Money Supply and the End of M3

Monday, November 14, 2005 | 04:01 PM

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 policymakers.”

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 decades.


* 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.

Monday, November 14, 2005 | 04:01 PM | Permalink | Comments (24) | TrackBack (1) add to | digg digg this! | technorati add to technorati | email email this post



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» M3 or not M3? from Econbrowser
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. [Read More]

Tracked on May 30, 2006 11:34:47 PM


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?

Posted by: Anon | Nov 14, 2005 4:44:07 PM

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