US Dollar Daily Chart And a Brief Comment on Estimated M3 and the Velocity of Money

If the dollar is going to manage a breakout from this counter-trend bounce, this is about the point where it should show some strength.

Perhaps the FOMC tomorrow will provide the impetus.

If it cannot move higher from here, the trend line may provide some support, but at a much lower level from here.



There is some excitement on chat sites from the dollar bulls with regard to the downtrending estimates of M3, as presented by our friend Bart at nowandfutures.com.



M3, as you may recall, is no longer tracked by the Fed, having discontinued its publication on 23 March 2006. But both Bart and John Williams estimate it from the available data on two key components, and extrapolations from prior relationship for the key missing variable which is Eurodollars.

We prefer to watch MZM as we have noted, and that chart is also showing a decline, but perhaps not as dramatic as the estimated M3.



There is a problem in estimated Eurodollars these days, and since that was the key driver behind the recent short squeeze as documented here many times, we tend to discount the reliability of the M3 estimates. We have discussed this with Bart, who realizes that he is estimating his best. We could do no better, and his work is above reproach, but based unfortunately on Federal Reserve opacity.

His site is a regular source of information, and his work is excellent. John Williams does great work as well on his shadowstats.com site. We just think that there M3 estimates are becoming less reliable with time.

We also have to caution the dollar watchers that the nominal levels of money supply are only one half of the function of value. Demand is the other half of that function, and with the US economy flat on its back, one would expect the nominal money supply figures to be declining. The velocity of money is cratering, and the liquidity that is in the system is flowing into an echo equity bubble, and not into productive economic activity. The result is a growing Federal budget deficit.



Speaking of the velocity of money, Dave Rosenberg notes today the correlation between the velocity of money, nominal GDP / M1, and the SP 500. We don't like to reference M1 since the Fed changed the overnight sweeps policy, gutting M1 in the process, but Dave's point is well taken. GDP and stocks should be correlated, and velocity of money is an indicator of monetization gaining traction in the productive economy.



Here are some other widely followed measures of the Velocity of Money Supply.



In closing, here are a few astute observation on the Federal Reserve Note from an interview by Ron Paul on CNBC. It would have been interesting if he had been elected President rather than the Great Reformer, although it is charitable at best to call that a 'long shot.' Maybe next time if America turns from the established two party system. It would be a change to see more third party and independent members of Congress.