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Debunking the Shrinking M3 Money Supply Myth

|Includes: SPDR Gold Trust ETF (GLD), SLV, TBT, TLT, UDN, UUP
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.