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!

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