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Mark Anthony, is an IT professional and who had a scientific research background before joining the information revolution. Visit his blog: Stockology (
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  • Debunking the Shrinking M3 Money Supply Myth 9 comments
    May 27, 2010 9:01 AM | about stocks: GLD, SLV, UUP, UDN, PPLT, PALL, SWC, PAL, TBT, TLT
    Recently an article published on the UK newspaper Daily Telegraph received wide-spread global attention and debate. The article titled US money supply plunges at 1930s pace as Obama eyes fresh stimulus and claimed that M3, the broadest measure of total US dollars in circulation, is shrinking, rather expanding, at rapid pace.

    The claim of a shrinking M3 can not stand the scrutiny of logic and fool even a three year old child. The US Treasury Department has been conducting bi-weekly treasury auctions of unprecedent and astronomical amounts. The treasury auctions never fail. There are always willing buyers bidding for the US treasuries at pathetically low, almost zero yields.

    Regardless who those misterious US treasury buyers are and why they are buying at such low yields, any one who buys US treasury must tender US dollars to buy the treasuries. The money tendered must be US dollars in one form or another and hence must be part of the circulating M3 of US dollar.

    If the total M3 is shrinking, where does the spare money come from that buys the US treasuries? Coming out of thin air? And where does the money go once they are tendered to the US treasury Department? Vanish into thin air again? A shrinking M3 makes no sense at all.

    Now where does the idea of shrinking M3 come from? Read the history of M3b here. Notice that the FED stopped publishing statistics of M3 as of March, 2006. So there is no longer any official data on M3 after March, 2006. Any M3 number we see after the FED stopped publishing it, are NOT official numbers, but mere the guess work of private parties. These unofficial M3 numbers, or M3b, thus may not be accurate.

    I studied how M3b is constructed ever since it was first published. I believe the person who originated the formulation to calculate M3b made a fatal mistake which renders the data useless.

    That is, an important component of M3 is the so called eurodollar. Do not be mislead by the suffix "euro" in the word eurodollar. It has nothing to do with Europe or euro. Eurodollar means all US dollars outside the US territory, i.e., US dollar deposited in foreign banks or held by foreign individuals and organizations.

    The official statistics of eurodollar is no longer published by FED. Without this data you can not construct the total M3. The inventor of M3b get around this problem by noting that eurodollar constitute only 3% of M3, and assumed that eurodollar is either a constant, or fluctuate only slightly with oil price.

    Such assumption might be true a few years ago before the current global financial crisis. But it is absolutely wrong now. Eurodollar is no longer only a small percentage of total M3, nor is it just a constant. Trillion dollars worth of money is dashing around the world, rushing across borders in so called Hot Money, seeking safe havens and investment opportunities some where else. More over, the FED itself enacts numerous currency swap agreements with foreign central banks, exchanging huge amount of one kind of printed color paper funny money with another kind of printed color paper funny money.

    How could any one still believe that the total amount of eurodollar is still small, and is still nearly constant? With all the US dollar rushing across borders?

    The so called shrinking M3b tells one true story which is that huge amount of money is escaping from the US soil and going to foreign land. The M3 within the US boarder may indeed be shrinking, despite of the FED's mad printing of money, thus draining the money supply within the US boarder, causing an illusion of monetary deflation in the USA. But the money does NOT disappear. It simply gets hoarded up by foreigners and foreign central banks. Countries like China doesn't like to hoard more US dollar at all, despite of being forced to do so. China is trying all it can to block the inflow of US dollar hot money.

    The total US dollar M3, globally, is NOT shrinking, but expanding rapidly. No one has an accurate account of the amount of hot money flowing around. Monetary inflation in countries like China and India are rampant. Eventually when foreigners have it enough, all those overseas US dollar will be flooded back home, causing hyperinflation in the USA.

    The temporary illusion of monetary deflation in the USA is only a prelude to the looming hyperinflation to come when the eurodollars come back home. It is like rapidly receeding water right before a tsunami hits. If you are on a beach and you see suddenly receeding water, don't rush in to pick sea shells, immediately rush to the high ground for your dear life! When you actually see the water coming back, it is already too late!!!

    People need to protect their financial lives by hoarding physical precious metals: gold, silver, platinum, but best of all, palladium is my favorite precious metal, before it is too late and inflation sign is already seen by every one.

    Disclosure: The author is heavily invested in precious metal palladium and related mining stocks SWC and PAL

    Disclosure: The author is heavily invested in precious metal palladium and related mining stocks SWC and PAL.
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Comments (9)
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  • American in Paris
    , contributor
    Comments (5495) | Send Message
    Dollars held outside the US may be not be relevant to spending on US produced goods and services.
    2 Jun 2010, 03:08 PM Reply Like
  • DRIx
    , contributor
    Comments (186) | Send Message
    2 Jun 2010, 08:17 PM Reply Like
  • suomimama
    , contributor
    Comments (64) | Send Message
    Before this hyperinflation kicks in should I convert my cash into Euros? Or what else??
    3 Jun 2010, 12:32 AM Reply Like
  • JohnnyJunk
    , contributor
    Comments (10) | Send Message
    Novice here, wouldn't the issuance of T-bills actually fit precisely with the shrinking M3 theory? In other words, if folks are trading in dollars for T-bills isn't that pulling money out of circulation? Thanks.
    3 Jun 2010, 12:49 AM Reply Like
  • JohnnyJunk
    , contributor
    Comments (10) | Send Message
    Also, under your theory, the only way the "real" M3 number is rising while M3b is falling is if the increase in eurodollar is outpacing the decrease in M3b. What's causing the unseen increase in eurodollars? Thanks again.
    3 Jun 2010, 12:56 AM Reply Like
  • Jan VanDenBerg_
    , contributor
    Comments (18) | Send Message
    And if there is a huge increase in dollars held outside the US recently, why would those dollars suddenly return here?


    And why would there ever have been such a huge increase in those foreign-held dollars? The declining trend in M3 has been in place for several years. It started in early 2008. Why would this have happened -- suddenly foreigners are sucking our money supply away?


    Back at it's peak in early 2008, the growth of M3 was an extremely alarming 17% yoy. That was obviously too high and I content that it relected the unsustainable increase in US money due tothe over-leveraged position of the banks and non-banks as regulators were allowing some of these outfits to get leveraged up to 40-to-1, which is a reserve ratio of the inverse of that, or 2.5%. Bank reserves are supposed to be around 8% under Basel II, so letting them fall to anything under 5% would represent a huge relaxation of money supply, but one effectuated by the beancounters at the OCC, which sets bank reserve requirement... so why would the current decline, now lasting 2 years, not reflect the obverse of that broad trend -- the raising of reserves in the banking system?


    Lehman Brothers filed for Chapter 11 bankruptcy protection on September 15, 2008. Bear Stearns collapsed in the spring of that year. That's about when the excessive growth of M3 stopped and turned down.


    If, in fact, all this instability is caused by changes in dollars held abroad, then you need to explain why such massive changes in those holdings would occur and their timing. Why foreigners were sending huge chunks of dollars back into the US during 2006-early 2008 and why they are have been taking them back for the past 2 years?


    I can think of no reason why foreigners should have been doing that.


    I find the argument that these changes are caused by a big changes in the overall required reserve ratio as effectuated by the myriad decisions of OCC bank regulators far more pursuasive.


    I think the OCC should be brought under the Fed and the overall effects of their myriad small, bank-book-based decisions tallied up so it doesn't affect monetary policy when they all run in one direction or the other like lemmings. Having them separate and independent assumes that there will be no coordinated, overall shifts but this is not what actually happens; the regulators are lemmings, too. They need herded by the Fed.


    Jan VanDenBerg
    3 Jun 2010, 12:19 PM Reply Like
  • Mark Anthony
    , contributor
    Comments (3595) | Send Message
    Author’s reply » Jan:


    You are asking about the eudodollar, i.e., why foreigners are "sucking away" US dollars and why they will be sending them back home soon. Let me explain.


    Foreigners do not just "suck" away US dollars from the US market. That is not how it works. Instead US investors bring away large amount of US dollar to foreign countries, in the form of HOT MONEY. This is not something foreign governments necessarily want, but they are forced to suck up the US dollars.


    For example, billionaire Jim Rogers decided that investment in the US market is no good and he wants investment opportunities in China. Therefore Jim sold his house in New York, furnitures included. He wants to invest in Chinese market instead, buying a house in Shanghai or buy stocks, for example. So he bring a whole suitcase of US dollar bills and travel to HongKong and then China, in hope to exchange the dollar for Chinese yuan, so he can use the yuan to invest in China.


    This is called Hot Money. There are many many suitcases of US dollars being brought out of US market and into China in the form of Hot Money, by people like Jim Rogers and others. But the Chinese government hate the inflow of international Hot Money. They are trying their best to block the inflow of hot money. At the Hongkong to mainland China boarder, they politely stopped Mr Jim Rogers and said: Sorry Sir, you can not bring in a whole suitcase of US dollars, you can bring in no more than 20,000 yuan equivalent currency each day. So Jim Rogers has actually been complaining on TV programs that he could not exchange more than 20,000 yuan per day. But still Jim Rogers figured out other ways of bringing in the US dollars and exchange them into Chinese yuan. So the hot money keeps flowing despite of the blockage attempts.


    Because such, the Chinese government needs to print extra Chinese yuan to exchange for all the US dollar Mr. Jim Rogers brought in. Jim use the yuan to buy houses in Shanghai, causing a Chinese real estate bubble. Jim bought other Chinese investment products, and the excessive yuan in the market causes hyper-inflation. Mean while the central bank of China now has too big pile of US dollar they don't know what to do with it, as the dollar is losing value. They will have to spend it out soon to buy hard assets and commodities. And if all the foreigners decide to spend their stockpile of the US dollar, all the dollars will eventually find their ways home to the USA, and that will be the start of hyperinflation in the USA.
    4 Jun 2010, 08:21 PM Reply Like
  • rge270
    , contributor
    Comments (44) | Send Message
    I ran this by 3 people that actually know how Reserve Accounting works - and received answers, below. Conclusion, it's not helpful for the professional status of Seeking Alpha for amateurs to attempt to pass rank speculation off as useful analysis. Perhaps Seeking Alpha needs at least SOME semblance of peer or editorial review - BEFORE publishing?


    Question: How could a currency supply ever change in size if every $ created has to matched with a $ of bond sales, yet the bonds must also be purchased with pre-existing $US? Something doesn't add up.


    Here are their 3 answers:


    1) [this guy is] "misguided beyond comment"
    [useful feedback, but explains nothing]


    2) "anyone can change demand deposits for currency; Fed then debits bank reserves by the currency withdrawal"
    [helps a bit, for those already familiar with Fed jargon]


    3) detailed explanation courtesy of Stephanie Kelton, UMKC


    "When the treasury auctions new bonds, it specifies what percentage of the total offering is eligible for purchase by Special Depositories (this is usually but not always 100%). This means that banks that are designated "special depositories" may purchase Treasury bonds without using any existing balances (i.e. without drawing on existing reserves). This means that private banks are acting as 'fiscal agents' for the US Treasury, buying bonds simply by crediting the Treasury's account (Abba Lerner called this 'printing money' on behalf of the government).


    Here's how it works, using balance sheet entries.


    ....... Bank ......................... Treasury
    ------------------------ ......................... ----------------------
    +Bonds | + TT&L .................. + TT&L | + Bonds


    (Assets) .. (Liabilities) ................. (Assets) .. (Liabilities)


    The TT&L accounts are "Treasury Tax & Loan" accounts. Private banks mark up the size of the Treasury's account to 'pay for' the purchase of the Treasury bonds. It costs the bank NOTHING to do this. And note that the TT&L is not part of the money supply. Nothing of consequence has happened up to this point.


    Now let's suppose the government expects to write $100 million in checks on its account at the Fed (the only way the Treasury spends), but it only expects to receive $80 million in tax payments into this account (simplifying, because most tax payments go, initially, into TT&L accounts). If it does nothing, the banking system will gain $20 million in reserves ($100 million in spending adds $100 million in reserves, and $80 million in tax payments drains $80 million in reserves -- so the net reserve effect is + $20 million). Under normal circumstances, net injections of reserves will push the overnight interest rate (fed funds) to zero, which isn't desirable, since the Fed is usually targeting a positive rate. To prevent the overnight rate from falling, the Treasury places a "call" on its TT&L accounts. The goal is to transfer just enough to offset the reserve 'add' that would otherwise result from the deficit spending (in this case, $20 million). When the Treasury directs commercial banks to transfer funds from its TT&L accounts to its account at the Fed, commercial banks lose reserves, but they gain them back in (roughly) the same proportion, so there is little disruption in the funds rate.


    Currency supply changes because the Fed buys things too! Anytime the Federal Reserve makes a purchase, it pays by crediting bank accounts (i.e. issuing new money). So net financial assets come from deficit spending by the Treas. AND from Fed purchases."
    4 Jun 2010, 04:52 PM Reply Like
  • ShivaJim
    , contributor
    Comments (24) | Send Message
    As I understand it, the Federal Reserve is by far the biggest purchaser of Treasuries.


    This is called printing money.
    6 Jun 2010, 03:59 PM Reply Like
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