The End of M3 – Hiding
the Truth About Inflation
Each week the Federal Reserve reports various measures
of the US dollar money supply. One of these, M3, is the total quantity
of dollars in circulation. Last week the Fed stopped reporting M3,
explaining as follows the reason for their decision:
“M3 does not appear to convey any additional
information about economic activity that is not already embodied
in M2 and has not played a role in the monetary policy process for
many years. Consequently, the Board judged that the costs of collecting
the underlying data and publishing M3 outweigh the benefits.”
To the casual observer not familiar with the nuances
of central banking, the above stated reason may seem plausible.
But those with experience know that central bankers only tell you
what they want you to hear. Therefore, what is the real reason the
Federal Reserve stopped reporting M3?
The answer is very simple. The Federal Reserve
wants to hide the truth. They want to hide the fact that they are
inflating the dollar.
The Federal Reserve says that
M3 is no longer needed, and that M1 and M2, which only measure part
of the total quantity of dollars, are sufficient. But look at the
following table which I’ve taken from the Federal Reserve’s
last money stock report that included M3.
H.6 (508) Table 2
Money Stock Measures
% change at seasonally adjusted
3-mos from Nov 05 to Feb
6-mos from Aug 05 TO Feb
12-mos from Feb 05 to Feb
Inflation arises from creating too many dollars.
Therefore, compare the growth rates of M1 and M2 to that for M3.
Regardless whether you use the 3, 6 or 12-month
reporting period, by looking at just M1 or M2 growth rates, one
would get the impression that the level of current dollar creation
was not unusual and that as a consequence, no inflationary pressures
were building within the economy. But M3 reveals the truth, and
the truth is that the Fed is pumping up the money supply. The total
quantity of dollar currency is soaring, which is also apparent from
the following chart which shows the annual growth rates of M3 at
each month end since January 1975.
This chart provides a useful roadmap that illustrates
the inflationary and disinflationary trends in the US dollar. There
was double-digit inflation in the 1970s because M3 was growing at
double-digit rates. Paul Volcker was appointed Fed chairman in 1979
and given the mandate to bring inflation under control. He achieved
that objective by ushering in a period of disinflation by deliberately
implementing a monetary policy that resulted in the declining M3
growth rates clearly visible on the above chart.
After his appointment in 1987, Alan Greenspan continued
the same disinflationary policy until September 1992 when the quantity
of M3 had actually declined from the prior year. This decline in
the money supply was deflation according to its classical definition,
but this brush with deflation was brief. The Fed began reflating,
and continued to do so until Y2K, in the process creating the greatest
stock market bubble of all time. Thereafter, M3 growth rates began
to decline along with the US stock market, bringing in another period
of disinflation. But look at what is happening now.
I have highlighted with the red circle the recent
trend in M3 growth. The rate of dollar creation has begun a new
upward path, which I call the “Bernanke Inflation”.
It is this new upward trend that the Fed does not want anyone to
By not reporting M3, the Federal Reserve thinks
they can inflate without consequences. As evidence of this conclusion,
please read the following quote from a presentation given on March
13th by Janet Yellen, president of the Federal Reserve Bank of San
Francisco. To provide some necessary background information, she
first explained in effect that expectations by the public for future
inflation have consequences because their expectations cause people
to take actions to protect the purchasing power of their dollars.
She then goes on to state: http://www.frbsf.org/publications/economics/letter/2006/el2006-05.html
“Over the past two years, wages, core
inflation, and long-run inflation expectations have remained well
contained despite a dramatic increase in energy prices. With inflation
expectations under control, we have avoided a rehash of the 1970s
and the need to rein in inflation by engineering a severe recession.”
In other words, if people don’t believe inflation
is a problem, the Federal Reserve has more opportunity to intervene,
taking actions potentially debasing and inflationary to the dollar
and to do this without consequences. Or at least that what’s
the Fed thinks. But the Fed is only fooling itself.
First of all, who really believes that inflation
is under control? The price of everything is going up, except perhaps
computers, but in contrast to food and energy, computers are not
an everyday purchase. A poll published by The Wall Street Journal
reveals that 75% of those participating believe that the inflation
they experience is worse than the inflation rate reported by the
federal government’s Consumer Price Index.
So who does the Fed think it is fooling? After
the Fed made its initial announcement in November 2005 that it would
discontinue M3, I wrote:
“By eliminating its reporting of M3,
the Fed is shooting itself in the foot. This misstep will only hasten
the rush out of dollars into the safety and security of gold.”
The reason for forecasting as I did a flight from
the dollar into gold is that I suspected that the Fed’s decision
to discontinue its M3 reporting would be immediately recognized
for what it is – something to be expected from a ‘banana-republic’.
In other words, if things are that bad that the Fed is no longer
going to report the whole story, then, the thinking goes, the sooner
one exits the dollar the better. And the best way to hedge oneself
against the effects of inflation is to buy gold.
Clearly, the rise in the gold price that
has occurred since the Fed announced in November its decision to
no longer report M3 must in part be attributable to this gross misstep
by the Fed. Given the new upward trend in the M3 growth rate on
the above chart, it seems inevitable that the price of gold is going
to rise much higher because inflation will continue to worsen, regardless
whether the Fed reports it or not.
James Turk is the Founder & Chairman of GoldMoney.com.
He writes The Freemarket Gold & Money Report, and his latest
book is The Coming Collapse of the Dollar.