M3 and the American success

Publié le par Jean-Pierre Chevallier

M3 and the American success

American companies lacked cash until the late 1990s. 
Indeed, the aggregate M3-M2 totaled cash to less than 20% of GDP,
Figure 1: http://s3.archive-host.com/membres/up/2107676425/20071030US1M123.gif

Everything changed at the beginning of the twenty-first century: profits doubled, from $ 600 billion in 2001 to $ 1,200 billion at present,
Figure 2: http://s3.archive-host.com/membres/up/2107676425/20071030US2NI.gif

Companies have ample cash: M3-M2 jumped from 2001 to reach 25% of GDP in March 2006, the date from which the Fed does not publish more figures for M3.
However, some people have reconstituted the equivalent of M3. According to data from economists of Work For All, M3-M2 have now reached almost 35% of GDP!
Figure 3: http://s3.archive-host.com/membres/up/2107676425/20071030US3M123WFA.gif

Given the jump in profits, these figures are quite realistic and reliable.
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The huge increase in M3-M2 does not mean that the risk of inflation has risen!
Indeed, the money that is in
M3-M2 no train because:

  • companies are increasing their profits to buy back some of their shares, which strengthens and increases the wealth of their shareholders benefiting from other dividends, which have grown even faster than profits!
  • And this money is usually reinvested, and therefore placed in securities that are outside of the money supply,

Figure 4: http://s3.archive-host.com/membres/up/2107676425/20071030US4CFNIDI.gif

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Dividends which accounted for less than 40% of cash flow until 2004 are now in 2007 almost 60% of these cash flows!
Figure 5: http://s3.archive-host.com/membres/up/2107676425/20071030US5DCF.gif,

And those dividends, which represent less than 3% of GDP until early 90s are now in 2007 to nearly 6% of GDP!
Figure 6: http://s3.archive-host.com/membres/up/2107676425/20071030US6DGDP.gif

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Americans are the happy beneficiaries of the profits of their companies because they are shareholders directly or indirectly, in particular through pension funds.
The money flowing M1, or M2-M1 (household savings that can move quickly in M1), are the only major aggregates, and there is no monetary loss in the United States (the ratios are in the standards, cf. chart 1).
Money is sound, according to the basic principles of Reaganomics.
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Companies continue to normally invest around 6.5% of GDP,
Figure 7: http://s3.archive-host.com/membres/up/2107676425/20071030US7IGDP.gif

In the twentieth century, companies were forced to borrow to invest.
They therefore depended interest rates of the Fed. This is no longer the case now because they have an abundance of cash that allows them to be self-supporting.
For this reason GDP growth increases slowly since the Fed raised its base rate to 5.25%, far above its neutrality at 4.25%.
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