Fed Making Decisions Based on Faulty Money Supply data, says Former Staffer William Barnett

February 16, 2012

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Skeptics over the accuracy of government data are abound – such as the use of various heuristics in inflation data or failing to account for contingent liabilities like Fannie Mae’s liabilities in outstanding debt statistics – but allegations over money supply data have largely escaped criticism, until now. 

The Fed is basing decisions on faulty statistics that understate the degree of credit growth and money being pumped into the system, says Former Federal Reserve Staffer, William Barnett in a new book: “Getting It Wrong: How Faulty Monetary Statistics Undermine the Fed, the Financial System and the Economy.”

“The Fed’s monetary data are poor, inadequate and ‘nearly useless to the public,’ he says. The totals apply equal weights to currency, demand deposits, savings accounts and some certificates of deposits,” despite stark differences. Cash pays zero interest and is more liquid for example.

Barnett created an alternate measure of money supply called, “Divisia monetary aggregates,” which weight items the components by liquidity. “This offers a more accurate reflection of the money actually being spent in the economy.”

The graphs suggest “the Federal Reserve could have been feeding the asset bubbles without the Fed’s being aware of it,” Barnett says. Likewise, Barnett says the Divisia data shows the Fed overly shrunk the money supply in 2007 and in the 1970s under Volker.

Source: book, bloomberg, Center For Financial Stability

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