M3 Money Supply
To provide a bit of background; M3 refers to the broadest measure of the amount of money in circulation in an economy (this is according to Investopedia.com). Simply put our M3 money stock is a measurement of all the cash and electronic money available in the South African economy; our entire supply of money.
The US is a good example; and man have they expanded their money supply since the big financial crisis of 2008. Take a look at the following chart of the monetary base of the US (this provides an estimate of the cash in hand and money at reserve at the US banks, i.e. their monetary base).
|Adapted from data: http://research.stlouisfed.org/fred2/categories/32345|
But what about the situation closer to home, in good old South Africa. What has our monetary base been up to? Have we 'created' any money?
To find out, I compiled the following graph, subtracting M1 base currency (notes and coins) from M3 money supply. I wanted to see if any money was created in a broad sense (apart from notes and coins). So let's see:
|Adapted from data: http://research.stlouisfed.org/fred2/categories/32345|
[Also: notice the extreme volatility present in the chart from 2008 to 2010, which have coincided with the financial crisis].
You may gather that I don't trust this money printing business much, it's a personal gripe. But, many economists argue that money creation only becomes a problem when it leads to excessive inflation. And hey, the guys managing our global economy know what the're doing, right?
But money creation requires us to keep a tab on inflation and we have to measure inflation against something. So, how do we typically measure inflation? We typically use a measure called the Consumer Price Index (CPI).
I inherently distrust the CPI
Note: my personal distrust of CPI flows from a perceived problem of incentives. Governments that print money should be expected to have vested interest in reflecting low measures of inflation. By understating inflation governments could increase the money supply more, thereby funding government obligations and liabilities, through money creation - without raising taxes (A less controversial policy choice).
The Corrupt Barman
Think about a corrupt barman, diluting the bottle of Johnny Walker behind the bar; while still charging you yesterday's price for your tot of whiskey. That should give you a fair idea of how inflation works, less bang for your buck!
Low CPI may mask the actual destruction of purchasing power through excess money creation and corresponding inflation. Some call inflation brought about in such ways 'stealth taxation'. So, I am saying that governments may have very real incentives to understate inflation, especially the CPI, and that's why I don't trust it.
Within this context, I decided to measure the value of South Africa's M3 Money stock in commodities. The basic question asked was: how much value could we purchase with our M3 money stock when we measure the value of M3 commodities (not in Rand)?
The following series of charts, I compiled, will give you an idea of the value of our M3 stock over the past 20 years measured in things like gold, silver, maize, soy, and fuel. I used the data gathered from http://www.indexmundi.com/ for this analysis.
Our M3 data was gathered from:
I have divided the commodities into 5 categories, in an attempt to make the information easier to digest.
[I am not suggesting that the uses described for the commodities in the categories were exclusive. They were merely chosen for broad categorization purposes]. The categories were chosen as follows:
By the end of 2011 M3 was valued at only about 150 million ounces of gold. A drastic decline of 57.14% Notice that measured in gold, our M3 has appreciated in value from 1980 until 2005/2006. It started to depreciate in value from 2006 onward. Yes indeed, M3 now buys less in gold.
Next up I'll consider 'stuff we eat', M3 valued in food prices.
From June 2002 to round about January 2008, we find that M3 has appreciated in beef (reflected an up trend). From January 2008 to August 2011 it appears that M3 has started to depreciate when measured in beef. Has M3 started to lose value when measured in Beef?
See the actual data below:
Keep in mind that maize is an important ingredient in much of the industrial food production industry. We should thus expect rising maize costs to have a knock-on effect on the prices of other food stuff.
Looking at M3 measured in wheat a short-term pattern of depreciating value appears to exist. Wheat was relatively cheap in 2005 and 2010, increased in price during the big financial crisis of 2008. Now our M3 money stock buys less wheat than in 2010 and 2005.
M3 Measured in tons of wheat
Apr 2006: 1.1 billion
Mar 2008: 497 million
Jun 2010: 1.6 billion
Aug 2011: 936 million
Measured in soybean, our M3 money stock has also shown a decline in value especially since April 2006.
M3 measured in tons of soybean
Apr 2006: 952 million
Jul 2008: 441 million
Mar 2010: 756 million
Aug 2011: 626 million
Sugar is another important element in the western industrial food chain (perhaps to our detriment). When measured in sugar, we see that M3 has steadily been declining in value since 2006/2008
So let's look at some commodities used for building processes.
3. STUFF WE BUILD WITH
Wood: soft logs
At this point it seems like M3 remained relatively stable and appreciating, when measured soft logs.
M3, when measured in copper appears to have been declining in value. Since the first semester 2009 M3 has dropped very much in value when measured in copper.
Wood: hard logs
Hard logs tell a story of depreciating value. M3 measured in hard logs spiked in 2010 where M3 was valued at 1.085 billion cubic meters of hard logs. In August 2011 M3 would have bought only 680 million cubic meters of hard logs.
That is lower than the average value which existed between June 2004 to July 2008. It appears that M3, measured in hard logs, is declining in value. The trend may even be reversing to a trend of depreciating value.
Hot Rolled Steel
STUFF WE USE TO GROW STUFF WITH
Triple-Superphosphate and Potash
Next up, let's look at two common types of fertilizer used in the agricultural sector: Triple-superphosphate and Potash.
The charts below seems to indicate that our M3 money stock, measured in these two fertilizers, is worth less than it was during the period of 2002 to 2007.
STUFF TO TRAVEL WITH
Gasoline, Crude Oil, and Jet Fuel
The following three charts appear to be nearly identical. M3, measured in these three fuel commodities, moves in a sideways range from 2000 to 2008. It then jumps in value during 2008/2009 and then starts to decline (implying M3 being worth less when measured in fuels).
Notice than our M3 money stock would have purchased much more fuel in 98/99 compared to today. Jip indeed, fuel has gotten more expensive. And we are due for another increase this week.
It's Index Time !!!
My final chart is an index I compiled from 21 commodities considered so far for this posting. I simply added all the aggregates of M3 measured in various commodities together and divided by 21 for each year. In theory, this should give us a sample of the general value of our M3 money stock measured over a population of commodities.
I used MS Excel to include a polynomial trend line on the chart. The trend line seems to agree with the general idea that more money printing will devalue the money stock in purchasing power. 'Curiously' the start of the depreciation of M3 found on the chart corresponds rather nicely with commencement of the US Federal Reserves Quantitative Easing programme.
Note that this research has various limitations. I am tentatively proposing in this posting that a further decline in the value of M3 may be likely. But additional research is needed on this topic. Maybe by people paid to do this full-time.
I have attempted in this posting, to show that even with big increases in money supply, both in local and US money supply, we may not be better off. It appears that our money stock has declined in value when measured in many of the commodities considered. Perhaps the old maxim that 'throwing money at problems rarely solves anything' is indeed true.
Troubling to me is the high depreciation of M3 when measured in wheat, maize, soy and sunflower oil and sugar. Over the long-term, M3 may also be declining in value when measured in oil, fuel and other fossil fuels (which seems to give support to the idea of appreciating energy prices and peak oil). If my results are true, we should expect to pay more for many things.
Our Johnny Walker, has been diluted!
Some commodities have not reflected a decline in value at this point; specifically chicken, beef, banana, soft logs, and hot rolled steel.
To venture a guess on whey that is: beef and chicken may still be heading for a decline, spurred by the higher input costs of wheat and maize. The polynomial trend-line for beef seems to be pointing down. Hot rolled steel has application in construction and in the US, for example, total construction spending has declined since 2006. I expect this to be a global trend. Logically, I would expect prices of this commodity to be low at present, representing more value.
Measured in real (non-fiat) money; specifically gold and silver - our M3 money stock has declined much in value. I think it is fairly accurate to suggest that M3, now is worth less than it was before the big economic crisis of 2008.
To conclude then, it seems to me like all the global money printing has not made us better off. South Africa as a whole may now have to accept buying less bang for our buck. We may have to deal with the diluted Johnny Walker, what do you think?