What are M2 and M3 telling us?

Here is a brief add on study to complement the cycle analysis we did in the last post, where we looked at the Chicago Fed National Activity Index. Today we take a look at the broad money supply in the US, known as M2.

For very suspicious reasons nobody has been willing to articulate, M3, the most broad accounting for the money supply, has vanished. They’d been compiling the stuff since 1959, then suddenly, poof! All they’ll say is DISCONTINUED SERIES. We’re mightily curious as to what was driving that decision. We doubt it had anything to do with keeping the public well informed.

Luckily, a website called NowAndFutures.com compiles a proxy M3 on a consistent basis. A private undertaking can produce US government statistics when the US government won’t? That ought to set off an alarm or two.

We’ve included a sample of their work. Notice that despite the appearance of narrower gauges of money, the proxy M3 has been trending, well, not up for quite a while. Would that have tipped a careful observer off to the possibility that not all was well in leverage land? You be the judge.

Here is the more mundane, less revealing M2 money supply, expressed in percentage change year over year. As we can see, it has been plummeting lately. As in down. This suggests that the Fed is actively draining money out of the system, trying to cool a potentially disturbing inflationary spike before it gets out of the barn, or, alternatively, that the stimuli aren’t going exactly as planned. We’re not sure and they aren’t talking.

For our final observation, we performed a Fourier transform on the year over year M2 value to see which cyclic components would be visible.

We detect an important 4.6 year cycle in money growth that seems to sync up roughly with the 5 year cycle we saw in the CFNAI. However, there is also an 11 year cycle (10.8 years more accurately) that sometimes aligns with the 4.6 year cycle. Why there is an 11 year cycle in money and an 8 year cycle in basic economic activity is mysterious and fascinating to us. According to this measure, it appears we are a few months ahead of another cyclic turn in the 4.6 year money cycle. How that translates into human behavior is anyone’s guess.

Tags: Fed, Fourier transform, M2, M3, money supply

This entry was posted on January 19, 2010 at January 19, 2010 and is filed under Economy, Featured, News. You can follow any responses to this entry through the RSS 2.0 feed.