Monday, January 30, 2012

South Africa's M3 now buys less Coffee, gold and other stuff; did Bernanke dilute our whiskey?

The previous two articles I did on the purchasing power of residential property, and the JSE Top 40 got me wondering: how much value could we purchase if we were to trade in the entire South African M3 money supply for commodities? I compiled some graphs and found the answer to be very interesting.    

So, if we were to trade M3 for commodities; would we get more, or less in commodities?  That is the question I attempted to answer in this posting.

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 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. 

It is an accepted fact that the central banks of the world are able to expand monetary bases (print money). That means that governments, along with their central banks, can manipulate the amount of money that circulates in their economies.

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:

Wow! I think it is rather obvious that Uncle Sam has been printing a lot of money since 2008.

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:
I think I am correct in saying we had a nearly parabolic increase in the RSA money supply since 1999/2000.

[Also: notice the extreme volatility present in the chart from 2008 to 2010, which have coincided with the financial crisis].

But, are there any negatives to extensive money creation? Well yes, there may just be one; a monster named INFLATION. I don't think inflation should become a problem if we had real inflows of real wealth into a country. But if the money was created from nothing, inflation must be expected.

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)?       

How much, in commodities, would our entire stock of M3 have purchased?  

Ok, so let's say we have gone completely insane and decided to trade in the entire M3 money supply of South Africa for different commodities. What then would our M3 be worth in commodities?

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 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:   

Stuff that shines: Gold and Silver
Stuff to eat: Food
Stuff the build with: Wood, Steel, Copper   
Stuff to travel with: Energy and Fuel
Stuff to grow other stuff with: Fertilizers 



Gold has had a staggering growth in price over the past decade. This growth is reflected in the chart above. In 2005 our M3 money stock would have purchased about 350 million oz of gold.

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.  

Silver has historically been a more volatile investment than gold. So how much silver could our stock of M3 have purchased over the last couple of years? 

M3 money stock in oz of silver

January  2005:    22.9 billion oz of silver
January  2009:    19.5 billion oz of silver
August   2011:       7.6 billion oz of silver  

A 67% drop from the high in 2005; M3 now buys less silver. So, in Gold and Silver - real money - our M3 money stock has declined in value.

Next up I'll consider 'stuff we eat', M3 valued in food prices. 



M3 Money Stock in Tons of Bananas:

January 2005:       404 million tons
December 2007:  378 million tons
January 2009:       213 million tons
August 2011:        319 million tons

Compared to the high of 2005 our money stock appears to be valued somewhat less in banana (404 tons to 319 tons).  Overall, the chart seems to have stayed within a broad trading range.      


Our M3 money stock measured in pounds of beef: 

April 2008:        221 billion pounds
August 2011:   169 billion pounds

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? 


Our M3 money stock appears to have appreciated in value, measured in chicken. The trend appears to be a trend of appreciation.  I found this very interesting, maybe one of our readers could tell us why M3 would show such a continual appreciation when measured in chicken.

See the actual data below:

Our M3 money stock measured in pounds of Chicken  

April 2006:             294 billion pounds of chicken
December 2007:  319 billion pounds of chicken
August 2011:         346 billion pounds of chicken


Maize appears to be another highly cyclical commodity. This is reflected by the highs and lows of the chart. However, the drop in value from June 2010 to Aug 2011 appears to be very pronounced. A depreciation trend might also have formed since 2005 (where M3 started to show a general decline in value when measured in maize).

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. 

M3 Money Stock measured in Tons of Maize: 
April 2006:     1.85 billion tons
July 2007:       1.50 billion tons
Jun 2008:        803 million tons
Jun 2010:        1.70 billion tons 
Aug 2011:       987 million tons

Coffee (Robusta) 

Next up my favorite commodity. It appears that M3 measured in coffee has declined significantly also since 2004.

M3 measured in Pounds of Robusta Coffee:
October 2004:    450.3 Billion pounds of coffee
March 2008:       178.6 Billion pounds of coffee


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

Sunflower Oil

Sunflower oil shows an interesting and volatile trend. Our M3 money stock was worth a lot in sunflower oil from Jan 2006 up to about Jan 2008. However, since Jan 2008 M3 seems to have been declining in value when measured in sunflower oil.

So let's look at some commodities used for building processes.


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

M3 measured in hot rolled steel has declined slightly since 2010.  The chart seems to reflect increasing volatility.  At this point M3 still buys a lot of hot rolled steel. However, if global production was really in an uptrend (as the news services would like us to believe) shouldn't this chart reflect a decline in value as hot rolled steel becomes more expensive? Which it has not.  


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.


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?

Posted by Gerhard van Onselen (follow me on Linked In and Twitter)

I am not a professional financial adviser. Information presented is intended to be solely conversational and educational, please don't make investment decisions based on just one source, do your own research, and consult a registered financial adviser.While I tried my best to present accurate information and numbers in this posting, I cannot guarantee the accuracy of any information presented.    

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