Interpretation of Money Supply

Discussion in 'Economics' started by Lightningsmurf, Nov 12, 2003.

  1. Hi,

    Recently there was a thread about money supply growth and contraction. I'm wondering:

    1. What's a good web site to get the numbers from in chart form. There were a few suggestions on the last thread, but I'm wondering if there are any "favorites."

    2. Are there any rules of thumb for interpreting this data? For example, the last numbers showed a significant decrease in money supply growth. Personally I would interpret this to be bearish since equity markets thrive on expanding money supply. One of the posters suggested that the drop in money supply could be interpreted as bullish since in all likelihood the drop was precipitated by people taking money from money market funds and pumping them into the equity markets.

    3. Is this data genuinely a leading indicator? I'm sure in many cases the data is inconclusive as to market direction but at times when significant money supply moves are published, does the market later follow the path described by the data.

    Anyway, these are just a few questions I'm wondering. If you think there are things I ought to know that aren't covered in the questions above, please speak out.
  2. I'm no expert on money supply, but you can get more info than you probably want from the St. Louis Federal Reserve:

    Definitions of M1, M2 and M3 are:

    The US Federal Reserve Board measures the money supply using the following measures.

    Money that can be spent immediately. Includes cash, checking accounts, and NOW accounts.
    M1 + assets invested for the short term. These assets include money- market accounts and money-market mutual funds.
    M2 + big deposits. Big deposits include institutional money-market funds and agreements among banks.

    What I find more disturbing than money supply is the continuing decrease in Commercial and Industrial Loans, which can be found on "Page 16: Bank Loans". Even though the economy is showing signs of improving, businesses still are not planing any major expansions in their production capabilities.

  3. I had a chance to go through most of the link you sent me. It was very informative. I see what you mean about the continued decline in commercial loans - it's not like the money isn't available!

    It appears that M2 might have peaked in the short term. I wonder if this will translate into lower equity prices - will be interesting to see how strong the co-relation is.

    Anyway, thanks again for your help. If anyone else wants to add their two cents, fire away.
  4. I understand how people can be fooled by aggregate numbers: they just don't look at details:

    "The panicky effort of the Fed to stimulate economic growth does produce what it considers favorable economic reports, recently citing second quarter growth this year at 3.1%. But in the footnotes, we find that military spending—almost all of which is overseas- was up an astounding 46%. This, of course, represents deficit spending financed by the Federal Reserve’s printing press. In the same quarter, after-tax corporate profits fell 3.4%. This is hardly a reassuring report on the health of our economy and merely reflects the bankruptcy of current economic policy. "

    People are also "educated" by war propaganda to think that war is good for economy whereas it is a big lie ! It is good only for those who benefits from these war:

    People who believe that war is good for economy are just ignorant and/or naive and should open their eyes by reading some geostrategic books like this one:

    From "THE GRAND CHESSBOARD - American Primacy And It's Geostrategic Imperatives," Zbigniew Brzezinski [the "war maker" and the right hand of Rockfeller Trilateral commission ], Basic Books, 1997:

    "The economic self-denial (that is, defense spending) and the human sacrifice (casualties, even among professional soldiers) required in the effort are uncongenial to democratic instincts. Democracy is inimical to imperial mobilization." (p.35)

    Economic self-denial because it is pumping the money for military defense that could be used for civil investment and so really boosting economy, instead of that the defense spending is used to mask the truth that money is pumped and profits of enterprise fall !

  5. UVLC


    Nov 18, 2003

    by Dr. Irwin Kellner, chief economist for

    The Federal Reserve may believe that it's keeping monetary policy accommodative, but if you look at the drop in the nation's money supply lately, the central bank may not be as easy as it thinks.

    There's a school of economic thought that considers a decline in the money supply -- such as the one that's been taking place over the past two months -- a sign that the Fed is tightening monetary policy.

    Known as monetarists, these economists believe that the Fed has total control over the country's money supply and that if it falls, it's because the Fed wants it to. I'm not so sure about this, as I will explain below.

    They also think that a shrinking money supply -- intended or not -- has a major effect on the economy and the financial markets if it lasts long enough. Here, you'll find no disagreement from most economists, including me.

    After rising continuously during the first eight months of this year, the major versions of the money supply have been contracting ever since. M2, which consists of cash, checking and most consumer deposits, has been shrinking since the middle of September; its 13-week rate of change has gone negative for the first time since 1995.

    M3, which adds large time deposits, eurodollars and other items, and even MZM, which includes all kinds of accounts on which checks can be written, also are shrinking, having abruptly changed direction in the past two months.

    If this decline in the money supply were to continue, it could restrain economic activity -- not to mention pull the stock market down. Indeed, the recent slowing in consumer spending and the pullback in stock prices may very well be the first signs that the economy is becoming parched for liquidity.

    Reasons why

    So what's to account for why the money supply falling at a time when the Fed has pushed short-term interest rates down to 45-year lows and maintains loud and clear that it is pursuing an accommodative monetary policy?

    The first thing that comes to mind is that the Fed doesn't have total control over the money supply, so its decline may be a reflection, rather than a cause, of a weakening in economic activity.

    Keep in mind that in our dynamic, free-market economy, the Fed can influence the supply of money, or its price (interest rates). It can't do both at the same time, however.

    In recent years, the Fed has clearly chosen to manipulate the price of money. Witness its emphasis on the federal funds rate, assuming that the money supply will respond accordingly.

    It's also worth keeping in mind that the Fed is only one of four players that influence the nation's money stock. The others are business, consumers and government.

    The central bank can provide the raw material to the others, in the form of the monetary base, but if the banks don't want to lend and consumers and business don't want to borrow, the money supply will shrink.

    This may be what's happening now. The monetary base is still growing, but the banks have turned more cautious about lending -- especially to debt-strapped consumers. The recent decline in mortgage refinancings is a factor, too.

    As for companies, they aren't borrowing much from their banks these days, either, for a couple of reasons.

    For one thing, they're generating lots of cash internally, since profits are soaring. For another, they're trying to keep inventories low, while the nascent rise in capital spending is being financed through the bond markets.

    So could this be another liquidity trap, such as the Fed encountered in the 1930s? Time will tell, in the meantime, keep your eye on the money supply.

    Dr. Irwin Kellner, chief economist for, is the Weller professor of economics at Hofstra University and chief economist of North Fork Bank.
  6. nitro


    Back when I was at the MERC, the book everyone was given was Stigum's "The Money Market"

  7. Exactly it's the banks that decide to lend or not. But funny that he just forgets then to mention that the Central Bank is directed by the same Banks haha ! The banks have no interest to lend when rates are low: rate by definition is the benefit made by unit of lending : if the benefit is low they have no interest to do so. So this an hypocrisis from these banks when they pretend through the FED that they are lowering the rate to ease the economy since they perfectly know that they won't lend that money to the economy.

    The big lie consists in eternal debates between inflation and deflation to know which one is better than the other whereas the debate should be elsewhere: it is the VARIATION or VOLATILITY by switching from inflation to deflation and vice versa that creates real harm to the economy. So their "REGULATION" is in fact "DESTABILISATION".