A Fibonacci Expansion of M3?
"M3" refers to the broadest measure of the money supply. In the years 1997 through 2000, M3 increased by about 460, 600, 500 and 600 billions per year, respectively. In 2001 M3 expanded much more rapidly -- by about 1.1 trillion -- to a total of about 8 trillion.
Perhaps '01 was an anomaly. But in case it marks the onset of a new trend, permit me to observe that its increase was approximately equal to the summation of the two preceding years' increases. The mathematician Fibonacci posited that a certain kind of expansion proceeds in this form: each successive element is equal to the summation of the two that preceded it.
It has been suggested elsewhere that the US economy has become addicted to an ever-expanding money supply. If this is the case, then M3 may try to maintain a Fibonacci expansion as follows:
Am I predicting that M3 shall actually increase by $30 trillion in 2008? No, not yet. But the path of least resistance is leading in that direction. Be sure to remember this: any currency can rapidly lose its value when too much of it is created. In cases where a currency begins losing its purchasing power, if a government unwisely tries to compensate by creating more of it, then the currency will collapse. Therefore, what the chart above depicts is not a world in which more and more dollars produce more and more aggregate dollar-purchasing-power. Rather, it depicts a world in which more and more dollars produce less and less aggregate dollar-purchasing-power.
When an addictive monetary bubble forms, it is only during the brief, early, expansionary stage that we can get away with increasing the money supply with impunity. It is only during this early stage that monetary expansion can produce a corresponding increase in aggregate purchasing power. Later on, aggregate purchasing power will fail to keep pace with the nominal expansion of money. Still later, in the terminal stage of a monetary bubble, arbitrary increases in the money supply become counter-productive, resulting in an unavoidable decrease aggregate purchasing power. And if all of that happens, then yes, M3 could have a one-year increase of $30 trillion by 2008.
As things presently stand, it has not yet been determined whether our addictive and unstable monetary bubble shall meet its demise in the form of an "implosion" or an "explosion." If, at some point, however, we try to prevent the money supply from increasing as the chart above shows, then the demise of our economic bubble will probably look something like a money bubble imploding (proceeding into a deflationary depression). On the other hand, if we permit the monetary expansion to go unchecked, then the bubble's demise will probably look something like a money bubble exploding (a hyperinflationary depression).
When a government desperately resorts to expanding its money supply rapidly, it becomes a monetary-economic addiction. Like any other addiction, this "bubble" represents a kind of shortsighted, ill-advised comfort-zone. By embracing this kind of comfort-zone, the addict compels himself to forsake his long-term well being in favor of a degenerating, short-term "high." In order to maintain his high - his comfort-zone - the addict is compelled to try to balance his dosage between two extremes. He tries to take enough to induce the comfort-zone without taking too much - producing a lethal overdose. He may imagine an unrealistic "rosy scenario" or even a "soft landing" while he tries to ignore or even deny that his minimum required dosage is constantly increasing. This kind denial applies equally to drug addiction and monetary addiction. When applied to a monetary addiction it results in such delusional ideas as a "justified war on gold."
Today, there is a purportedly serious public debate about whether we may be entering a problematic monetary inflation (like Argentina) or a problematic deflation (like Japan). It boils down to an argument about whether too much or too little addictive M3 money is being created. But any time there is a debate concerning too much or too little of an addicting substance: all of the participants are compelled wrongly to presume that the addiction remains in an early stage. They are compelled to make this presumption because once an addiction enters its later stages, the very distinction between "too much" and "too little" (with regard to whether or not it will maintain the addict's comfort-zone) becomes a matter of idle semantics. Let me explain what I mean by that:
In an earlier stage of a drug addiction there remains a distinct difference between (1) the kind of discomfort experienced when an addict takes too small a dose to induce the comfort-zone (he may begin to tremble, e.g.) as opposed to (2) the kind of discomfort experienced when he takes too much of the drug (as when he is delivered to the E.R., unconscious). Therefore, in this early stage of addiction, there are two distinctly different sets of symptoms associated with these two ways an addict can fail to maintain his comfort-zone. At a later stage of the addiction, however, the minimum dosage required to induce the comfort-zone approaches the amount of a lethal overdose. As the minimum converges with the maximum, any purported "debate" about "too much" vs. "too little" becomes an exercise of idle semantics.
Likewise, in an earlier stage of a monetary-economic bubble, there would remain a distinct difference between instances of deflation (not enough monetary increase to maintain a bubble's comfort-zone) as opposed to rampant inflation (too much monetary increase to maintain a bubble's comfort-zone). As we approach the later stages of the addictive monetary bubble, however, the very distinction between inflation and deflation is lost (beginning with the paradoxical onset of "stagflation"). During the earlier stages of a monetary bubble, it remains possible for people significantly to debate whether imminent inflation (overdose symptoms) was becoming problematic as opposed to imminent deflation (withdrawal symptoms) becoming problematic. Independent of who might be "right" or "wrong" in such a debate, during the earlier stages of a bubble such arguments would have meant something. During the later (terminal) stage of the bubble, however, the same debate becomes one of pointless, idle semantics.
Have you noticed that the cheerleaders try to assure us that inflation can't be imminently problematic because, after all, there are symptoms of deflation present! They go on to assure us that deflation can't be imminently problematic because, after all, symptoms of inflation are present! That's like trying to assure a terminal addict that the discomfort associated with withdrawal can't be imminently problematic because symptoms of overdose are present; whereas the discomfort associated with overdose can't be imminently problematic because symptoms of withdrawal are present! Stock market cheerleading tries to focus on this kind of semantical reassurance that an addict's comfort-zone will continue because neither implosion nor explosion are unambiguously imminent.
During the late 90's, while the tech bubble was still in its expansion mode, how many times did we hear, (1) "This ever-expanding new economy obviously justifies an expanding money supply." Now the economy is shrinking and the money supply is expanding at an even faster rate. The very same people (the cheerleaders) now (2) point to a shrinking economy as if it now provides obvious justification for expanding the supply of money! "We need to stimulate the economy," they say. Put (1) and (2) next to each other and you will see that by a cheerleader's standards, anything would justify increasing the money supply. It becomes an attempt to get rich simply by creating more money. It is the kind of thinking used to rationalize an addict's comfort-zone.
Presuming that Greenspan & Co. can connive to maintain the present economic-monetary bubble for yet another year, it will be interesting to observe how great a monetary increase it will need. If M3 has to expand by about $1.7 trillion it will mark the second consecutive year in which its increase is equal to the summation of the two preceding years.
If that happens, it will indeed begin to look as if Greenspan's monetary addiction is compelling him to try to manage a doomed Fibonacci expansion of M3.
Robert Gregory
January 11, 2002
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