Reply from Mr Plunger on my board on the FOOL to the following post
M3 analysis - From Minyanville
M3 is the broadest measure of the country's money supply. It includes savings and time deposits, currency in circulation, and money funds. M3 has dropped $120 billion in the last three months. The rate of change has only turned negative twice before in the last 40 years: 1969 and 1992, so this is a momentous occurrence.
A reduction as described by Brian in money funds does not necessarily reduce M3: money flowing out to buy existing stocks and bonds is returned to the system by the sellers of the stocks and bonds.
One way the money can leave the system is for money funds to be used to purchase new treasury debt: as the deficits have grown, the treasury has issued new debt. This has certainly occurred, and has allowed the process to occur with little increase in yields, but probably does not explain the entire drop in M3.
Another way is for capital to actually flow out of the country by, for example, purchases of non-dollar denominated bonds. Still another would be an overall contraction of debt, either by paying it down, delinquencies, or write-offs. Any of these the Fed does not want to see happen in the middle of an expansion.
A final way would be if the Fed actually reduced the money stock, something they have direct control over by stopping the printing presses. This is not occurring as the change in the money stock is still positive.
So this is not the end of the story and the story is significant. We are not sure exactly what is going on, but it is huge. In a debt based society, it is crucial for liquidity to continue to expand as the interest on the debt requires financing.
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Plunger's Reply
money flowing out to buy existing stocks and bonds is returned to the system by the sellers of the stocks and bonds.
Plunger:OK, let's go with that.
One way the money can leave the system is for money funds to be used to purchase new treasury debt
Plunger:So Minyanville think that the treasury don't spend and recycle the cash they get from issuing bonds?
Another way is for capital to actually flow out of the country
Plunger:These guys haven't heard of foreign EXCANHGE? So what happens to the dollars that are sold? They don't belong to the buyer? They went up in smoke?
Fed ... have direct control over ... the printing presses
Plunger:Sure they do, by setting the Fed Funds rate at FOMC meetings. But every other day, the amount of money printed is decreed by the amount the market requires to stabilise overnight rates at that defined Fed Funds target. There's very little discretion day to day.
Plunger:My own view is that liquidity is probably drying up because there is still disinflation and the real Fed Funds rate is therefore rising, and the amount of liquidity demanded at a 1% overnight rate is reducing.
The Fed will need to reduce rates and/or enact Bernanke's yield curve stabilisation-at-low-levels program during 2004.
Plunger. |
