Special Forex Q&A with Ed Ponsi
Hello from New York! I am heartened by your responses to my three-part series, "The U.S. Dollar and the Thief in the Night". Thank you one and all. If we can increase the public's awareness that there is a serious problem here, we just might be able to do something about it. I'd like to answer a few of the most frequently asked questions that I've received over past few weeks regarding this important issue.
Checking in on the U.S. currency, the daily chart shows yet another crushing day for the greenback. Here are the last 100 days of activity in the U.S. Dollar Index, which measures the U.S. Dollar vs. a basket of currencies that includes the Euro, the Great Britain Pound, the Japanese Yen, the Canadian Dollar, and several other currencies (see figure 1).
Figure 1: The U.S. Dollar has fallen hard during the past 100 days. Source: FX Street
As bad as the previous chart looks, the damage depicted therein is dwarfed when viewed alongside the USD Index price action over the past 100 months, as seen below (see figure 2).
Figure 2: USDX plunges from 120 to 77 during the past 100 months. Source: FX Street
Remember, these charts depict the value of every dollar you've earned and every dollar you've saved. The good news is, we don't have to sit idly and watch our wealth disappear. Let's get to your questions...
Q) I look forward to reading your articles which are written in such a way that a layman really finds it understandable – Thank you for taking time to explain different aspects of trading. Would you be so kind to explain what M1, M2 & M3 (Money Supply) are? How are they measured and controlled by The Fed? And what information do they provide?
Ed Ponsi) Thank you for your question. M1, M2 & M3 are simply measurements of the amount of money in circulation. Out of these three, M3 is the most important money aggregate for economists, analysts and Fed watchers to get an idea of the speed at which the Fed is printing money and devaluing the currency. Here are some definitions:
M1 is basically a measure of all currency in circulation and not in the vaults of the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions.
M2 = M1 plus most savings accounts, money market accounts, and certificates of deposit of under $100,000.
M3 = M2 plus all other CDs (including those above $100,000), deposits of Eurodollars and repurchase agreements.
While M1 and M2 are measurements of money that are held for the most part by the general public, M3 adds huge institutional funds to the equation. Fed watchers have used M3 for years as the preferred measurement of the money supply, because it gives the clearest clues as to how many dollars are being printed and pumped into the overall float. M3 is effective in part due to its tracking of certain components which are not part of M1 or M2. Only M3 told us what was really going on with monetary growth because the big money is in the institutions.
Then, on November 10, 2005, the Fed released a statement that began with this sentence: "On March 23, 2006, the Board of Governors of the Federal Reserve System will cease publication of the M3 monetary aggregate."
The Fed's statement goes on to say that M3 isn't important, and the data isn't worth collecting:
"M3 does not appear to convey any additional information about economic activity that is not already embodied in M2 and has not played a role in the monetary policy process for many years. Consequently, the Board judged that the costs of collecting the underlying data and publishing M3 outweigh the benefits."
Am I the only one who finds it strange that the Fed claims it is simply too expensive for them to tell us how much money they are printing? Now I am not one for conspiracy theories. Please don't have me fitted for a tin foil hat just yet. But doesn't it seem odd that the Fed is telling us that they will no longer report that data, and that the data isn't important anyway? Shouldn't we be the judge of that?
And yes, there is a movement to bring M3 back. Read on for more about that.
Q) Mr. Ponsi, I thoroughly enjoyed your three articles, "The US Dollar and the Thief in the Night." My only concern is that the same message I took from it falls mainly on deaf ears. You mentioned a solution being to make our elected leaders aware that fiscal sanity matters to us. I agree 100%. Is there a way you could provide contact information for individuals or organizations that I could write to, expressing my concerns?
Ed Ponsi) Thank you for your question. First of all, I'd like to say that I'm not a political person, and it is not my desire to sway your vote to one side of the aisle or the other. I am not endorsing anyone, but I'd like to point out that there are politicians out there who "get it" when it comes to the consequences of a weak U.S. Dollar. One such person is U.S. Representative Ron Paul of the 14th congressional district of Texas. With the permission of Dr. Paul's staff, I've reprinted several excerpts of his recent writings:
"In a very real sense, the Fed and the government are close to going over the spending limit of our nation's credit card. We rely on foreign investors to buy our debt so our government can maintain its appetite for spending."
"Printing more money is the Fed's typical answer, but we are on the verge of runaway inflation. We have printed so many dollars now that we are at parity with the Canadian dollar for the first time since 1976. Since the Fed stopped publishing M3, which tracks the total supply of dollars in the economy, we can't even be sure how many dollars they are creating."
"Ultimately, we'll get back on track financially only when government spending is held in check and the free market controls monetary policy, not the other way around."
"The Money Has to Come From Somewhere" by Dr. Ron Paul, reprinted by permission
Now, I know nothing about Dr. Paul. I don't know what his views are on other issues. I am not endorsing him. However, I do believe he has nailed it on this particular issue. The point is that he understands the consequences of what is happening to the U.S. dollar. He has spearheaded legislation to bring back M3. And, he is not alone. We need more people in Washington who appreciate the importance of this issue, because ultimately, the financial future of this country and its citizens is at stake.
Have a question about Forex trading? Send an email to eponsi@tradingacademy.com and we may use your question in an upcoming newsletter. Until next time, best of luck to you in trading.
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Ed Ponsi is a globally recognized name as a lecturer and teacher and is the former Chief Trading Instructor for Forex Capital Markets. An experienced professional trader and money manager, Ed has advised hedge funds, institutional traders, and individuals of all levels of skill and experience. Ed has appeared on CNBC, CNN International and TheStreet.com, and has recently written his first book for Wiley Finance, "Forex Patterns and Probabilities" (which you can purchase through