companies going through major withdrawal symptoms.
You would think a 9% increase in the money supply would be inflationary but instead we get deflation? That is because of the decrease in the rate of increase. It is sort of like the difference between speed and acceleration. Speed is the amount of increase 1%, 2% etc. but as it goes from 1% to 2% that is acceleration. The economy is addicted to acceleration. So deceleration results in deflation while acceleration results in inflation.
Currently, we are seeing a slight acceleration in the money supply, which may help the patient temporarily but hasn’t done a thing to cure his addiction.