Sunday, March 26, 2006
Running on M3
Well, this week the Fed will stop reporting M3 (see A Peak Behind the Curtain for a discussion of M3 and its significance). The Economist, not exactly a publication known as a hang out for tin-foil conspiracy hacks, has an excellent article in the March 25th edition (available to subscribers only online HERE, or see page 12 of the print edition). Their title tells us what they think about this move: "Running on M3." Funny, I wonder if they intended the Peak Oil connotations of their allusion to "Running on Empty"?? Although the Iranian Oil Bourse will not be opening as scheduled this month (probably delayed 6+ months), and there are other talks about a dollar-denominated Qatari bourse, there is still good reason to question the Fed's timing here. Despite the Fed's claim that M3 conveys no information not already embodied in M2, The Economist points out that M2 and M3 have grown at divergent rates twice in the recent past: once in the late '90s equity bubble, and in the past year when M3 growth was double that of M2. Bottom line, from The Economist, is that such loose monetary policy does not bode well for controlling inflation (see graph).