M3 growing at 10% annually

[powayseller]

Barry Ritholtz writes that M3 is growing at 10% annually, since the government stopped publishing the figure in March.

That should mean inflation is growing at 10% too, right, and that precious metals are the only way to preserve our spending power?

I’d seen the charts over at Shadow Government Statistics before, but wasn’t sure what to make of it. I still don’t….

[Anonymous]

It means that there is POTENTIAL for inflation.

Money supply x velocity = nominal GDP. If the incremental dollars aren’t spent or invested (zero velocity), no inflationary effect.

Right now, the Japanese and Chinese have a lot of dollars parked/iced (velocity = 0); if they ever put them into circulation by selling them, they’d be added back to the money supply and could cause inflation.

[powayseller]

The government creates the money by auctioning Treasuries, and they use that money to run the government, right? So they are spending the money they are creating.

If we use the true inflation figure, based on what people actually buy, maybe CPI is close to 10%.

[sjk]

Powaysellar,

M-3 is the following; M2, plus large time deposits, repos of maturity greater than one day at commercial banks, and institutional money market accounts.

M1, is restricted to the most liquid forms of money; it consists of currency in the hands of the public; travelers checks; demand deposits, and other deposits against which checks can be written. M2 includes M1, plus savings accounts, time deposits of under $100,000, and balances in retail money market mutual funds.

In short, the M3 money supply is a broad measure of money and is an estimate of the entire supply of money within an economy. Regards,

[Anonymous]

PS, yes to “…So they (Federal government) are spending the money they are creating…”

But, the Federal government then sells Treasury securities to the Japanese and Chinese and Brits: those folks turn in billions of dollars and get a Treasury note/bill/bond in return.

Thus, as long as foreigners and Americans keep buying Treasuries, there is no increase in dollars (the government is, net effect, purchasing goods and services with Treasury securities/IOUs), hence, relatively benign inflation to-date.

When the foreigners and Americans quit buying those Treasuries, the printed dollars used by the government to purchase goods and services will remain in circulation, resulting in inflation.

[powayseller]

sjk, thanks but I know what M3 is… I’m not *that* confused, 🙂

[bubba99]

We have talked about M3 in other threads, and yes is a problem. Particularly beginning last month where other governments did not buy the US debt offerings to pay the balance of payments. Although I cannot prove it, the only other way to pay the debt is for the FED to buy US treasuries to pay the bills. This means more dollars in circulation, and less value to those who hold dollar debt in Europe, China, and Japan. The difference comes out in the exchange rate of dollars to euros.

Remember that at the end of 2002, a dollar bought 1.12 euros. Now 4 years later, a dollar buys .76 euros – a decline of 36% in a little under 4 years. So in theory, the price of European goods and services should have gone up 36% because the dollar decline by that much, but they have not. The Europeans, China, and Japan, et al are continuing to eat the losses to keep selling to the US consumers. But not forever.

China which is holding/was holding about a trillion dollars in reserves has said they are going to diversify into other currencies. And last month we saw the result. Not enough foreign buyers for dollar debt. When you wrote the earlier thread about foreign banks diversifying out of dollars (earlier this month, or last month) it was .78 dollars per euro, now it is .76, a loss of 2.56%. The more US debt the FED buys, the faster the growth of M3. Sooner or later out foreign suppliers will need to raise prices to offset the dollar devaluations, and then inflation will hit 10+ percent.

[powayseller]

How long do you guys think it will take for the dollar to tumble, and/or inflation to hit over 10%? I’ve learned that the economy and the markets move much slower than I ever thought. Earlier this year, I was certain we’d have a recession by now, but I did not realize the Fed would keep loosening the money supply, and the private equity bubble was growing, and that housing prices take so long to fall. It could take several years for the dollar to fall. It can rise again next week.

[sdrealtor]

FYI, housing prices fell rapidly this year. The pace of declines is unlikely to continue IMHO.

[powayseller]

What do you think will happen to housing prices when 70% of all homes purchased AND refinanced in San Diego since 2004 reset to higher interest rates?

We’re talking about 70% of 100,000 homes sold, plus 70% of unknown numbers refinanced, for a total of possibly 100K – 200K homes. What happens when they reset to higher interest rates? So you think that prices will drop less AFTER these mortgages reset, than before?

[sdrealtor]

You state these number as fact so easily. I think the big early declines we have seen were easy to erase. I said so back in April if you remember. So far I have been spot on. I trust my gut and instinct more than your numbers. I have no confidence in any of the data reported for anything based upon what I have personally seen and what I see reported. I think further declines wont come as easy as they have so far. Only time will tell who is correct.

[powayseller]

It’s a fact that almost 70% of all mortgages and refinances in San Diego County in the last 2 years are adjustable. In Phoenix it’s 40%, in Wyoming 25%. The majority of resets start next year.

I don’t put any faith in forecasting “by gut”.

A correction for you. It’s kind of cute that you say “your numbers”. The numbers are not mine. Mortgages are tracked by various firms, such as First American Real Estate Solutions and LoanPerformance, so it’s their numbers.

[sdrealtor]

I didnt ask you to put faith in me forecasting “by gut”. So far it hasnt failed me so I’ll stick with it until proven otherwise. The numbers you present are “your numbers”. I have no faith in them just as I have no faith in any reported statistics. I’ve seen too much that makes me question them. Interestingly, you constantly question the voracity of reported numbers that don’t support your viewpoint (i.e. inflation rates) while accepting those that do. I don’t accept the ones that support or contradict my viewpoint.

BTW, there are a lot of different kinds of adjustable mortgages. Some will adjust soon and some still have a long way to go. I know people with adjustable mortgages that could pay them off in cash if they want. I know this might be more the exception than the rule but I think the data on mortgages out there is crap.

[qcomer]

JG,

The FED prints money and passes this money on to govt via buying US debt (trasury bonds). Once the govt has the money it needs for its huge budget, it spends that money on defence,schools,infrastructure,public services,construction,Fed mortgage,to pay salaries of govt employers, etc. So all that printed money eventually makes it back to the people and causes real inflation that should be 10%. This is why dollar has declined somewhat in proportion to the money supply inflation, but the core CPI hasn’t reflected that. So I am not sure about your original point, the money printed by FED does reach the public eventually.

Now, the core CPI hasn’t moved by 10% because it excludes housing, stocks, energy, food, etc. On top of that, China/Japan artificially set the price of their currency to protect their exports to the US thus keeping the price of most everyday items in walmart, from rising too much. Also productivity has increased tremendously thus keeping up the supply of everyday items, to the money supply.

However, this kind of inflation then shows its face by resulting in asset bubbles in asset markets where supply is limited (real estate, gold, oil,stocks,etc) but demand keeps rising with increasing money supply. Inflation in these assets then forms a bubble as speculators/hedgies/flippers join in. This is why you have seen the price of houses/stocks/gold/oil jump up by huge amounts in last 4-5 years but the core CPI hasn’t been able to reflect that. This is also why I believe that there is a solid ground beneath house/stocks/gold/oil prices. How can you encourage people to save money in such fiscally iresponsible policy? If I get a car for $10K at 5% APR but am getting 20% return from my fund/house then why should I not keep borrowing and buying?

[Anonymous]

QC, my sole point is that the Japanese, Chinese, and Brits have voluntarily taken $2.5 trillion of U.S. dollars out of circulation over the last decade. If those dollars return to circulation, we will have mighty inflation.

[img_assist|nid=1590|title=
M3 vs. CPI and Net Foreign Purchases of U.S. Securities|desc=|link=node|align=left|width=466|height=255]

In the past, before big purchases of U.S. Treasuries by foreigners (pre mid ’90s), big increases in the money supply resulted in big inflation (big pink followed by big blue, three years later).

Today, we continue to have big increases in M3. However, because foreigners sop up those dollars and keep them out of circulation (by turning them into the U.S. Treasury in exchange for U.S. Treasury notes/bonds/bills), we’ve had low inflation. As soon as those foreign purchases of U.S. Treasuries stop, we’ll have big inflation, in my opinion.

Until that happens, though, big increases in M3 only have the ‘potential’ to add to inflation, and will not cause inflation as long as those newly printed dollars remain out of circulation. Just my view of the world.

[Author]

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