Reporting/Market Focus from the May 2007 edition of the SGS Newsletter

The first anniversary the Federal Reserve’s abandonment of M3 reporting passed recently without much fanfare. Ostensibly, the series was abandoned due to its lack of relevance and high cost of preparation. Neither reason given has much merit, which leaves open the question as to why the series was abandoned. Given the historically high annual growth currently seen in the SGS Ongoing M3 reporting, is it possible that the U.S. central bank did not want the domestic and global markets to contemplate the significance of what was then (March 2006) looming double-digit growth in the broad money measure?
As to reporting, annual growth in the still-reported M2 now is 7%, and the non-M2 components of M3 are averaging about 25%. The two dominant non-M2 components, large time deposits and institutional money funds still are reported weekly by the Fed in some usable form. With most of the needed data still being reported, how much can the Fed be saving by not publishing the full series?
As to relevance, of course, part of the issue may be tied to the meaningfulness or quality of the underlying economic series (GDP, CPI, etc.) that are being assessed against M3. The graph below shows growth in M3 and SGS Ongoing M3 plotted versus the CPI-U and the SGS Alternate Consumer Price Measure.

In the post-1987 liquidity panic era, annual M3 growth has a negative 40% correlation with annual CPI-U inflation, suggesting that higher M3 growth leads to lower inflation. Wait until the Wall Street hypesters start spinning that one! In contrast, M3 has a positive 71% correlation with the SGS inflation measure, suggesting that higher M3 growth has some relationship to higher inflation.
The Federal Reserve has been in a long-term liquidity trap, where pumping up of the money supply generally has not stimulated normal economic growth in the post-1987 era. Excessive liquidity did help to build stock-market and housing bubbles, which helped boost economic growth from the standpoint of a perceived wealth effect and extraordinary debt expansion.
The Fed’s pushing on string, however, never addressed the underlying structural collapse in economic activity, the long-term decline in inflation-adjusted household income, with a meaningful portion of the U.S. manufacturing base moving offshore. Therein lies the heart of the current economic crisis. Without a new gimmick from the Fed aimed at somehow buying more time, the economy is foundering based on negative fundamentals that cannot be turned quickly (as in decades), and certainly not with excessive money supply pumping. Without sustainable real income growth there can be no sustainable economic growth.
The Fed can hide whatever numbers it chooses, the government can massage its economic statistics as much as it wants, but the underlying reality of a deteriorating inflationary recession remains in place. What the politicians are missing is that Main Street U.S.A., which tends to vote its pocketbook, does not believe the gimmicked data and has an amazingly good sense as to what is going on. The reference there was to Main Street not Wall Street.