Maybe you want your tax dollars to be spent tracking the M3 but let me keep mine for something useful, like tracking soaring private wealth. I've seen folks on FR regularly post the charts on M2 and M3 like in #126 as if they're supposed to be self-evident proof that the government is printing money with reckless abandon and inflation is out of control.
I've never understood this because if what I read is true, The Fed has not used money supply but rather interest rates to spearhead monetary policy for the past 20 years. The fact that M2 and M3 have increased so dramatically with modest inflation clearly shows this disconnect.
If M3 is relevant to inflation, wouldn't there be some correlation between M3 and the CPI? I've looked at the history of M's, as well as the CPI less energy, and I can't find much of a relationship between M3 and the CPI.
The annual increase in currency is often the main component of the increase in monetary measures. If this is so, where is all this currency? Isn't a great deal of it being held overseas and is not in our economy and, therefore, is not in play? The Commerce Department publishes data on the amount of US dollars circulating in foreign countries and, if I could find it, I'd bet a chart of these flows looks very much like the M2 and M3 charts in post #126.
These flows probably don't include money spent by tourists and the incredible amount of personal remittances sent overseas (think Mexico). Drug dealing also causes a great deal of our currency to flow out of the country. Why should this be counted as part of the domestic money supply?
The massive underground economies of the world operate based on US dollars. Dollars are much easier to get and store than gold so I'd also bet that the dollar is used by underground economies as a safe haven. There is a serious lack of a relationship between macroeconomic fundamentals and monetary aggregates because of the unaccounted foreign holdings of US dollars. For these reasons, I have to think the charts showing the rapid growth of M2 and M3 are pretty worthless for predicting or indicating inflation.
Money supply growth is a function of the availability of credit. Federal debt and the dollar are the same thing, except that the dollar pays no interest. Liquidity premium.
The "Glorious Revolution" of 1688 set the scene for the first Central Bank, The Bank of England. Bank of England notes traded on exchanges of the day and increasingly became money.
I have no particular affection for gold. I am more interested in history and bemused (and amused) by human activity. My own, especially!!
I did not say that M2 and M3 were signs of approaching inflation. In recent years they have not. I more enjoy the M2 Velocity of Circulation:
Indeed the willingness to hold dollars as a store of value is nearly universal outside of Old Europe. On the other hand these overseas dollars fuel Chinese activity in oil and in particular oil in the ground. China and Japan hold a great deal of GSE debt, amongst other things, because of their balance of trade with the United States. If there is to be a "collapse" in the residential real estate market it seems likely that the collapse of Fanny Mae will be instrumental. I said "if".
As far as Mr. Bernanke's operation of the Fed - I watch the 13 week bill - 10 year bond spread as an indicator of "financial liquidity" - Mr. Bernanke seems to have nipped inflationary expectations nicely. Mr. Greenspan was working in that same direction before him. It remains to be seen however if commodity raw material prices continue their upward trend. Certainly Bill Rogers thinks they will.
As an aside I don't see the Urban CPI as an effective inflation indicator. The GSCI and the CRB index are more reliable I suspect.
As far as central banking goes I understand Andrew Jackson's great distrust or the Bank of the United States. I believe though that central banking will be around for quite a while, and probably as long as technological change requires rapid redeployment of physical assets. Unfortunately there is a price to pay.