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Luckily Gonch, the members of the Fed know you can't look at these numbers
in a vacuum. The reason the money supply as measured by M3 (M2 seems to be
out of style these days...) is growing so fast without any inflationary
impact on the US economy is because so much of the new supply every month is
immediately leaving the US economy, and it's not coming back any time soon.
As the global economic problems have spread from one country to another,
more and more people (and businesses) have lost faith in their domestic
currency, and are converting their money into US dollars to use for everyday
transactions. The dollars that are now being used as the local medium of
exchange in other countries have effectively been removed from the US
economy, but they still appear in the M3 calculations.
In a few months you might see a massive spike in M3. Why? Because
Argentina is considering getting rid of their own currency and switching
entirely to dollars. To do this will require an enormous shipment of paper
currency from our central bank to theirs (but don't worry, in the long run
it's a great deal for us...).
Unfortunately, 99% of the outflow of dollars is done on a more "informal"
basis, and is therefore very difficult to precisely measure. However, there
are several economists who feel that the "effective" M3 money supply in the
US has actually DECREASED over the last two years. Their evidence? The
disinflation we're currently experiencing...
Bruce
-----Original Message-----
From: TheGonch <Daniel.Goncharoff@xxxxxxxxxxxxxxxxxxxx>
To: RealTraders Discussion Group <realtraders@xxxxxxxxxxxxxx>
Date: Monday, January 25, 1999 3:53 PM
Subject: Money Supply
>An exerpt from an article in thestreet.com:
>
>The Money Train Steams Ahead
> By James Padinha
> Economics Correspondent
> 1/25/99 3:05 PM ET
>
>The M2 measure of the money supply is growing at its fastest
>pace since February 1987. Real (inflation-adjusted) M2
>jumped 4.4% in 1997 and vaulted another 8.2% last year; not
>since 1971-72 has it posted such a big two-year increase to
>land at such a strong growth rate. The M3 measure of the
>money supply is growing at rates not seen since January
>1985 ...
>
>The 1998
>increase in bank credit went down as the second biggest
>since 1985; real-estate loan growth, which in 1997 turned in
>its best performance since 1990, accelerated during each of
>the final three months of 1998.
>
> Pay particular attention to the money numbers because,
>as
> the FOMC concedes, "monetary growth does appear to
> provide some information about trends in the economy
>and
> inflation." Consider that the Fed thought them
>important
> enough six months ago to point out that "the rapid
>growth of
> M2 and M3 over the first half of 1997 was consistent
>with the
> unexpectedly strong advance in aggregate demand."
>
>Regards
>DanG
>
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