Maybe the Fed Isn't Really Printing Money Like a Drunken Sailor

What if conventional wisdom about the Fed is wrong and it isn’t printing money like a drunken sailor? Well…that would make most of the media coverage of the bond market and the economy wildly off the mark.

As it turns out while media talking heads were ranting about how the Fed was running their printing presses overtime to push up money supply the facts were very different. M1 has actually declined since the middle of December, 2008. During the same six month period M2 has only risen by a little less than 3%.

For some reason that I can’t explain most financial, economic and media experts don’t bother to read the Federal Reserve’s weekly money supply data before writing authoritative articles or spouting off on TV about money supply and its implications.

Of course, M3 followers argue that M1 and M2 are bad money supply indicators because they are too narrow and that only M3 should be used to measure the growth in money supply. Unfortunately, the Fed stopped publishing M3 a few years ago (because they said it was irrelevant) which started a club of M3 conspiracy theorists, i.e., people that believe the Fed stopped publishing M3 as part of a conspiracy to hide irresponsible monetary policy.

However, even without M3 being specifically published we know that broader measures of money supply, like M3, haven’t materially risen in 2009.

M3 followers can get a very rough idea of what M3 would have been, if it were published, by looking at the Federal Reserve quarterly Flow of Funds Accounts of the United States which was distributed yesterday. As it turns out, total net borrowing of the United States (private and public) dropped approximately $255 billion in the first quarter and other indicators of M3 fell or are about flat (on a net basis). The Flow of Funds Accounts data is inconsistent with a large rise in M3 (or a large rise in any money supply measure). By the way, this data supports Brad Setser’s theory that the fall in private borrowing is more than offsetting the rise in government borrowing and therefore, at least for the time being, financing the deficit isn’t a problem.

And, I have a suggestion for the M3 conspiracy theorists; get a life. Worrying about a Federal Reserve conspiracy isn’t worth your time and effort.

Set forth below is a chart that was compiled from weekly Federal Reserve data that illustrates money supply growth, seasonally adjusted, since the week ending December 15, 2008. The data suggests that the Fed is hardly “out of control” or a drunken sailor.

To those readers who want to flame me for not accusing Bernanke & Company of ruining the economy because of the growth in the Fed’s balance sheet, just hang in there. You will get your chance soon enough. Over the weekend I am going to write about the “irresponsible” expansion of the Federal Reserve balance sheet (or maybe why it wasn’t irresponsible at all).

Comments

[Dave Wrixon:]

It depends on your definition of money.

Money with a capital M relates to that which is added to the Feds Balance sheet.

money with a lower case m is money made available to the public including all the debt created by banks. This is normally much greater than Money due to the fractional reserve banking system. At the moment it is not so big because the banks are not lending that much. There are too reasons for this. Once is that their balance sheets are under stress, although this has been greatly relieved due to their newly granted ability to attribute wholly unrealistic valuation to toxic assets. The second is that those seeking loans are largely uncreditworthy by todays standards.

The bottom line is that whilst there is much more "Money", there is actually less "money". However, as lending returns to normality which it must if the hypothetical recovery is ever to materialize, then "money" will expand exponentially without the Fed actually doing anything. To undue the expansion of "money" the amount of "Money" must be reduced. The problem is because much of this has been lent to Bank which are insolvent and Uncle Sam who is also insolvent, then this is not as easy as it might seem without creating a credit crunch that is much more severe than the one we have just experienced. So basically just batten down for Hyper-inflationary Stagnation. And that is the optimistic scenario!

Jun 13 10:16 AM

[ed233:]

This article is absurd. You have a country that is slated to have the largest deficit spending in the history of mankind. You have gross domestic production that is far short of committed spending which requires the issuance of debt. Your children's children will be paying for this exorbitant debt. The foreigners like China are not going to buy into US inflationary debt. So how do you think that this debt is going to get counter-balanced on the balance sheet -something out of thin air or another accounting sham? Get a hold of yourself the US has no choice than to increase debt and the money supply. Don't believe the trickery of government information. LOL Looking after your money.

Jun 13 11:39 AM

[nobby73:]

I am one of those who was deeply suspicious when they ceased publishing M3, and I believe my concerns were justified. What it hid was not the Fed's irresponsible monetary policy, but rather the exponential growth in the use of ABS in repo, which hugely expanded "money" supply and led to the problems of now. The enormous increase in real money has been to replace this "ghost" money, when it became clear it was not all highly rated, or highly liquid.

However, where the problem now lies is in the fact that this has not improved the quality of the assets. The Fed now owns huge quantities of these and the rest still lies in the financial system. We have not recognised the losses, but merely deferred them in the expectation the housing market and the economy will recover.

Jun 13 12:09 PM

[InnocentsAb...:]

By pumping cash into broke banks, they will be able to be looted again another day. The monetization is in the bailout and re - bubbling. It's happening quickly -- in the East Asian and Latin American stock and debt markets. And elsewhere.

Jun 13 01:25 PM

[The Geoffster:]

I believe Dave is correct. The money is sitting in the Fed until such time as the banks begin lending again. The velocity of money will then pick up greatly. Even more disturbing is debt and unfunded liabilities. I don't believe this can be paid for. I suspect we will see a combination of higher taxes, program cuts and monetization, coupled with a new Bretton Woods type agreement. I'm starting to think this will happen sooner rather than later.

Jun 13 02:34 PM

[dj10:]

I understand the M3 conspiracy buffs are hot on the trail of the hitherto unknown "M4"

Jun 13 02:54 PM

[Vuke:]

I also believe Dave is correct. The last thing the Fed will do is let anyone know exactly what it is they're doing. But, looking at all that debt, the rational expectation is a choice between inflating it down or paying it down.

Historically speaking, a no-brainer. Expect a lot of "strong dollar" talk and walk from all concerned.

Jun 13 03:32 PM

[Steven Hansen:]

everyone is half right concerning the expansion of the money supply - but i would argue that the M3 (if this data was published) growth was backed money (assets exchanged for cash). this is exactly the same type of event which happens normally with the fractional reserve process.

for me the issue at hand is the rapid expansion of spending by the government, and the purchasing of treasuries by the fed reserve. this is a game changer.

Jun 13 06:04 PM

[Market Sniper:]

Though I enjoy the contrarian viewpoint, Mark, I think you should address the following few points: 1) Define "money". Is it M Zero (the currency and coinage in circulation)? How about demand accounts that have been leveraged through the "miracle" of modern fractional banking? What is the stuff we are using as "money"? How is it created? How does it come into "being"? Think you will find that it is created out of DEBT. It represents debt and not wealth. 2) What effect on "money" does a burgeoning national debt and bloated Federal Reserve "balance" sheet have? 3) what effect on "money" does a national trade deficeit have? I do believe you labor under a basic false perceiption. That is understandable when you have grown up in a fiat fairyland. And we will not even start with the "M3 conspiracy".

Jun 13 08:17 PM

[Moon Kil Woong:]

It's true M1 and M2 have dropped but inflationary pressure can come because the amounts of goods and services drop faster than the rate of money supply. Thus there are a bit fewer dollars chasing a lot fewer goods which is the case. In addition, with little money chasing housing, all that huge sloshing amount of money has nowhere to go since people don't want bonds either. That inevitably should lead to a rush to goods and services, but people don't want that either. Thus the speculation gets crowded into commodities and equities to some degree. That can turn not just into inflation and dollar depreciation but hyperinflation even if M1 and M2 don't rise since the amount of commodities produced has also declined even though more and more money is chasing it right now due to people being spooked about inflation and dollar depreciation. By and large, once again, the Fed has created its own bizzarro economic crisis from its failed policy of QE with an already massive deficit.

The equation is a balance between money supply and what the money is being used for. If the Fed just wants to keep M1 and M2 from falling in a recession you will inevitably get inflation or even stagflation every single time (not to mention a massive deficit and a bloated Fed balance sheet that makes your balance sheet look worse than Citibank's).

Jun 13 08:41 PM

[prudentinve...:]

"M1 has actually declined since the middle of December, 2008. During the same six month period M2 has only risen by a little less than 3%.".

You are comparing money supply now with its level after the most egregious run of the printing press since fiat money was invented. How about comparing current money supply with a year ago (June 2007), two years ago (June 2006), three years ago (June 2005), .......... ?

Jun 13 09:09 PM

[TracingError:]

It's funny how many wingnuts on this site won't even consider the possibility that experts have any idea what they are doing. I'm not saying the Fed and Paul Krugman are necessarily right, or right all the time, but, uh, it's worth considering they might be. The article proposes "maybe" it's not so bad. The reactionaries and crackpot fundamentalists come over here and say "no way," and in so doing many reveal themselves to have absolutely no understanding of how an economy and a credit system function.

Jun 14 08:54 AM

[Alphameister:]

Here's another vote for not replacing Ben Bernanke with any of the above posters. Remains to be seen whether he'll succeed in avoiding monetization of the debt and severe inflation down the road, but he's done a masterful job of skirting a deflationary disaster in the short run.

Jun 14 09:37 AM

[fireball:]

perhaps it would be beneficial to examine the founding of the fed and those that founded it. also to consider how stated purpose has failed. then consider the loss of buying power in the dollar. these are fairly obvious. from a nation of wealth to a nation of debt. much private debt can be attributed to foolish consuming. the ridiculous government debt and stealth taxation by inflation are part of the fed. every frn comes into existance by debt. why were greenbacks and united states notes so short lived?
a conspiracy is simply 2 or more in collusion for dishonesty. get a life conspiracy theorists is a weak shot at diverting dissent. were aig, boa and c free of conspiracy? was the continuing saga of gm free of conspiracy.
i have a good life and i am much richer for recognizing that they are not all honorable men.

Jun 14 10:08 AM

[Market Sniper:]

Though I applaud the attempt at "wait and see", what has been set in motion here is the end result of an illegal act committed in 1913. I agree, no poster here should replace Helicopter Ben. NOBODY should replace him. The entire Federal Reserve structure should be abolished forthwith. Read your Constitution. When the Congress passed the Federal Reserve Act and turned over the control of money in this country to a PRIVATE organization, it was illegal as that power was expressly reserved to the Congress. It is the same as if Congress granted the right to declare war to Lockhead.

On Jun 14 09:37 AM Alphameister wrote:

> Here's another vote for not replacing Ben Bernanke with any of the
> above posters. Remains to be seen whether he'll succeed in avoiding
> monetization of the debt and severe inflation down the road, but
> he's done a masterful job of skirting a deflationary disaster in
> the short run.

Jun 14 11:36 AM

[JCL:]

Wake up!

<Worrying about a Federal Reserve conspiracy isn’t worth your time and effort.>

It is people like you who the money masters low. Bah bah SHEEEP!

Jun 14 02:14 PM

[inthemoney:]

> And, I have a suggestion for the M3 conspiracy theorists; get a life. Worrying about a Federal Reserve conspiracy isn’t worth your time and effort.
------------------------
Yes, but not because it doesn't exist but because there is nothing we can do about it.

And even though we keep hearing that banks are not leading much of the TARP money, they do use this money to make trading profits in the stock market. People keep saying how irrational this rally is. There is nothing irrational about it. It is simply current preferred way for investment banks to dig themselves out of the hole since they can't lend money (not enough qualified borrowers, not enought reserve capital at the bank ) and M&A activity is dead. Hello, stock bubble.

Jun 14 03:30 PM

[Westcoaster:]

Thank you Mark for the data. Also, the governments actual cost of financing our debt is lower this year to date than last year, also good news.

All of the unemployed winers on this site are assuming that inflation will happen even though real incomes are falling. It can't happen. How much are your wages going up this year? I suspect that inflation will track that amount much closer than the growth in the money supply.

Jun 14 05:49 PM

[inthemoney:]

> All of the unemployed winers on this site are assuming that inflation will happen even though real incomes are falling. It can't happen. How much are your wages going up this year? I suspect that inflation will track that amount much closer than the growth in the money supply.
----------------------...
How did hyperinflation happen in Russia or Argentina. Did you think it was due to wage increases? No. It was due to currency collapse and the fact that they were net importers. I know, they don't teach that in the MBA class.

Jun 14 08:36 PM

[dragonpaw:]

It depends in what you mean by "money''is. More specificly it depends in what you mean by"it" is. Even more specificly, it depends on what you mean by "depends" is or is it 'means'...or really why do we need to parse and belabor our minds when we are spoon-fed (or more aptly force-fed gov't supplied BS. We forever and hereafter must have learned AT LAST that we can't trust BIG BROTHER'S lies!Where were you during the Vietnam war and the propaganda that we were fed daily for twemty-plus years and four 'Administrations'??!!

Jun 14 09:17 PM

[Westcoaster:]

I don't have an MBA. Hyperinflation in these countries happened when they defaulted on their debt bozo. Last year our debt service cost us about 266 billion. We taken in trillions of tax revenue. Not even close to default. All the US has to do is say they won't give out Social Security until everyone is 70 and quit giving unlimited health care to people over 80. Our deficit is gone at that point.

Also the US is one of the largest exporter in the world, we just happen to import even more because others want our cash. That is just a balance of accounts it is neither good nor bad but an accounting entry. Are you so bad off because you exchanged 1000's dollars for a flat panel Chinese TV? Do you think China is going to take you over. Please get a life Immoney.


On Jun 14 08:36 PM inthemoney wrote:

> > All of the unemployed winers on this site are assuming that inflation
> will happen even though real incomes are falling. It can't happen.
> How much are your wages going up this year? I suspect that inflation
> will track that amount much closer than the growth in the money supply.
>
> ----------------------...
> How did hyperinflation happen in Russia or Argentina. Did you think
> it was due to wage increases? No. It was due to currency collapse
> and the fact that they were net importers. I know, they don't teach
> that in the MBA class.

Jun 14 11:06 PM

[Alphameister:]

"Though I applaud the attempt at "wait and see", what has been set in motion here is the end result of an illegal act committed in 1913. I agree, no poster here should replace Helicopter Ben. NOBODY should replace him. The entire Federal Reserve structure should be abolished forthwith. Read your Constitution. When the Congress passed the Federal Reserve Act and turned over the control of money in this country to a PRIVATE organization, it was illegal as that power was expressly reserved to the Congress."

Amen! If we could go back and abolish all the unconstitutional crap that has brought this country to its current depths, I'd be near the forefront of the parade celebrating such changes.

Jun 14 11:35 PM

[CLH:]

Mark you are right on!!!! Inflation during a credit crisis? Not possible. How much inflation anywhere in the world during the 1930s? NONE.

The fools out number all others in stupid comments.

Jun 15 07:27 AM

[Thomas J. G...:]

Fine, the money supply isn't growing that much. I would argue if that is true then Treasury needing to finance Bush Deficits (300 billion) and Obama Deficits (2 trillion) is genuine borrowing. Wouldn't that drive interest rates up?

Jun 17 06:26 PM