Sunday, May 30, 2010

M2 - Money Supply

There's been some discussions about the "collapse" in the rate of growth of M3, the money supply. I question both the timing and accuracy of these speculations since M3 is no longer being used by the Federal Reserve. From the Federal Reserve press release on the cancellation of M3 data:
On March 23, 2006, the Board of Governors of the Federal Reserve System will cease publication of the M3 monetary aggregate. ...

M3 does not appear to convey any additional information about economic activity that is not already embodied in M2 and has not played a role in the monetary policy process for many years. Consequently, the Board judged that the costs of collecting the underlying data and publishing M3 outweigh the benefits. Source
Below is an Excel chart made from the Federal Reserve data. The magenta line is the straight line continuous growth trend which appears curved on an arithmetic scaled chart. It is apparent that in the latter part of 2008 the rate of growth in M2 increased rapidly as liquidity was injected into the system because of the financial crisis. Over the last 18 months the rate of growth slowed towards the more normal rate. The data point on April 19th was the low spot and M2 has turned higher since then.

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