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He who sells what isn''t his''n buys it back or ... hides in Xi''an?
By Caroline Baum
Bloomberg News Service
Tuesday, November 22, 2005
A chill wind swept across Western Europe, rattling the remains of
long-dead Germans who carried memories of wheelbarrows full of
worthless deutsche marks to their graves.
Stateside, the conspiracy theorists seized on the new information as
further proof of deceit and manipulation. And ordinary folks, who
never had the slightest interest in the M's, wondered why the
Federal Reserve was discontinuing the weekly publication of its
broadest monetary aggregate, M3, on March 23.
The announcement, posted quietly on the Fed's Web site on Nov. 10 as
part of the weekly report on money stock measures, said simply that
the Fed would cease to publish M3 data and the following components:
large-denomination time deposits, which are captured in another
weekly report on bank balance sheets; repurchase agreements; and
Institutional money market funds will still be included in the
weekly monetary aggregates report. Most of the information from M3
is captured in the Fed's quarterly flow of funds report or in
depository institutions' call reports filed with supervisory
When queried about the decision, a Fed spokesperson said that
because M3 doesn't appear to contain any more relevant economic
information than M2 and has a diminished role in the policy process
(when did it ever have a role?), the costs of collecting and
publishing the data outweigh the benefits.
That may all be true, but why no warning or comment period?
"It doesn't seem they reached out very far to get user feedback on
the discontinuation of the series," said Maurine Haver, president of
Haver Analytics and chairwoman of the National Association of
Business Economics statistics committee.
In that latter capacity, Haver meets quarterly with directors and
deputy directors of the U.S. statistical agencies, including the
Bureau of Economic Analysis, Census Department, Bureau of Labor
Statistics, the Internal Revenue Service, and the Fed. The committee
is "consulted regularly whenever a series is being discontinued or
changed," she said.
Who knew so many people cared about M3? Are the folks carping about
its termination the same ones who regularly rag on money as having
lost its relevance to the economy?
More surprising than the Fed's announcement was the level of
misinformation emanating from Europe, where the memory of 1920s
hyperinflation never dies. The European Central Bank has made
monetary analysis one of its "two pillars" and M3 its preferred
"As he is on the verge of being confirmed by the Senate, Dr.
Bernanke's first act as Fed Chairman has been to cease publication
of M3," wrote Gabriel Stein, director of Lombard Street Research in
Bernanke has yet to be confirmed by the full Senate. (He was
approved by voice vote of the Senate Banking Committee on Nov. 16,
one day following his appearance before the committee.) He is still
President George W. Bush's chief economic adviser. If confirmed, he
will move from fiscal policy to monetary policy on Feb. 1, 2006. At
that point, he would be in a position to have input on monetary
And even then, the lifespan of M3 or any other data series might not
rest entirely with him. That's because all government statistical
reports come up for review every three years, on a staggered basis,
in accordance with the Paperwork Reduction Act. The Office of
Management and Budget requires agencies to submit a report
justifying the continuation of data series.
This applies to the Fed as well, which has to submit all the reports
it produces to a periodic cost/benefit analysis. The Board
identifies the cost to the institutions collecting the data, the
cost to the Fed of processing the data, and the users.
"It's tough to argue that tax money should be spent collecting data
that no one looks at," said Dick Anderson, an economist at the St.
It was for that reason the deposit turnover survey and demand
deposit ownership survey were summarily killed nine and 15 years
ago, respectively. A measure of liquid assets, "L," met its maker in
1998, while debt was discontinued in 2002.
In the M3 review, the board staff determined that the elimination
would save roughly $500,000 a year for the board and Reserve banks
and $1 million a year for depository institutions, according to a
Fed board spokesperson. In addition, a search of the economic
literature yielded very few results for M3.
So while the discontinuation of a series very few people pay
attention to may have been a surprise, it was not nefarious. Nor was
it a prelude to a massive, secretive money-printing operation on the
part of the Fed, which is how the hard-core conspiracy theorists are
On Safehaven.com, where fantasy and reality mix, contributor Robert
McHugh offered up the answer to why the Fed is discontinuing the
weekly report of M3.
"Why? It's simple, really," wrote McHugh, a regular contributor to
the site. "So that the Plunge Protection Team can hide its market
manipulative, equity-buying activities."
The PPT is an alleged cabal of government institutions and large
banks that intervenes to support the markets, most notably stocks
Repurchase agreements, which are among the M3 components to be
discontinued, are "the most obvious reporting item where PPT market
buying transactions show up," McHugh said.
If the theory sounds far-out, the accounting is even harder to
follow, especially when actions are in anticipation of some future
stock-buying binge, as McHugh implies.
"Apparently, the Federal Reserve (a key member of the PPT?) sees a
coming need to buy -- or facilitate the buying -- of markets,
including the equity market, incognito." That explains "the extra M3
growth over the past several months." The Fed can print as much
money (buy as many government securities) as it wants, but if the
banks don't want the reserves, they will dump them, and the federal
funds rate will collapse.
That isn't happening. The funds rate has been creeping up every six
weeks to 4 percent even as M3 expanded an annualized 10.9 percent in
the last 13 weeks.
If the markets are rigged, and McHugh has it all figured out, "why
is he exposing it rather than telling me how to profit from it or
profiting himself?," asked Jim Bianco, president of Bianco Research
Good point. Don't let reason interfere with a good conspiracy theory.
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