Last blog I talked about the 'coincidence' that the Fed has slowed M3 growth or even contracted M3 prior to the 2010 and now 2012 elections. If the hypothesis is right, and it is not past the window of opportunity to affect the 2012 election (for better or worse), then the Fed should be focussing on healing the economy and for the next 6-12 months we will see M3 expanding. A real-life test, where we don't know the outcome in advance!! But let's hope we are right, and that it is not something disfuncti
Remember the conspiracy theory of Fed manipulation of the money supply to weaken the economy prior to elections? To examine if this had any validity I created a weekly index of when the conspirator would want to have the greatest positive or negative effect on the money supply. A Republican conspirator wanting a favorable economy for the 2008 economy (Republican administration) might ramp up monetary expansion from about 18 months prior to the election (i.e. the first week in June 2007) to a peak at 6 months before the election (i.e. the first week in June 2008) and then retracing back to a normal growth pattern by June 2009. To generate an unfavorable economy for the 2008 mid-term election (Democrat administration) a conspirator might start to slow or contract monetary growth 18 months before the election (i.e. first week in June 2009) to a bottom about 6 months before the election (i.e. June 2010) before slowly returning to a more normal growth pattern by June 2011, before repeating the slow-growth exercise for the 2012 presidential election. I didn’t want to believe that the Fed would actually do this but guess what? This is exactly what happened. I ran a correlation between my index representing hypothetical conspirator behavior and actual M3 growth—and found a correlation of .88, or 88%. This is extremely high for economic data.
Does this mean that the conspiracy theory is right? Not at all, there are some statistical issues with using simple correlation and M3 growth rates (as opposed to acceleration) for analysis of what is a failry complicated economic phenomenon, and correlation is not causality. A little bit depends on how much you believe in coincidence. But M3 growth has an unsavory appearance, and for an institution as concerned with appearance as the Fed is, this is a worrisome sign. The Fed has some explaining to do!
So we have seen the changes in the money supply related to the past three elections--those under Bernanke's Fed presidency. Why would there be a relationship between money supply and elections? Here are some possible reasons
1. There really isn't a relationship--it is just random coincidence. This explanation is easily debunked by statistical analysis--but more on that in later blogs. Also, do we really believe that everything the Fed does has no consequence and money supply is just random?
2. Bernanke thinks the economy is fine and doesn't need any help. Really?
3. Bernanke cares about the banking industry but not the economy. There has been a lot written on this in the financial pages and on the websites in the past few years, and to some extent it may well be true. But it doesn't explain election cycles.
4. The Fed has run out of ammunition to increase the supply of money. This is consistent with slowing year-over-year increases in money supply, but not with acceleration in money supply. Money supply growth decelerated prior to the 2010 election, accelerated dramatically in the interim between the 2010 and 2012 elections, due in part to quantitative easing, and has decelerated prior to the 2012 elections. Yet Bernanke says that another round of quantitative easing is available if necessary. So it must be that Bernanke thinks it is best not to have quantitative easing?
5. Fed decisions on the money supply are directly related to influencing elections. Oooh--isn't this a bit of a weird conspiracy theory? Is there really any evidence at all to support this?
Which is your favorite explanation? More data and analysis to come on