Friday, November 17, 2006

U.S. M3 Growth at Nearly 10%?

In the comment section of a post(scroll down) on the latest Philly Fed report in Nouriel Roubini's blog, one poster had an interesting link which nearly reconstructs the "discontinued" M3 measure of money.

Despite the false claim of the Federal Reserve board that "M3 does not appear to convey any additional information about economic activity that is not already embodied in M2", M3 have generally better correlated with financial bubbles and credit expansion than M2, which is why it is my prefered measure of money. And it is probably the case that this was the exact reason why the Federal Reserve board "discontinued" it.

But as the authors of the linked piece points out, most of the non-M2 M3 components are in fact still published by the Fed. Institutional money funds are still published in the money supply releases and the other components except eurodollars are published in two other releases (this and this).

On their calculations, M3 growth have accelerated greatly since its release was "discontinued" and is now nearly 10%, much higher than the 5% growth rate of M2. This in turn indicates that monetary conditions in America is much looser than most people think.

"But", some people might think, doesn't this contradict my earlier claim of the correlation between M3 and asset bubbles, given the current housing bust?

No, not really, because (1) While the housing sector is in a bust, equity- and bond markets have boomed in recent months (2) Despite falling house prices and construction activity, real estate lending is still actually increasing rapidly.


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