The Money Supply

So, in the first article in a journal about the economy, it would be useful for me to describe my background. I can say firmly that I am only a student of the economy. My college degrees are both in music performance, a career I had for about 5 years professionally and 10 years semi-professionally. However, I can also firmly say that I have been a student of news, politics, and economic issues for at least that time period. Consider it my avocation during the time I was a musician and teacher. I currently work in the transportation industry driving trucks for a local heavy materials delivery company.

Also, in this first posting of this particular blog, I would like to identify the purpose: to share with others my findings about the economy and my opinions about its future. I am not an expert. I am simply interpreting what I have learned over my years of observance and attempting to provide an understanding for those who don't spend as much time studying it.

This particular anecdote will help you understand why I begin this project. I became acquainted with a bank teller. She has only been in the industry for about 6 months. At one point I asked her what she thought about the Fed's quantitative easing program. She did not know what it is. Now, I don't expect everyone in the U.S. to have an understanding of macroeconomic policy. But I think that would be pretty useful information for someone who wants to be a career banker. Indeed, I expect that at higher levels of her company, one of the reasons she was even hired is due to the cheap money the Fed is pumping into banks. But her ignorance is not unusual. There is a general need in America to understand this mysterious thing called the economy. I hope to boil some complicated information down to easy to understand concepts so that more can realize the situation our economy is in.

So, let's start from the very beginning. A very good place to start. Because really, knowing these things should be as common as “Do, A Deer.” To keep things simple, let's start with understanding what we have. When I say what we have, I mean to analyze what we as Americans own. Because it's the most basic of economic wealth, I think it's appropriate to begin this week with the supply of American dollars in the world.

So I can set the standards as to what I know, I just this week studied the different types of money in the money supply. I understood some of this but did not now that we even had a simplified nomenclature for explaining the different types of money. This system was set up concurrently with the U.S. finishing its separation from the gold standard. We have three basic kinds of “money.” M1 – basically the cash in circulation, traveler's checks, and money in checking accounts; M2 – All of M1 plus savings accounts and Certificates of Deposit less than $100k. M3 – All of M2 plus “large time deposits, institutional money market funds, short-term repurchase and other larger liquid assets.”ⁱ If we know the M3 number, then we know how much money the United States has.

The November 2013 numbers, the latest released at the time of posting here, are M1-$2.61 trillion, M2-$10.93 trillionⁱⁱ. Understand the first number as the money in our wallets, and the second number as the money in both our bank accounts and wallets - cash. If we divide the total by an estimated 317 million persons living in the United States, that comes to about $34,400 per person. However, we are well aware that United States citizens aren't the only ones who own dollars. And, we also know that the majority of wealth is also owned by less than 10% of the population – don't be surprised if you have less cash than this. I certainly have much, MUCH less.

And now we should research the even larger number, M3. Look up the M3 number for the U.S. Dollar. You won't find it. The Fed stopped publishing those numbers in March 2006 and claimed that knowing this number doesn't give significantly more information about the money supply that the M2 number. I would have to respectfully and vehemently disagree with Ben Bernanke and the rest of the Fed's governors on this subject. M3 does not give information about what we currently have in terms of cash. But it certainly gives information about what we WILL have. Recalling that the M3 number is the long-term holdings of banks and large financial institutions, we realize that we have no information about how much money our banks have. Considering that most people deposit their money into banks, it seems fair that we should know how much money they have.

Let me take a brief tangent to make the argument that we own the banks. I say “we” to mean the people of these United States. We own them in two ways. Since all of the largest banks are public companies, their shares are owned by millions of Americans by both directly holding their stock and indirectly through mutual fund shares and IRAs. If the banks make money, we make money. On the flip side, those same banks' deposits are insured by FDIC insurance through the federal government. And, as we learned in 2008, when the banks get in real trouble, the federal government steps in and bails them out with huge amounts of cash. Where did the government get that cash? Well, from its citizens of course! Since we own the banks' profits and losses, one would think we have the right to know what they own. Indeed, so does the federal government, and banks are required to publish this information quarterly.

Ok, back to M3. The banks in fact do publish their assets, including long-term bond holdings. However, they are known to obfuscate the number by a little bit of cooking. Let's go to an article at CNN Money from February 11^th, 2013 by Stephen Gandal entitled “How Banks Could Get Blown Away By Bond Bubble”:

[In the summer of 2012], JPMorgan Chase CEO Jamie Dimon, in an effort to reassure Congress about the safety of his bank's investments in the wake of the London Whale trading loss, testified that the average duration of the the bonds in JPMorgan's portfolio was three years. Look at JPMorgan's books, however, and you might come away with a very different number.

In its third quarter securities filing, the last time the bank has updated investors on the matter, JPMorgan (JPM) said that it held nearly $200 billion in bonds that won't mature for 10 years or more, or nearly 56% of its overall portfolio. That would suggest JPMorgan's average duration is at least 10 years, perhaps more, and potentially a cause for concern.

The rub is the difference between the date the bonds come due, which is what JPMorgan's books are going by, and the so-called effective duration, which is a bank's guess as to when its bonds are likely to be paid off. The later figure is the one Dimon quoted Congress.ⁱⁱⁱ

So, Mr. Dimon wants to recast the 30-year mortgage as a 3 year mortgage in his books – yes, my portfolio would look much better on paper if I was getting my money 10x faster. Yes, people pay mortgages off early, when they buy a new house. But they don't just move out of their house onto the street. They typically move into a new house with a new mortgage, often of the “full” 30 year duration. Not always. Some people completely pay off their houses or buy a house with a shorter mortgage. But especially given the economy right now, most people have been “trading up,” to better houses rather than paying off the one they already had a mortgage on.

Know that I'm trying my best in this series to deal in facts, not in speculation. But we have evidence of two disturbing trends. One is the Federal Reserve's refusal to provide real data on the total amount of money in circulation, the M3 number. Long term bonds are the currency fueling the banks right now – QE3 is still going on and $85 billion of new money is going into the banks every month. The other trend is that banks are confusing the public on their assets and hence their value and long term security. Combine these two trends, and we have a very important data point that is a complete mystery to almost anyone on Earth. One wonders if the Fed could even calculate the number of dollars if it wanted to.

In my humble opinion, the Federal Reserve should recommence with publication of M3 data. This data is how those in the financial industry calculate inflation. Those numbers are then used by the rest of the general public to make plans for their own money.

I don't stand alone here. Former Representative Ron Paul of Texas felt the same way when he was in Congress, and many Americans more intelligent than I feel this information is essential for the United States to function. We should make public how many dollars are in circulation.

Anyway, we now have an idea of how much money we have: close to $11 trillion. Next week we'll get into something far more tangible and easier to count: real estate.

i Wikipedia.org, “Money Supply,” accessed January 4^th, 2014.

ii http://www.federalreserve.gov/releases/h6/current/, Accessed January 4^th, 2014, updated monthly

iii http://finance.fortune.cnn.com/2013/02/11/banks-bond-bubble/, Accessed January 4^th, 2014