Re: M3 Declined

["Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>]

Not necessarily. It could be merely shifting of categories rather than a
total shrinkage.

M3 is merely M1+M2+ time deposits over $100K and term repos. L
(long-term liquidity) is M3 + other liquid assets such as Treasruty
bills, savings bonds, commpercial papers, bankers acceptance, non-bank
Euodollar holdings of US citizens.  The money supply data are not very
revealing these days because of structured finance.  With financial and
banking deregulation, there is much contrversy about what constitutes
money supply at a given time.  M1, 2 and 3 represent money and near
money and L represents longer term liquidity.  Near money is cash
equivalents and other assets that are easily convertible into cash.
Real estate is normally not considered as liquid assets, but these day
securitization of real estate portfolio and debts turns much of real
estate in near money. Bonds that are closed to maturity dates are
considered near money. Are derivatives near money? The notional value is
not real, but the financial value derived from the notional value is
real.  This make mockery of the concept of money supply. The money
market is a market for short term debt instruments, negotiable
certicifcates of deposits, eurodollar CDs, commercial papers, bankers
acceptances, T-bills, and discount notes of the Federal Home Loan Bank,
Fanny Mae, Freddi Mae, Federal Farm Credit System, among others. Fed
funds borrowing between banks, bank borrowings from the Fed window and
various forms of repo agreements are also elements of the money market.
The common characteristic of all these instruments are safety and
liquidity.  The money market operates through dealers, money center
banks, the Open Market Trading Desk of the NY Fed. Arbitrage trades help
keep prices uniform worldwide.  Options, futures and forwards enhance
safety and liquidity to many assets and reduces systemic safety and
liwuidity. Liquidity refers to the ability to buy or sell an asset
quickly and in large volume without substantially affect the price.
Liquidity ratio and liquidity diversification are serious issues in
corporate finance and increasing in government finance.  When one
institution, such as LTCM, commanded a derivative obligation of hundered
of billions of follars at a leverage of several thousand time equity, it
taxed systemic liwuidity without government limitation.  LTCM could not
exit without adding to its woes. The Fed was forced to bail  it out to
prevent a systemic liquidity crisis.

I have posted on Liquidity on PKT a couple of years ago:
http://csf.colorado.edu/mail/pkt/2001/msg02218.html

Henry C.K. Liu


Santos wrote:

> The appears to have been a sharp decline in M3 in October. Is this the start
> of more shrinkage?