View From a Height

As his contribution to this week's Carnival of the Capitalists, the Prudent Investor takes the Fed to task for deciding to stop publishing M3 data. This Austrian blogger believes that 1) the M3 has been expanding at rates that should indicate a strong market in wheelbarrow futures, 2) the Fed is engaged in the beginnings of a coverup that will hide this fact, destroying all US economic forecasting, and 3) the US government bombed the Pentagon on 9/11 to justify a Nazi-like takeover of the country.

Really.

You know how we used to talk about the "Vietnam Syndrome," how every war was another Vietnam? Apparently, for some Mittel-Europeans, every large-scale terrorist assault followed by the response of a healthjy society, combined with normal governmental activity, is another Anschluss. No doubt the incipient hyper-inflation is merely another step in Hermann von Rumsfeld's plan for a New American Century fund.

It would help if more than about 1% of his analysis were grounded in fact. Bernanke wants to expand transparency of the Fed's decision-making process, the money supply isn't expanding like a Guth-universe, and Barbara Olsen actually died when her plane hit the Pentagon. Then again, any government capable of turning the Pentagon into the set of Capricorn One could probably fake these numbers more easily then just not publishing them.

What's that point #2 again? The money supply isn't running out of control? Well, not entirely.

Here are the year-over-year graphs for M1 and M2:

And here's the year-over-year for M3:

Sure, it's higher than growth, but by historic levels, it's not particularly high, and through the low-inflation 90s, its margin compared to GDP growth was much higher than it is now.

Where's the extra growth coming from? Here's the Fed's definition of the M3:

M3: M2 plus large-denomination ($100,000 or more) time deposits; repurchase agreements issued by depository institutions; Eurodollar deposits, specifically, dollar-denominated deposits due to nonbank U.S. addresses held at foreign offices of U.S. banks worldwide and all banking offices in Canada and the United Kingdom; and institutional money market mutual funds (funds with initial investments of $50,000 or more).

And here are the M3-specific components:

Which one of these things is not like the others? Why, it's large-denomiation (read: institutional) time-deposits! That's where the M3 growth is coming from. Companies with too much cash, looking for places to invest. There are some signs that inflation could become a problem, including high metals prices, some evidence from the price indices, and lots of purchasing- and supply-manager survey data. But the money supply itself doesn't look like it's flying off into space.