Okay, I know this is going to sound rather technical and perhaps even boring, but understanding what M3 is what it means to you can have a significant impact on your life.
The Federal Reserve is responsible for determining how much money is circulating in the market place. However, it's a little more complicated than just keeping a tally of all the bills that are printed and subtracting all of the bills that are destroyed or withheld from the marketplace.
There is a statistic known as M0 that measures the actual physical currency that is in circulation. There is another statistic known as M1 that includes all of M0 plus checking account balances. Then there is M2. M2 is the M1 statistic plus small time deposits and mutual funds. M3 includes all of M2 plus large time deposits, institutional money-market funds and other large liquid assets.
As you can see, since our economy borrows and re-borrows money over and over again, the M0 statistic doesn't accurately reflect how much money is in the marketplace compared to the M3 statistic.
Here's what's interesting; in 2006, the Federal Reserve STOPPED calculating the M3 statistic! Why is this interesting? Well, to many economists, the M3 statistic best reflected our market's actual inflation. By not calculating it, the Federal Reserve effective hid what the country's inflation was!
Now, the Fed's response to why they cancelled the M3 statistic is that it took up too many resources to calculate and that they made very few decisions based off of it. I don't doubt that this is true.
Consider this. If this overall inflation rose, then costs of good would go up and, ultimately, salaries would go up cancelling each other out. The Fed's primary responsibility is to make sure this relationship isn't widely distorted. This relationship is called the CPI or, the consumer price index. Since the Fed's job is to moniter and maintain a healthy CPI, then overall inflation IS unnecessary and the M3 statistic isn't very valuable.
But, overall inflation IS valuable!
Now, you've heard that inflation is somewhere in the ballpark of 4% to 5%, right? Well, that number, called core inflation, includes all items NOT INCLUDING FOOD AND ENERGY COSTS! I don't know about you, but I can't live without food and energy, so, not factoring in those costs seems rather useless to me.
And it should to you too!
Since 2006, when the Federal Reserve stopped calculating the M3 statistic, overall inflation has risen from about 8% to almost 18% (of course, remember that this number is now calculated by private institutions and not the Fed).
And it's on the rise!
With the Federal Reserve promising to bail out Fannie Mae and Freddie Mac, the Fed is going to effectively print huge amounts of money. This will unquestionably effect inflation.
Now, who is this going to affect the most?
Retirees.
Yup, retirees, or anybody, who lives off of a fixed income is going get hit hardest by the rising costs of goods due to the hidden tax called inflation. All retirees should immediately look to finding ways to secure their finances other than just putting into a savings account. If your bank promises to pay you 4% of your money, but the overall inflation of the economy nears 18%, you're losing 14% of your cash every year!
PLEASE NOTE! Those not financially learned enough to understand all of this are going to get hammered in the near future. The rules have changed. What used to be risky is now safe, and vice versa. Saving is a loser's game!
-Beasley
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