Money Supply is Soaring ... Right?
posted - Wednesday, May 09, 2007
by Mike Shedlock / Mish
The above chart shows that money supply as measured by M3 is soaring. I suppose one could nitpick about the latest drop from +12% annual rate of growth to +10% annual rate of growth but seriously that would be just nitpicking.
So money supply is soaring ... Right? Not so fast. Let's take a look at M Prime. I first talked about M Prime in Money Supply and Recessions. M Prime is based on Austrian economic theory that distinguishes money from credit. Those interested in the details can click on the previous link, but essentially M Prime approximates M1 with sweeps added back in.
Sweeps are automated processes whereby banks clear (sweep) excess funds from checking account nightly into other accounts so that it can be lent out. Sweeps originated in 1994 and with sweeps the last semblance of any sort of reserves went right out the window.
With the minor exception of things like travelers checks accounting, M Prime is pretty much a reconstitution of what M1 looked like prior to 1994. Here are a few charts.
Long Term M Prime
Note: The latest sweeps data we have is from March. That data was extrapolated forward through the first week in May. A quick look at the above charts will show this is likely to be a minor consequence. Thanks to economist Frank Shostak for the idea behind M Prime. Thanks to Bart at NowAndFutures for reconstructing M3 and for the charts in this post.
Hmmm. M3 is soaring while M Prime is contracting... So what's it all mean?
What does it mean?
This post originally appeared in Minyanville. Jeffrey Cooper on Minyanville is writing about Hoofy in La La Land. You may wish to check it out.
Mike Shedlock / Mish
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Cached/copied - 08-09-07 - mpg
See also an analysis of this article by Gary North - Monetary Statistics