Money Supply and the End of M3

Alex, I’ll take esoteric economic indicators for $100: 

Last week, the Federal Reserve System
announced that, as of March 23, 2006, they will be ceasing the publication of
the M3 monetary aggregate. According to a Fed spokesman, the Federal Reserve
Board of Governors wants to “de-emphasize the role of M3.” Academically, they
add, this measure of money supply receives less attention than M1 and M2 do. A
Fed spokesman also suggested that M3 is “no longer closely tracked by

For those of you who are not econogeeks, M3* is the broadest
measure of money supply in the U.S.

The Fed will still report the individual components, and so
anyone who wants to can (painstakingly) reassemble this into their own M3 No
word if the regional Fed banks like the St. Louis Fed will continue to do so.

One would hardly think an obscure economic measure is the
stuff of conspiracy theorists.
Some within the blogosphere are curious, but its hardly buzzing much over the issue.

The cessation of M3 data publication was hardly auspiciously
timed. Consider the huge increase in Money Supply over the past 8 years, while
the US has becomie excessively reliant on overseas credit to fund our twin
deficits (Balance of Trade, and Federal Budget) have reached record levels. So
why stop reporting M3?

Spencer England of SEER noted that MZM may be a more useful
measure of Money Supply, ever since the relationship between M1 + M3 and the
markets broke down. He blamed money market funds and banks paying interest on
demand deposits as the prime cause for the decoupling.

Oregon Economics Professor Mark Thoma noted that having M3
available makes it easier to track movements “into and out of M1 and M2 over
time.” While not having it available “is not a huge loss, it was nice to know
it was there to look at when it was needed. Thoma would have preferred that if
M3 goes, “some improved measure of highly liquid assets beyond M2 be
constructed to take its place.”

Given the computing power at the Fed’s disposal, and the
already incurred expense of compiling the data components, it essentially costs
the Fed nothing to create the M3 data. Compared to CPI, this is one of the most
steady data points the Federal Government generates. It seems a shame to lose a
series that has been reported (and in such a consistent manner) for so many


* M3 includes M2 components, plus institutional money market mutual funds,
large-denomination time deposits, repo agreements on U.S. government and
federal agency securities, and Eurodollars held by U.S. addressees overseas.

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What's been said:

Discussions found on the web:
  1. Anon commented on Nov 14

    So what’s the real reason?

    In general, when a U.S. government agency in the last five years has ceased publishing a data set, it has always been to cover up something. This has been a pattern without exception. So, what is being covered up here? A hard landing?

  2. Tim commented on Nov 14

    So where will repurchase agreements (RPs) and Eurodollars show up in the future. Large time deposits are in the Z1, but it sounds like they are no longer going to report repurchase agreements (RPs) and Eurodollars.

    How does M3 get reconstructed?

  3. Jnavin commented on Nov 14

    Anon asks “what is being covered up here?”

    Answer: inflation.

    It’s almost a buy signal for precious metals or TIPS and a sell for bonds.

  4. alice commented on Nov 14

    “Safe Haven” also has a couple articles out on it. They are also pretty alarmist:

    W shall see if this thing blows up in importance, it’s a good test of the “blogiospheres” ability to muck rack.
    Or is that rack muck?

  5. cm commented on Nov 14

    So the discontinuance of M3 is no big deal, as everybody is free to do the X+Y+Z for themselves?

    While that may be “technically accurate”, there is a larger meaning to it — scrapping of easily accessible information, AKA “transparency”.

    In analogy, we can always survey the local stores by ourselves and compile our alternative CPI, but that’s not exactly the idea, is it?

  6. cm commented on Nov 14

    If memory serves, a few years back the Fed already discontinued some GDP-related data series (or threatened to) as it was used by some to “reverse-engineer” unpublicized GDP components. The detail eludes me though.

  7. MyKillK commented on Nov 14

    Could someone explain or reference a description of repurchase agreements?

    Thank you

  8. cb commented on Nov 14

    Changes that cloud the financial waters will only cost the FED credibility and FED credibility is one of the few reliable supports for the dollar, it certainly isnt Congress or the White House. This is a pointless change that only makes people question the FEDs motives and independence from political pressures.

  9. Tim commented on Nov 15

    “The Fed will still report the individual components, and so anyone who wants to can (painstakingly) reassemble this into their own M3.”

    So where will repurchase agreements (RPs) and Eurodollars show up in the future. Large time deposits are in the Z1, but it sounds like they are no longer going to report repurchase agreements (RPs) and Eurodollars.

    How does M3 get reconstructed?

  10. Charles Hoyenski III commented on Nov 22

    Is it a coincidence the Iranians are opening a euro only bourse in March next year ? This would compete directly with the petrodollar based exchanges in London and New York,
    It may be they’ve already planned the iranian invasion and realize that a war paralyzed persian gulf would effectively strangle the economy by sending oil well past $100 a bbl.
    I’d predict record high prices along with concurrent inflation starting in march of next year, this seem’s to be the ideas being orchestrated by the various branches of our govt. and private
    sectors (defense and fed. reserve, a PRIVATE entity).

  11. Bud Hovell commented on Nov 22

    From an authoritative source at the FED:
    The H.6 Release, Money Stock Measures, has never contained any information about the Federal Reserve’s open market operations. The data on repurchase agreements contained in this release, which we will stop collecting and publishing on March 23, 2006, are the RPs that banks use to raise money from the public for their business activities.

    Data on the repurchase agreements related to the Federal Reserve’s open market operations are published on the H.4.1 Release, Factors Affecting Reserve Balances
    ( The current amount of outstanding repurchase agreements can be found on line 9 of the first page, and it is these amounts that show the RPs that the Federal Reserve has engaged in to add reserves to the banking system.

    The Federal Reserve Bank of New York, which actually conducts the open market operations, publishes extensive information and analysis of these operations on its website
    ( On this page, the New York Fed provides a tool for the public to look up daily historical data on past operations and a link to an ftp site where the historical data are stored. The New York Fed also posts data on the current day’s operation very shortly–often 5-10 minutes–after they
    occur (

  12. Dick Lepre commented on Dec 16

    I made a lengthy posting on this topic in my blog regarding this issue. Two points: 1) a better measure would be what I would can M2.5 which would be M2 + Repos (eliminating Eurodollars and big-ticket CD’s from M3). Repos are in play. Eurodollars are not in play in the US economy. 2) None of this really matters. These “classic” measures of money supply have been rendered essentially useless because so much wealt is controilled my Mutual Funds and not under the thumb of the Fed. In short, if “money supply” means “that which is available to spend” the fact is that the Fed no longer controls this.

  13. Andrew Vallee commented on Feb 16

    Perfect setup, Gee how long is it going to take before forign investors realize they been had by the US government. This is a temp. cover up of the Governments in ability to cover the massive un-published commitments of 55+ trillion owed by the US. Fed Gov. (Social Security / Medicare + 11 trillion offbook finance and the 8.4 Trillion Published National Debt the USA has.) Gee the writing is on the wall as Americans have a negative savings rate first time since the great depression. Will we witness the US collapse the world financial markets???

    Ask yourself why was Alan Greenspan hording Gold since 2000??? Because he knew that what he was doing was wrong for the long term stability of the nation but was told if he wants the job he has to do it or they would replace him!

    Silver/Gold/Zinc and Farm Land ect.. is the next wave.

  14. Spencer Hall commented on Apr 27

    M3 is mudpie. It is meaningless. It is an incontrovertiable fact that it is mathematically impossible to miss forecasts for GDP, inflation or interest rates. I.e., money is the measure of liquidity (always has been, always will be); income velocity is a contrived figure; and the rates-of-change used by the Fed are specious. Vt (transactions velocity) is a function of three factors: (1) the number of transactions; (2) the prices of goods and services; (3) and the volume of M. Inflation analysis cannot be limited to the volume of wages and salaries spent. To do so is to overlook the principal “engine” of inflation. Some people prefer the Devil Theory of inflation: “It’s all OPEC’s fault” This approach ignores the fact that the evidence of inflation is represented by the actual prices in the marketplace. The administered prices of OPEC would not be the actual market prices were they not “validated” by MVt.

  15. Mrbob commented on May 1

    What happens when the Iranian or Norwegen Oil Bourse starts to trade in Euros and folks start to dump eurodollar deposits for other currencies. Would M3 have shown this?

  16. Econbrowser commented on May 30

    M3 or not M3?

    In response to a post earlier this week on M2 and inflation, one of our readers asks why I looked at M2 rather than M3. Here’s the answer.

  17. Dog commented on Dec 18

    I think i’ll get me some physical gold bullion!

  18. Bill Boscowitz commented on May 9

    “M3 is mudpie.”

    Maybe you’re right. How then can we calculate whether the Fed is “printing money” to address the liquidity problems brought about by unnaturally low interest rates?


  19. Flow5 commented on May 15

    The Fed has eliminated any gauge. They discontinued the debit series & they don’t publish required legal reserve figures. M3 contains both liquid assets & the money stock. The Keynesian’s don’t distinguish between the supply of money & the supply of loan-funds. And it’s hard to know anything about money if you can’t separate the two. In the long run our means-of-payment money will approach M3. But there will be no way of knowing. And the money “multiplier” (commercial bank credit/legal reserves) is increasing 5x faster than in the past. The link has practically been severed. I think the Fed is operating without an anchor or a rudder.

    BR: John Williams at Shadow Govt Stats assembles the same data that goes into M3.

  20. flow5 commented on Feb 14

    Maybe you’re right. How then can we calculate whether the Fed is “printing money” to address the liquidity problems brought about by unnaturally low interest rates?

    (1) Ben S. Bernanke
    Chairman and a member of the Board of Governors of the Federal Reserve System. Chairman of the Federal Open Market Committee, the System’s principal monetary policymaking body.

    At the same time, because economic forecasting is far from a precise science, we have no choice but to regard all our forecasts as provisional and subject to revision as the facts demand. Thus, policy must be flexible and ready to adjust to changes in economic projections.

    2) European Central Bank (ECB) Central Bank for the EURO

    The transmission mechanism is characterised by long, variable and uncertain time lags. Thus it is difficult to predict the precise effect of monetary policy actions on the economy and price level…

    3) Janet L. Yellen, President and CEO of the Federal Reserve Bank of San

    You will note that I am casting my statements about the stance of policy and the outlook in very conditional terms. I do this because of the great uncertainty that surrounds these issues. Frankly, all approaches to assessing the stance of policy are inherently imprecise. Just as imprecise is our understanding of how long the lags will be between our policy actions and their impacts on the economy and inflation. This uncertainty argues, then, for policy to be responsive to the data as it emerges, especially as we get within range of the especially as we get within range of the desired policy setting.

    (4) Thomas M. Hoenig
    President of Federal Reserve Bank of Kansas City

    Monetary policy must be forward-looking because policy influences inflation with long lags. Generally speaking a change in the Federal funds rate may take an estimated 12-18 months to affect inflation measures….But the course of monetary policy is not entirely certain. & will depend on how the economy evolves in the coming months.

    (5) William Poole*
    President, Federal Reserve Bank of St. Louis

    However inflation is measured, economists agree that monetary policy has at most a minimal influence on the rate of change in the price level over relatively short time periods—months, quarters or perhaps even a year. Central banks are responsible for medium- and long-term inflation—such inflation, as Milton Friedman wrote, is a monetary phenomenon that depends on past, current and expected future monetary policy. As a practical matter, the medium- to long-term likely is a period of two to five years.

    (6) Robert W. Fischer – President Dallas Federal Reserve Bank
    November 2, 2006:
    “In retrospect [because of faulty data] the real funds rate turned out to be lower than what was deemed appropriate at the time and was held lower longer than it should have been. In this case, poor data led to policy action that amplified speculative activity in housing and other markets. The point is that we need to continue to develop and work with better data.”

    (7) Governor Donald L. Kohn

    I think a third lesson is humility–we should always keep in mind how little we know about the economy. Monetary policy operates in an environment of pervasive uncertainty–about the nature of the shocks hitting the economy, about the economy’s structure, and about agents’ reactions. The 1970s provide a sobering lesson in the difficulty of estimating the level and rate of change of potential output; these are quantities we can never observe directly but can only infer from the behavior of other variables.

    First, there is no ambiguity in forecasts. In contradistinction to Bernanke (and using his terminology), forecasts are mathematically “precise” (1) nominal GDP is measured by monetary flows (MVt); (2) Income velocity is a contrived figure (fabricated); it’s the transactions velocity (bank debits, demand deposit turnover) that matters; (3) “money” is the measure of liquidity; & (4) the rates-of-change (roc’s) used by the Fed are specious (always at an annualized rate; which never coincides with an economic lag). The Fed’s technical staff, et al., has learned their catechisms;
    Friedman became famous using only half the equation, leaving his believers with the labor of Sisyphus.
    The lags for monetary flows (MVt), i.e. proxies for real GDP and the deflator are exact, unvarying, respectively. Roc’s in (MVt) are always measured with the same length of time as the economic lag (as its influence approaches its maximum impact; as demonstrated by a scatter plot diagram).
    Not surprisingly, adjusted member commercial bank free legal reserves (their roc’s) corroborate/mirror both lags for monetary flows (MVt) –– their lengths are identical.
    The lags for both monetary flows (MVt) & free legal reserves are indistinguishable. Consequently it has been mathematically impossible to miss an economic forecast. There are no inaccuracies, just some non-conforming & unavailable data This is the “Holy Grail” & it is inviolate & sacrosanct.
    The BEA uses quarterly accounting periods for real GDP and deflator. The accounting periods for GDP should correspond to the economic lag, not quarterly. They should represent a rolling moving average.
    Monetary policy objectives should not be in terms of any particular rate or range of growth of any monetary aggregate. Rather, policy should be formulated in terms of desired roc’s in monetary flows (MVt) relative to roc’s in real GDP. Note: roc’s in nominal GDP can serve as a proxy figure for roc’s in all transactions. Roc’s in real GDP have to be used, of course, as a policy standard.
    Because of monopoly elements and other structural defects which raise costs and prices unnecessarily and inhibit downward price flexibility in our markets (housing being most notable), it is probably advisable to follow a monetary policy which will permit the roc in monetary flows to exceed the roc in real GDP by c. 2 percentage points. In other words, some inflation is inevitable given our present market structure and the commitment of the federal government to hold unemployment rates at tolerable levels.
    Some people prefer the devil theory of inflation: “It’s all OPEC’s fault.” This approach ignores the fact that the evidence of inflation is represented by actual prices in the marketplace. The “administered” prices of OPEC would not be the “asked” prices were they not “validated” by (MVt).
    Dr. William Poole: The depreciation of the dollar is something that is not explicable. And the way I like to phrase this – I like to put my academic hat back on. If you look at academic studies of forecasts of the exchange rates across the major currencies, you find that the forecasts are simply not worth a damn.

    Your best forecast of where the dollar is going to be a year from now is where it is now. There is no model that will beat that simple model. And people have dug into this over and over again. Obviously, you can make a ton of money if you were able to have accurate forecasts.

    No one has been able to come up with a forecasting methodology that will make you a lot of money. And you can’t make money under the forecast that the dollar is the same as it is right now a year from now. I can go a step beyond that though – and this is what I think is really interesting.

    The academic literature is also full of papers trying to explain exchange rate fluctuations after the fact – after you have all the data that you can put your hands on – data that you can’t accurately forecast, but data that after you get your hands on it might logically explain the fluctuations of currency values. And those models aren’t worth a damn either.

    We cannot explain the fluctuations of currencies after they have occurred even with all the data that we can dig out. And therefore, to me, it’s completely unsupported idle speculation not only to make the forecast but to talk about why the dollar has behaved as it has.

    I know the financial pages and the traders love to talk about that, but I would challenge any of them to construct a model that would stand up to a peer review journal in economics or finance. The models just aren’t that good.”

    A post-event question from a Bloomberg reporter: “I was hoping you could elaborate a little bit on the implications of the weakness in the dollar right now… whether implications on inflation or just the economy in general.”

    “I don’t see any implications for inflation, at least with the magnitude of the depreciation that we’ve seen so far. The evidence is that – there’s a literature that looks at what’s called “pass through” – pass through of changes in domestic prices. And the evidence is that the pass through coefficient has gotten small and smaller.”

    If the world’s largest economy ($13b+) has a contraction in its economy, imports will fall, & export driven countries will suffer, exacerbating the negative flow of funds, and any currency crisis. Forecasting results:

    Mexico crisis 2/17/1982 (not identified) – Peso was pegged
    Listed below, currency crisis that were predictable & preventable
    (1) Black Monday Oct 19 1987 (same day)
    (2) Mexico Peso crisis Dec 1994 (2 months early) Peso was pegged
    (3) U.S. dollar fall in Mar. 1995 (same month)
    (4) Asian financial crisis July 1997 (one month late) – without primary time series
    (5) Russian financial crisis 1998 (same month)
    Yea for these, our sterling pieces, all of pure Athenian mold — ARISTOPHANES, THE FROGS

    Monetary flows (MVt) peaked Oct. 1974 (the stock market bottom)
    Monetary flows (MVt) peaked Oct. 1982 (1 month after the stock market bottom).
    (MVt)’s lag for long-term rates peaked Sept. 1981 (this century’s peak in long-term interest rates).
    Monetary flows (MVt) peaked in Jun 1984 (the stock market bottom). 1 option trade beat Prechter’s trading championship record with his 200+ trades
    The stock market bottom of 1982 was identifiable a year and ½, earlier

    Go, presently inquire, and so will I, where money is. — THE MERCHANT OF Venice

    1938-1940 roc’s in “free” legal reserves pulled us out of the depression.
    1951 (Korean War) had the highest roc’s in inflation & in “free” legal reserves since WWII.
    1973 had the highest roc’s in inflation & the highest roc’s of “free” legal reserves ever.
    1979-1980 had the highest rates of inflation & the highest roc’s of “free” legal reserves ever.
    “Black Monday” Oct. 19, 1987, coincided with the sharpest and fastest peak-to-trough decline in the roc for real GDP since 1915.
    The stock market’s 1QTR top in 2000 coincided with a +3.24 (roc) in Dec. 1999, which reversed to -.32 in Feb 2000. An historic reversal.
    Feb 27 coincided with the sharpest decline in 1) the absolute level of “free” legal reserves, & 2) & an historically large peak-to-trough reversal of roc’s for proxies on real GDP & the deflator.

    The policy rule is ex-post. (e.g, Taylor Rule).
    Bank debits & “free” legal reserves are ex-ante.
    Some people think Feb 27, 2007 started across the ocean In fact, it was home grown. Member Bank Reserve Requirements; Feb, 5, 1938. “In 1931 this committee recommended a radical change in the method of computing reserve requirements, the most important features of which were…”(2) uniform percentage requirements against the volume of deposits of both types and in all classes of cities; and (3) requirements against debits to deposits.”

  21. whit3hawk commented on Feb 24

    If you follow a chart of the growth of M1, M2, M3 moving simultaneously you can see how increases in M2 and M3 have later translated into increased in M1.

    It stands to reason that when a CD and other large time deposits expire, some will be re-invested, but even the small percentage that moves into M1 is enough to become an unpredicted or unforeseen inflationary factor, if M3 isn’t in the equation at all.

    But maybe the Fed doesn’t need that because they are not really able to manage what’s happening, anyway, with all they do already… we still have economic chaos.

Read this next.

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