Why M3 No Longer Matters
Over the past couple of years I've periodically received a solicitation in the mail to become a subscriber of a well-known investment advisory. Funny thing is, the promotional hasn't changed at all since I first received it in the mail the early part of 2004.
One of the things the reader's attention is drawn to in the promotional is the steady long-term decline in the Monetary Base statistic released by the Federal Reserve banks. The reader is told that the last time such a pronounced drop occurred in this monetary measure, it preceded the infamous stock market crash of 1987. Therefore, concludes the advisory, the U.S. stock market is nearing another "historic" crash. Two years have gone by since I first received this flier and we still haven't witnessed a "historic crash." To the contrary, many major stock indices made new all-time highs this year.
Why hasn't the Monetary Base figure been of any value in recent years, vis a vis, the 1980s when it was a much more widely followed and authoritative statistic? Is it because the transition to our current credit-based economy is no longer as reliant on the so-called monetary "base" itself? Whatever the reason, for all intents and purposes the Monetary Base number is a relic of a bygone era and simply no longer holds the same significance as it did in former decades.
I mention this by way of introduction because I believe we've arrived at yet another transitional point along the monetary policy time line. Another widely followed and much ballyhooed Fed statistic, namely the M3 money supply figure, will evidently no longer be published by the Fed for public dissemination beginning in March 2006. This announcement that M3 will soon no longer be available to the public has caused no end of shock and outrage in some financial circles (especially among the Internet gold bug community, who see it as a conspiracy or suppression to keep the public in the dark concerning monetary policy and to allow the Fed banks to work their deeds with less transparency).
Admittedly, this move toward less transparency in the release of the M3 money supply figure is suspicious in and of itself. This is particularly true when one considers the great emphasis the banking establishment lays upon the need for increased transparency among public institutions and private citizens. But philosophical considerations aside, I've concluded that it really doesn't matter whether the Fed releases the M3 numbers or not because it no longer really matters.
How much of an influence do the monetary aggregates have on the all-important U.S. financial markets - and by extension to the general economy - when taking into consideration that we've increasingly being merged into an expansive global economy? A global economy, for that matter, that depends on flows of funds across international boundaries and that can be commanded through any number of complex financial techniques. As an article in a 1989 journal of Business Economics expressed, "The monetary aggregates no longer serve the same dominant role as a guide to [Fed monetary] policy that they had in the earlier part of the 1980s".
There was a time when domestic monetary policy was the paramount consideration. But today the financial system of the U.S. is regulated in large part through the securities market and related endeavors (including Federal Reserve securities lending and various open market operations), global currency exchanges, and plain and simple flow of funds manipulations.
In fact, to a very large extent the stock exchanges have taken precedence over almost all other considerations when it comes to the regulation of the nation's economic health. The equities market is in the final analysis not only a barometer of the economy but is in fact the great stimulus thereof. As the great historian and cycle expert Oswald Spengler wrote in his book, The Hour of Decision, "Productive economy is in the last resort nothing but the will-less object of stock exchange maneuvers. It was only the rise of the share system to domination that enabled the stock exchange (formerly a mere aid to economy) to assume the decisive control of economic life."
The July 11, 2005 cover story of Business Week magazine observes that the growing financial clout of Asian economies has become a major factor in the economies of developed nations such as the U.S. "Too Much Money: The surprising consequences of a global savings glut" is the title of this important article by Rich Miller. This phenomenon of global liquidity, with mountains of cash in the hands of developing economies not to mention multinational corporations is now a prime consideration to any discussion of money supply and monetary policy in the U.S. and has supplanted a narrow focus on M3 as the baseline consideration for monetary policy.
The name of the game in keeping the U.S. economy healthy has become one of sophisticated financial market maneuvering for the purpose of attracting "hot inflows" of foreign funds to keep the system buoyant. Much more could be said about this "new wave" in money supply analysis. This much will suffice, however, as additional commentary will be reserved for later.