Comments on: Why Do I Follow M3?

By: flow5

flow5 — Wed, 09 Jan 2008 15:26:10 +0000

Since the DIDMCA the money supply has become unknown & unknowable.

Even so, what went for M2 went for M3. And M2 erroneously includes MMFs in its definition. MMFs are the customer’s of the commercial banks. They are financial intermediaries.

Monetary savings are never transferred from the commercial banks to the intermediaries; rather are monetary savings always transferred through the intermediaries. Whether the public saves or dis-saves, chooses to hold their savings in the commercial banks or to transfer them to intermediary institutions will not, per se, alter the total assets or liabilities of the commercial banks; nor alter the forms of these assets or liabilities.

Financial intermediaries (MMFs) lend existing money which has been saved, and all of these savings originate outside the intermediaries. The utilization of loan-funds or activation of monetary savings by these financial intermediaries is captured thru the velocity of their deposits (bank debits/withdrawls), not thru the volume of their demand deposits.

I.e., from the standpoint of the economy, MMF deposits never leave the CB system. And the growth of the MMFs is prima facie evidence that existing funds/savings have already been spent/invested (transferred) by their owners/savers to borrowers. I.e., this represents a double counting.

Even now, M3 is meaningless.

By: anon1

anon1 — Wed, 09 Jan 2008 13:15:00 +0000

The balance sheet of the banking system – credit or M. It doesn’t matter. Credit creates M at the macro level. The size of the balance sheet, both sides, is what’s key. As are capital ratios of course. Although ‘risk-adjusted capital’ ratios are now revealed to be as much of a sham as the risk managers’ math models.

By: fidel_castro

fidel_castro — Tue, 08 Jan 2008 17:54:50 +0000

Using the delta of M3 – M2 as a measurement of how stretched is Federal Reserve’s balance sheet is a novel and interesting aspect to these numbers.

I revisited the definitions of M[0-3] and up to M2 it all measures cash in its various forms. M2 = cash + deposits + savings + money market. M3 = M2 + CDs + eurodollars + repurchase agreements.

Obviously repurchase agreements are evidence of expanding balance sheet but are they not masked by the amount in CDs and eurodollars? To me the delta of M3-M2 can’t clearly speak about Fed’s balance sheet.

I believe that on Fed’s web site you can find the amount of outstanding repurchase agreements, why would you need M3 to glean that? They must be less than $50bil and M3 is trillions. The size of the repurchase agreements is dwarfed by the other components of M3.

To me M3 demonstrates the amount of dollars that are abroad and less of an indicator of repurchase agreements.