In an earlier post [see Contracting Money Supply, Deflation Bugaboo And Dubious Statistical Models] we argued that some experts have used wrong models to fear monger about deflation and or market crashes.
Where in most occasions experts fall victim to associating correlation with causation, we argued that the actions of M3, a monetary aggregate statistic, has even had inconsequential correlations to even suggest for a meaningful causal link.
Dr. Frank Shostak points out why the use of M3 as basis for predicting the path of the economy isn't reliable.
Mr. Shostak writes, (bold highlights mine)
``It is quite possible that monetarists are reaching valid conclusions with respect to the economy in the months ahead. We are of the view however, that money M3 is not a valid measure of money.
``In order to account correctly for money, one must make a distinction between money that is deposited and money that is loaned out.
``When an individual exchanges goods for money he in fact increases his demand for money and when he lends his money he is lowering his demand for money. Individuals can exercise their demand for money in a variety of ways. For example, they can keep money in a jar, or under the mattress, or in their wallets, or place the money in a bank warehouse. From this it follows that the overall amount of money in individual holdings should be the sum of money they hold in bank warehouses also known as demand deposits plus the money they hold outside banks warehouses.
``This, in turn, means that the inclusion of various term deposits such as large time deposits and money market mutual funds deposits into the definition of money such as M3 produces an erroneous account of the amount of money in the economy.
Dr. Shostak further says that his preferred monetary statistics, the AMS, appear to be saying a different story.
Read the rest here.
Where in most occasions experts fall victim to associating correlation with causation, we argued that the actions of M3, a monetary aggregate statistic, has even had inconsequential correlations to even suggest for a meaningful causal link.
Dr. Frank Shostak points out why the use of M3 as basis for predicting the path of the economy isn't reliable.
Mr. Shostak writes, (bold highlights mine)
``It is quite possible that monetarists are reaching valid conclusions with respect to the economy in the months ahead. We are of the view however, that money M3 is not a valid measure of money.
``In order to account correctly for money, one must make a distinction between money that is deposited and money that is loaned out.
``When an individual exchanges goods for money he in fact increases his demand for money and when he lends his money he is lowering his demand for money. Individuals can exercise their demand for money in a variety of ways. For example, they can keep money in a jar, or under the mattress, or in their wallets, or place the money in a bank warehouse. From this it follows that the overall amount of money in individual holdings should be the sum of money they hold in bank warehouses also known as demand deposits plus the money they hold outside banks warehouses.
``This, in turn, means that the inclusion of various term deposits such as large time deposits and money market mutual funds deposits into the definition of money such as M3 produces an erroneous account of the amount of money in the economy.
Dr. Shostak further says that his preferred monetary statistics, the AMS, appear to be saying a different story.Read the rest here.
