borodog's mistaken understanding of M3...don't listen to his drivel

[DcifrThs]

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I like econ but this thread makes me want to bang my head in to the wall. It appears to me that Barron and Borro are both very well versed in economics so I would like to ask a couple of simple questions.

Money Supply as measured by M2 has grown rapidly but CPI figures have not, some have speculated that the excess liquidity has bid up real estate and stocks resulting in asset inflation rather than price inflation as measured by the CPI. How do you feel about that explanation?

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this is something i stated and a very possible explanation for the lack of increase in CPI.

in my other thread i wanted to test this. basically, if M2 increases eventually hurt everybody by bidding up the prices for the relative fixed goods (i.e. money increases far faster than the supply of things and stuff), then this will definitely be seen in the CPI #s no matter how well the govt messages them (i.e. 1970s).

the excess liquidity has to find a home. that risky assets aren't included in CPI is a controversial issue in my mind (they should be in some form or another)....but housing, specifically is in CPI. there is something in there called "owner equivalent rents." this is basically a measure of both what a renter has to pay to reside in an area or what an owner could rent his/her house out for should he/she choose to do so. it definitely captures the increase in housing prices and has jumped a ton in the past few years.

i'd obviously expect this year that it falls by some 2-5%.

stocks, money market accounts and the like are not included in CPI though they may influence how people consume and in the end how much money is bidding for a fixed (relatively speaking) supply of goods.

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Repos are a source of financing and add liquidity to the system, it would therefore seem that M3 levels are meaningful. I think I remember in Greenspan's book he talked about the FED being in the repo market but I am not 100% certain. What are the consequences of the rapid growth in M3? Inflation? Not meaningful?

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the rapid growth of M3 is i don't think anywhere near as meaningful as M2. the reason is because even the fed's open market operations are justa drop in the bucket in terms of the total notional value of repos outstanding (the "repo" line item in M3). ALL financial institutions use them, almost ALL hedge funds use them (so some huge % of $1.4trillion) all over the world. they provide leverage where there was none before (illiquid bond markets, some asset backed securities markets).

until i see some concrete data that show the fed has a ton of outstanding repos i'm going w/ the above. (also the fed's repos are basically overnight always).

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Finally, do both of you feel that CPI numbers will eventually go up dramatically based on the rapid growth of M2 and / or M3?

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yes, as a result of economic factors, of which M2 is included, most likely.

Barron