Unpleasant Trend - Fed Counters By Stopping Release of M3 Money Supply Data

The Prudent Investor ^ | November 12, 2005

[vrwc0915]

At a time when money supply (link to Wikipedia) has been exploding and weekly figures provide a nasty experience week after week, month after month, the Fed put out a short, flat notice last Thursday, saying that it will discontinue publication of M3 figures after March 2006. Such a step may fit in the policy of the current Bush administration but certainly not a supposedly independent central bank. M3 is the most important money aggregate for economists, analysts and Fed watchers to get an idea at what speed the (electronic) printing press is running. The European Central Bank (ECB) honors this set of data with a special press release every month. So much about transparency.

GRAPH: Recent M3 figures are certainly unpleasant and worrisome. M3 has been growing at an annual rate of 7.5 percent or double the most recent rate of GDP growth (subject to a revision.) Since Bush took office money supply M3 has risen by 40%. The Fed prints it and the government spends it as can be seen by growing government participation in growth numbers.

I am still shocked and in a state of disbelief that gives place to being disgusted about the new style. What will be next? Discontinuation of industrial production figures below zero? The consumer price index (CPI) being treated as a national secret once it rises above 5% despite all hedonic adjustments? Torture threats against people insisting to get the whole picture?

US Investing Will Become A Fly By Night Adventure No! First comes the discontinuation of more important data releases. No more repo data, no more Eurodollar data, no more large time deposits. Investing will become a fly by night adventure. From the Fed website (saved locally for later reference):

On March 23, 2006, the Board of Governors of the Federal Reserve System will cease publication of the M3 monetary aggregate. The Board will also cease publishing the following components: large-denomination time deposits, repurchase agreements (RPs), and Eurodollars. The Board will continue to publish institutional money market mutual funds as a memorandum item in this release. Measures of large-denomination time deposits will continue to be published by the Board in the Flow of Funds Accounts (Z.1 release) on a quarterly basis and in the H.8 release on a weekly basis (for commercial banks).

Take note that only publication, but not calculation of these figures will be discontinued. I strongly hope that Ben Bernanke will revise this decision, being an economist who knows that sound research can only be done on the basis of data.

Looking back into history economic data was only kept a secret in failing economies, e.g. the Soviet Union. As this data is published by the board of governors of the Fed every one of their words will have to be scrutinized most carefully in the future and tested for credibility. Words are easy, but I prefer hard data. No prudent investor will navigate his funds through a foggy world but lie at anchor below a clear sky, meaning: elsewhere.

[carl in alaska]

To be honest, I don't know the exact definition of M3 or how meaningful it is as a statistic. I'm just countering some replies that said the Fed is hiding this data because it doesn't look good. The Fed's decision may well be based on legitimate issues with distortions in the data used to calculated M3 or the economic significance of M3. If the Fed thinks the data has distortions that are making M3 growth look higher than it is, then it would make sense to stop publishing M3 beacuse the distorted data could increase inflationary expectations, and that would be damaging to the economy. But I really don't know why the Fed stopped publishing this data. We'll have to send an email to Bernanke and ask him.

My point is just that this decision may not be the deep, dark government conspiracy that some think it is.

[DoughtyOne]

If there were nothing wrong with deficit spending, then there would be nothing wrong with continuing to report the M3 figures. Seems to me there's an off-hand acknowledgement floating around here somers.

[Dick Bachert]

...and freeze-dried, N2 packed food, guns and ammo.

Cause when this puppy comes down, it could get really ugly.

Remember the Scout motto: "Be PREPARED."

In the meantime, here's a little something some of the Founding Fathers left us to read covering how they TRIED to keep BRAVO SIERRA like this from happening.

(WARNING:A CLEARLY RHETORICAL QUESTION AHEAD!)
AS A PEOPLE, ARE WE REALLY AS STUPID AS OUR MASTERS BELIEVE???

---

(I wrote this a number of years ago when things were NOT going well with the economy. Trust me: They WILL get ugly once again as man -- or certain men -- cannot resist playing God. We continue to violate the universal, immutable laws of economics at our great peril.)

Despite the apparent economic strength of the American economy, history proves that EVERY house of cards eventually comes down. And the higher the card house, the harder the fall when it finally comes. And when it does, the more freedoms we will voluntarily surrender to "restore order." It was the Founders' concern about this historically valid problem which prompted their attempt -- now ignored -- to keep American "money" sound and honest.) Dick Bachert 1998

* * * * * * * *


The Forgotten History of Money
This is the fascinating story of the efforts by certain of the Founding Fathers to prevent the economic distress we find all about us today. It is also a sad story on the basis that modern, "sophisticated" Americans have abandoned the corrective institutional mechanism that remains in place to this day. As you read it, think about a world with many fewer S&L, banking and political scandals and economic problems now considered the norm.

"Blood running in the streets. Mobs of rioters and demonstrators threatening banks and legislatures. Looting of shop and home. Strikes and unemployment. Trade and distribution paralyzed. Shortages of food. Bankruptcies everywhere. Court dockets overloaded. Kidnappings for heavy ransom. Sexual perversion, drunkenness, lawlessness rampant. The wheels of government are clogged, and we are descending into the vale of confusion and darkness. No day was ever more clouded than the present. We are fast verging on anarchy and confusion. (George Washington in a 1786 letter to James Madison, describing the effects of fiat paper money inflation then ravaging America in the pre Constitutional period.)

"The annihilation (of the paper money) was so complete that barber shops were papered in jest with the bills; and sailors, on returning from cruises, being paid off in bundles of this worthless money, had suits made of it, and with characteristic lightheartedness, turned their loss into frolic by parading through the streets in decayed finery which in its better days had passed for thousands of dollars." (Contemporary writer, Breck, 1786)

"Paper money polluted the equity of our laws, turned them into engines of oppression, corrupted the justice of our public administration, destroyed the fortunes of thousands who had confidence in it, enervated the trade and husbandry, and the manufactures of our country, and went far to destroy the morality of out people." (Peletiah Webster, 1786)

At the drafting of the U.S.Constitution, there were many "Friends of Paper Money" present. On August 16, 1787, when the discussion arose on Article 1, Section 8, the proposed wording was this: "The Legislature of the United States shall have the power to...coin money...and emit bills of credit of the United States."

A hot argument ensued on the power to emit bills of credit, which is another way of saying "printing paper money".

Here are the actual words James Madison wrote describing the debate in his diary: "Mr.G.Morris moved to strike out *and emit bills of credit.* If the United States had credit, such bills would be unnecessary; if they had not, unjust and useless.

MADISON: Will it not be sufficient to prohibit the making them a tender? This will remove the temptation to emit them with unjust views. And promissory notes in that shape may in some emergencies be best.
MORRIS: Striking out the words will leave room still for notes of a responsible minister which will do the good without the mischief. The monied interest will oppose the plan of the Government, if paper emissions be not prohibited.
COL.MASON: Though he had a mortal hatred to paper money, yet as he could not foresee all emergencies, we was unwilling to tie the hands of the Legislature [Legislature = Congress].
MR.MERCER:(A friend to paper money) It was impolitic...to excite the opposition of all those who were friends to paper money.
MR. ELSEWORTH thought this was a favorable moment to shut and bar the door against paper money. The mischiefs of the various experiments which had been made, were now fresh in the public mind and had excited the disgust of all the respectable part of America. By withholding the power from the new Government, more friends of influence would be gained to it than by almost anything else...Give the Government credit, and other will offer. The power may do harm, never good.
MR.WILSON: It will have a most salutary influence on the credit of the United States to remove the possibility of paper money. This expedient can never succeed whilst its mischiefs are remembered, and as long as it can be resorted to, it will be a bar to other resources.
MR.READ thought the words, if not struck out, would be as alarming as the mark of the Beast in Revelation.
MR.LANGDON had rather reject the whole plan than retain the three words *and emit bills*".

The motion for striking out carried.

Historian George Bancroft later wrote: "James Madison left his testimony that *the pretext for a paper currency, and particularly for making the bills a tender, either for public or private debts, was cut
off.* This is the interpretation of the clause, made at the time of its adoption by all the statesmen of that age, not open to dispute because too clear for argument, and never disputed so long as any one man who took part in framing the constitution remained alive."

ROGER SHERMAN(1721 1793)should be a name familiar to every American. As familiar as Washington, Madison, Jefferson and Adams. He is the only man to have signed all 4 documents surrounding the formation of the United States of America: The Continental Association of 1772, The Declaration of Independence, The Articles of Confederation and The United States Constitution. He was a Judge of the Superior Court in New Haven, Connecticut, serving that office with distinction from 1766 until 1788. He served as Treasurer of Yale University from 1765 to 1776. He was renouned for his high intelligence and unswerving honesty and was described by John Adams "as honest as an angel and as
firm in the cause of American independence as Mount Atlas." He served in the U.S.Senate from 1791 until his death in 1793.

Why is Roger Sherman*s name unfamiliar? HE WAS AN ENEMY OF PAPER MONEY!! In 1751, Roger Sherman and his brother William sued James Battle for paying a debt to their shop in New Milford, Connecticut, in depreciating paper currency. Over a period of 15 months, Battle had charged "divers wares and merchandizes" amounting to 129 pounds of what
Sherman assumed were pounds of Connecticut "Old Tenor", a stable currency whose value were well preserved by taxation taking it out of circulation. But Battle assumed the debt was denominated in pounds of ever depreciating Rhode Island currency, tendered in same, and the Shermans took a beating in the payment and sued for recovery of loss by depreciation. The Shermans lost when Battle argued that he was merely following the accepted custom of the day. In 1752, Sherman wrote his book "A Caveat Against Injustice or An Inquiry into the Evils of a Fluctuating Medium of Exchange" indicting UNBACKED PAPER MONEY.

It was this experience that Sherman brought to the Constitutional Convention and prompted him to rise on August 28,1787 and propose new, more restrictive wording to Article 1,Section 10. The standing version under consideration was worded this way: "No state shall coin money; nor grant letters of marque and reprisal; nor enter into any Treaty, alliance, or confederation; nor grant any title of Nobility." (From Madison’s Notes of the Convention) "Judge Sherman and Mr. Wilson moved to insert the words *coin money* the words *nor emit bills of credit, nor make any thing but gold and silver coin a tender in payment of debts* making these prohibitions absolute, instead of making the measures allowable with the consent of the Legislature of the U.S. Mr. Sherman thought this a FAVORABLE CRISIS FOR CRUSHING PAPER MONEY. If the consent of the Legislature could authorize emissions of it, the friends of paper money would make every exertion to get into the Legislature in order to license it." Mr. Sherman*s and Mr. Wilson*s motion was quickly agreed to and became the supreme law of the land.

Some additional quotations to ponder:

"All the perplexities, confusion and distress in America arise not from defects in the constitution or confederation, nor from a want of honor or virtue so much as from downright ignorance of the nature of coin, credit and circulation" (John Adams in a letter to Thomas Jefferson, 1787)

"I deny the power of the general government to making paper money, or anything else, a legal tender." (Thomas Jefferson)

"You have been doubtless been informed, from time to time, of the happy progress of our affairs. The principal difficulties seem in great measure to have been surmounted. Our revenues have been considerably
more productive than it was imagined they would be. I mention this to show the spirit of enterprise that prevails." (George Washington in a letter to the Marquis de LaFayette, June 3, 1790 AFTER the United States Constitution prohibited unbacked paper money at Article 1, Section 10)

"Since the federal constitution has removed all danger of our having a paper tender, our trade is advanced fifty percent. Our monied people can trust their cash abroad, and have brought their coin into circulation." (December 16, 1789 edition of The Pennsylvania
Gazette)

"Our country, my dear sir, is fast progressing in its political importance and social happiness." (George Washington in a letter to the Marquis de LaFayette, March 19, 1791)

"The United States enjoys a sense of prosperity and tranquility under the new government that could hardly have been hoped for." (George Washington in a letter to Catherine Macaulay Graham, July 19,1791)

"Tranquility reigns among the people with that disposition towards the general government which is likely to preserve it. Our public credit stands on that high ground which three years ago would have been
considered as a species of madness to have foretold." (George Washington in a letter to David Humphreys, July 20, 1791)

"It is apparent from the whole context of the Constitution as well as the times which gave birth to it, that it was the purpose of the Convention to establish a currency consisting of the precious metals.
These were adopted by a permanent rule excluding the use of a perishable medium of exchange, such as certain agricultural commodities recognized by the statutes of some States as tender for debts, or the still more pernicious expedient of PAPER CURRENCY." (Andrew Jackson, 8th Annual Message to Congress, December 5, 1836)

DESPITE WHAT YOU WERE TAUGHT IN SCHOOL, THE HISTORICAL RECORD IS CRYSTAL CLEAR: AMERICA WAS TO HAVE BEEN SPARED THE DESTRUCTIVE EFFECTS OF AN UNBACKED PAPER MONEY SYSTEM. MOST OF THE PROBLEMS WE FACE TODAY CAN BE TRACED TO WHAT ANDREW JACKSON CALLED "THE PERNICIOUS EXPEDIENT OF PAPER MONEY".

HISTORY TEACHES THAT AN "ARTIFICIAL" MONEY CREATES AN "ARTIFICIAL" WORLD WHERE THE PRICE FOR SOME ITEM...EVEN OUR MOST POPULAR WELFARE "PROGRAM"...CAN BE DEFERRED TO FUTURE GENERATIONS (OUR $11 TRILLION
NATIONAL DEBT) OR PAID WITH A "MONEY" CREATED OUT OF THIN AIR WHICH ROBS THE VALUE FROM THE MONEY WE MIGHT BE UNFORTUNATE ENOUGH TO HAVE IN OUR POCKETS AT THAT MOMENT (INFLATION). AND ONE THING YOU MUST REMEMBER ABOUT INFLATION IS THAT IT IS NOT AN "EQUAL OPPORTUNITY" DESTROYER: THOSE FIRST IN LINE TO GET THEIR HANDS ON THE NEW MONEY ROLLING OFF THE PRESSES (THE MODERN FRIENDS OF PAPER MONEY) HAVE A CHANCE TO SPEND IT BEFORE IT LOSES ITS VALUE. THE LITTLE PEOPLE (THAT’S US, FOLKS!) FARTHEST DOWN THE LINE ARE THE ONES WHO FEEL THE FULLEST EFFECTS OF THIS DESTRUCTIVE PROCESS.
filename:$history

Dick Bachert

[Travis McGee]

Nobody will be laughing then.

[planekT]

If I make $50,000 a year and get a 30 year mortgage for $200,000 my debt is now 400% of my GDP.

I don't think you'd have enough to live on in that scenario after taxes, food, insurance, utilities, car payment, maintenance, etc. But give it a try and let me know how you're doing. I hope you don't have a family to support. Good luck!

[Travis McGee]

"In the long run, we are all dead" is a fine philosophy...if you are a heartless and nihilistic creep who doesn't care about the lives his grand children will be forced to lead.

[Jack Black]

Remember, up until now every optimist in history has been right. Now place your bets.

Well possibly if your time frames are long enough. But in normal-human years someone following your diversify strategy in 1928 might have gone from rich to poor as the stock and bond values dropped through the floor, anitques devalued as money dried up. At least their gold was good, until FDR siezed by executve order! Pessimists who thought Hitler was going to destroy Germany and acted accordingly (left country) did far better than those who were 'optimistic' when bad things started happening. History offers plenty of examples.

[CodeToad]

"If I make $50,000 a year and get a 30 year mortgage for $200,000 my debt is now 400% of my GDP."


Sure, but so is your asset holdings. That $200K is backed by a $200K house. What backs our national debt or currency? Nothing.

[Mulder]

"If recession should threaten serious consequences for business (as is not indicated at present) there is little doubt that the Federal Reserve System would take steps to ease the money market, and so check the movement." ----Harvard Economic Society, October 19, 1929

History repeats itself while the sheeple are blind.

[Mulder]

If I make $50,000 a year and get a 30 year mortgage for $200,000 my debt is now 400% of my GDP. Is that good or bad? I guess it depends on whether I want to sell you a big ass hunk of gold!!

The difference is, in your case you very likely have a future income stream that will increase more than your future expenditures, so that you can reduce your debt. You also likely have that now. Furthermore, you won't be borrowing $200,000 next year, or the year after, of any year into the foreseeable future. And you likely don't have a bunch of unfunded liabilities down the road.

In the case of the federal government, spending is increasing faster than revenues. There is NO plan to pay down the debt, or even achieve a balanced budget. They plan to borrow even more money next year compared to this year. And there are massive unfunded liabilites around the corner once the boomers retire.

I guess it depends on whether I want to sell you a big ass hunk of gold!!

Gold beats paper over the long haul every time. As for "selling gold", as least they are selling some tangible instead of passing paper around all day like "sophisticated" investors do.

[Toddsterpatriot]

Sure, but so is your asset holdings. That $200K is backed by a $200K house. What backs our national debt or currency? Nothing.

So now you agree that the chart is useless without any reference to the assets that back the debt. Welcome to the club.

[Toddsterpatriot]

In the case of the federal government, spending is increasing faster than revenues.

The stupid chart included business and household debt. Without any reference to household and business assets, it's useless.

Gold beats paper over the long haul every time.

It doesn't beat stocks. Would you like to see a few examples that beat gold?

[CodeToad]

"So now you agree that the chart is useless without any reference to the assets that back the debt."


No, I agree that having a national debt is a bad thing and that a national debt backed only by the faith and credit of the US government is not much to go on. Our founding fathers also thought so.

[CodeToad]

"It doesn't beat stocks. "


Yes and no. Some stocks have been worth far more than metals ever could but most stocks have fizzled and many public companies have ceased to exist.

Also, most stocks do not provide dividends such that to realize the value of a stock the stock must be sold, thereby releasing any future value the stock may provide.

Metals have rarely been a great investment for gains but right now they are.

[Toddsterpatriot]

No, I agree that having a national debt is a bad thing

I agree, having more national debt is worse than having less national debt.

and that a national debt backed only by the faith and credit of the US government is not much to go on.

That's funny! What debt would you prefer to hold? What debt is safer than debt backed only by that silly faith and credit?

If you want to complain about the increase in national debt since Bush took office, that's fine. It increased by $2 trillion. While household net worth increased by $10 trillion.

[Toddsterpatriot]

Also, most stocks do not provide dividends such that to realize the value of a stock the stock must be sold, thereby releasing any future value the stock may provide.

Some stocks pay no dividends. Gold pays no dividends. Did you have a point?

[Mulder]

The stupid chart included business and household debt. Without any reference to household and business assets, it's useless.

It is a relevant chart since it's apples-to-apples over 100 years. Computing debt is easy. Computing GDP is accomplished in a fairly straightforward manner, and is a metric, even if not 100% accurate. How do you compute the sum of all assets? What do you think would happen to the price of those assets when everyone tried to realize their "value" by selling?

It doesn't beat stocks. Would you like to see a few examples that beat gold?

The Dow-to-gold ratio has stayed constant between 3 and 5 over most of the 20th century. It traded above this range during the 3 secular bull markets of that century, and below that range in the secular bear markets that followed. In our latest bear market, the ratio has already dropped from 45 to 20. (It is interesting to note that each succeeding bull market brought higher highs, and each succeeding bear market produced lower lows-- if that holds true this time, you'll be able to buy one Dow Jones for an ounce of gold).

Also, keep in mind that Dow Jones average is sort of cheating since it simply kicks out poor performing companing and adds strong performing companies to its average (the Dow Jones today is not composed of the same companies that comprised it in 1900). Also, it assumes that the average investor gets to change horses for free. It doesn't count broker's fees to sell the old company. It doesn't count the capital gains or other taxes on this transaction. And it doesn't count the broker's fees to purchase the new company.

It would really be interesting to see a plot of gold vs. the original Dow Jones over 100 years.

Having said all that, I make the following claims:

1) It cannot be disputed that gold has outperformed the most widely held paper asset of all in the United States over the past century: the dollar.

2) It cannot be disputed that gold has outperformed ALL fiat currencies over time.

3) I will concede that a fair analyis (including taxes, broker fees, etc....) of stock prices vs gold prices MAY conclude that stocks have outperformed gold over the past century. However I have yet to see that data, so until then we must use the previously referenced chart. Nonetheless, I would not be surprised if stocks still won out over the 20th century due to the massive economic growth of the US. Looking forward, I do not expect this growth to repeat itself in the 21st century for a number of reasons.

4) While many individual stocks undoubtedly did outperform gold during the 20th century, many (most?) others did not. The Dow Jones is sort of cheating by eliminating those companies that did not, and adding those that did over time. So an apples-to-apples comparison is suspect since it favors the Dow.

[Toddsterpatriot]

It is a relevant chart since it's apples-to-apples over 100 years. Computing debt is easy.

No it isn't. How much of that debt is double counted?

How do you compute the sum of all assets?

If you're using household debt, use household assets. If you're using corporate debt, use corporate assets. If you're using government debt, use government assets.

What do you think would happen to the price of those assets when everyone tried to realize their "value" by selling?

You let me know when that "happens".

The Dow-to-gold ratio has stayed constant between 3 and 5 over most of the 20th century.

Considering that gold was fixed at $20.67 an ounce until 1933 and then fixed at $35 an ounce until 1971, that ratio is kinda useless until the price of gold was floated. And most of the 20th Century would be more than 50 years. And that's not even the case.

It traded above this range during the 3 secular bull markets of that century, and below that range in the secular bear markets that followed.

I don't suppose you have a nifty little chart that shows this ratio?

Having said all that, I make the following claims:

Just so long as you stopped claiming "Gold beats paper over the long haul every time".

[Mulder]

http://www.sharelynx.com/chartsfixed/dowgold1900.gif

[Mulder]

You have to copy and paste that link into your browser address for it to work.