Yesterday the US Federal Reserve cut interest rates again, noting that inflationary pressures seem to be receding. Not so fast. How would we know whether or not there is monetary inflation, since the Fed ceased reporting the vital M3 statistic in March of 2006 (it's like.... they saw this coming). I've written about the importance of this move to stop reporting M3 in "Running on M3" and "A Peak Behind the Curtain." Common sense would suggest that repeated rate cuts, not to mention the arguably more significant Fed Open Market Committee subsidized bond auctions for tens of billions of dollars every few weeks, would lead to inflation. It also seems evident that, in light of our entitlement/Ponzi-scheme system and our economy's need for at least apparent growth, we will choose inflation over deflation at virtually any cost (I've written about this in "The Case for Inflation" at The Oil Drum).
While it's easy to theorize about monetary inflation, a new statistic, MZM, being tracked by the Saint Louis Fed, effectively reconstructs M3. The results are damning:
John Williams at ShadowStats.com put together this fine piece of analysis. M3 was M2 plus institutional funds and eurodollar holdings. MZM (Money of Zero Maturity) is M2 plus institutional funds--so it is a very close proxy to the old M3. Based on the graph above, the Fed is fully aware that its Open Market Committee policies are driving inflation--they are, after all, the ones who record and track MZM. I made the following graph to show the correlation between MZM and the Fed's decision to stop reporting M3:
If any one wants to check the data, the St. Louis Fed provides a handy charting tool that reveals just how much they aren't telling us in their press releases.
This raises two questions, in my mind: 1) if, as the Fed said in their statement explaining why they were dropping the M3, the "M3 does not appear to convey any additional information about economic activity that is not already embodied in M2," then why are they wasting my tax money tracking MZM, which does nothing but account part of that same additional information that the M3 included, but the Fed says doesn't exist?? 2) how do they reconcile the explosion of MZM with yesterday's fed statment that "members believed that price pressures will moderate in coming quarters"??
Rhetorical questions . . . warning, inflation ahead.
Hat tip to Tony from The Oil Drum!
Publishing Note: I've committed to publishing every Monday morning, and I'm building a backlog of non-time-critical posts to ensure this happens. However, when something pops up that can't wait until Monday, I will post mid week, in addition to a regular post the following Monday. In light of current events, this is an example of a post that shouldn't wait.
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