Abstract
A hypertrophy of the M3 money supply has been occurring in the United States since the early 2000s, as clearly shown by the graph depicting the ratio of the M3 money supply to current GDP (as a percentage).
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This expansion of the M3 money supply poses a dangerous threat to the fundamental economic balances of America.
Its increase leads to a decline in real GDP, and vice versa, according to the law of free money supply.
Document 2:
One solution to restore America’s fundamentals and return its money to soundness would be to drastically reduce the supply of Eurodollars.
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We live in an increasingly financialized world, yet paradoxically, economists are attaching less and less importance to what is, in fact, fundamental: the relationship between the money supply and wealth creation—that is, GDP.
Yet this was the major issue that the monetary authorities of the so-called Western countries monitored very closely—and successfully—during the second half of the 20th century.
The purpose of this article is to return to these fundamentals and bring them up to date…
Arthur Laffer’s maxim, “sound money is the first pillar of Reaganomics”, is now nothing more than a distant memory of a bygone era…
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Every fully independent and sovereign country has its own currency.
However, the example of Germany between the two world wars showed that when a nation’s monetary authorities allow monetary hypertrophy to get out of hand, a major economic crisis ensues—one that can even have catastrophic global consequences.
This is why, after World War II, the monetary authorities of developed countries acted vigorously and effectively to prevent the formation of monetary bubbles in Western nations—a task that Karl Otto Pöhl accomplished remarkably well during his tenure as president of the Bundesbank.
Thus, during the second half of the 20th century, all central bank governors in the countries of the so-called free world perfectly managed fluctuations in monetary aggregates to keep them within optimal limits, without, however, defining them theoretically or empirically in relation to a baseline—namely, GDP.
However, it is possible to define these limits (by quantifying them) based on the statistical series published by the Fed over the long term, dating back to the postwar period, which helps us better understand that it is the fluctuations in monetary aggregates that are the primary and fundamental cause of fluctuations in real GDP (in the opposite direction), all other things being equal.
As a reminder, the total money supply of a nation, denoted by M3, is the sum of three monetary aggregates…
The monetary aggregate M1 is the sum of positive current account balances and currency in circulation, and the M1/GDP ratio (as a percentage) must not exceed 15% of annual current GDP.
The monetary aggregate M2 consists of the sum of the M1 aggregate and the M2-M1 aggregate, which includes savings account deposits. This M2-M1/GDP ratio (as a percentage) must be less than 40% of current GDP.
Finally, the M3-M2 aggregate corresponds to the total cash holdings of corporations and money market funds. This M3-M2 / GDP ratio (as a percentage) must be less than 25% of current GDP.
These limits had never been exceeded simultaneously in the United States prior to 2006,
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Thus, the M3/GDP ratio (as a percentage) should never exceed 80% of current GDP.
This raises a problem: Ben Bernanke had the publication of figures for the total U.S. money supply, M3, banned as soon as he took office as Fed Chair in February 2006, so that monetarist economists could no longer analyze them and draw conclusions that are, however, essential!
However, I have managed to reconstruct the amount of the U.S. M3 money supply—which I denote as M3r, with an r standing for revised—based on the components that make up the M3-M2 aggregate, which are still published elsewhere…
In fact, a nation’s total money supply M3 consists, on the one hand, of the monetary aggregate M2 (whose figures are still published monthly in the United States) and, on the other hand, of money market mutual funds (MMMF) and corporate net cash flow.
FRED of St. Louis publishes this data quarterly for money market mutual funds (MMMF) under the code MMMFFAQ027S and for corporate net cash flow under the code CNCF.
Thus, for the period from 1976 to 1990, the curves derived from the series published by FRED of St. Louis based on M3 aggregate figures (published by the Fed) coincide perfectly with those of the M3r figures calculated from the sum of the M2 aggregate, money market mutual funds, and total corporate net cash flow.
Subsequently, a divergence becomes apparent, which eventually tends to narrow by 2006.
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Consequently, based on this redefinition of the U.S. M3 money supply from 1976 to the present, it is possible to determine the relationships between changes in this M3 money supply and those in GDP.
It then appears (to simplify) that an increase in the M3 money supply held by Americans leads to a decline in real GDP, and conversely, which holds true over the long term, since 1976—that is, since FRED of St. Louis began publishing these data.
More specifically, it is the change in what I call the free M3 money supply—which is the difference between, on the one hand, the change (year-over-year, in percentage terms) in the M3 money supply, and, on the other hand, (minus) the change in real GDP (year-over-year, in percentage terms)—that causes a reaction opposite to the change in this real GDP.
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In the first part, we will therefore analyze the characteristics of the changes in the M3r money supply, and in the second part, the changes in real GDP relative to those of the free money supply M3r.
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Part One: Analysis of the Characteristics of Changes in the M3r Monetary Aggregate
Since the beginning of 2022, month-over-month changes in the U.S. M3r money supply have been of large magnitude, with peaks reaching nearly $800 billion—as was the case in January 2026, for example!
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Month-over-month fluctuations in the M3r money supply were modest during the 20th century, with peaks in the range of $50 billion, but everything began to change starting in 1994.
These fluctuations intensified starting in October 2005—that is, before the Great Recession of 2008—and have been completely out of the ordinary since January 2019, reaching an all-time high in April 2020 of more than 1,000 billion dollars in connection with the COVID-19 pandemic!
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The year-over-year increase in this money supply M3r was 9.26% in March (the latest figures published to date), which is well above the historical trend of around 5% and the current GDP growth rate for the first quarter of 2026, which was 6.0%,
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At the end of March 2026, this M3r money supply reached a total of 35,732.38 billion dollars, of which… 10,247 billion dollars are completely out of line with standards (i.e., exceeding the 80% of GDP limit), especially since the COVID-19 pandemic.
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In absolute terms, the money supply M3r should have complied with the standards (shown here as a dotted line), meaning that this total money supply should have remained below 80% of current GDP.
A closer look at the recent period shows that this money supply M3r continues to far exceed its 2020 peak after a period of stagnation from 2022 to 2024.
During the first three months of 2026, this money supply M3r exceeded its long-term upward trend established since the second quarter of 2024,
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As a reminder, according to standards defined based on observations of changes in monetary aggregates since these data were first published (1959), the level of this M3r money supply should not exceed 80% of current annual GDP.
These standards were more or less adhered to for 50 years but have been significantly exceeded since the Great Recession of 2008.
The M3/GDP ratio skyrocketed in 2020 and has not since returned to an acceptable range, continuing to rise to the point of exceeding 110% of current GDP, with a sharp increase during the first three months of 2026.
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It is this excessive expansion of the M3 money supply that, since the early 2000s and especially since 2007, has created the fundamental economic imbalances that have had—and will continue to have—devastating long-term consequences in the United States and elsewhere in the world.
During the second half of the 20th century, FOMC members consistently succeeded in keeping the M3 money supply within an optimal fluctuation range of around 70% of GDP by raising the Fed’s benchmark rate whenever there was a risk of exceeding these limits.
Such measures have failed to produce the expected positive effects since 2008 because this monetary expansion has become far too large.
The U.S. monetary authorities should therefore intervene decisively to bring this M3/GDP ratio back to around 70% in order to restore a sound currency in the United States, as was the case during the second half of the 20th century.
Thus, this excess M3 money supply currently stands at approximately… 13,400 billion dollars!
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Furthermore, it is possible to analyze these monetary problems from a different angle using the velocity of money, which is the GDP/M3 ratio—that is, the inverse of the M3/GDP ratio in percentage terms analyzed previously.
This velocity of circulation of the money supply is a useful educational concept because it helps explain why the faster money circulates, the more it stimulates growth—and vice versa.
For example, when consumers are quick to spend their income and invest, GDP growth is strong. The velocity of circulation is then high—that is, well above 1.
Conversely, when a crisis is anticipated, consumers tend to set money aside (by increasing their precautionary savings) to cope with a foreseeable, uncertain future that generates fear, which causes GDP to slow down. The velocity of money is then low, that is, less than 1.
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These curves, drawn from statistical series published by U.S. authorities, highlight that the increase in this excessive expansion of the M3r money supply was caused from 2020 to 2022 by the extraordinary rise in the M2 monetary aggregate, by the rise in money market funds starting in 2019, and by the rise in corporate cash flows, especially during the first three months of 2026,
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The dashed lines correspond to what would have been the normal trend for these series.
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Part Two: The Law on Free Money Supply M3r
Based on these revised figures for the U.S. money supply M3r, it becomes very clear—to put it simply—that an increase in this M3 money supply held by Americans leads to a decline in real GDP, and vice versa, a trend that holds true over the long term, ever since these data have been published by FRED of St. Louis…
More specifically, it is the change in what I call the free money supply M3r—which is the difference between, on the one hand, the change (year-over-year, in percentage terms) in the M3r money supply, and, on the other hand, (minus) the change in real GDP (year-over-year, in percentage terms)—that causes an inverse reaction in real GDP.
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However, paradoxically and exceptionally, this law did not hold true during the first quarter of 2026 because this free money supply M3r (Free Money Supply, denoted FMS / M3r) increased by… 6.60% and real GDP growth was 2.66% (year-over-year percentage change in both cases)!
In fact, normally, the sharp 6.60% increase in the M3r money supply at the end of March 2026 should have caused a decline in real GDP, which did not happen for two reasons…
On the one hand, the excessive hypertrophy of the M3r money supply (which corresponds to 112% of GDP; see Document 11 above) has become so significant that it is beginning to create an unmanageable situation manifested by irrational market exuberance—a phenomenon that will be short-lived and followed by a major crisis, a momentum crash.
On the other hand, an article by ZeroHedge showed that three-quarters of the GDP growth in the first quarter of 2026 was driven by extraordinary investments in artificial intelligence, which constitutes a new bubble within the already bloated monetary bubble!
Click here to read this ZeroHedge article.
Consequently, based on the figures published to date, the United States is in a situation of deeply entrenched monetary hypertrophy that has not occurred in the past 50 years, apart from the peak linked to the so-called COVID period—which was therefore limited in time, unlike the current situation.
Aside from this current, completely extraordinary situation, this law regarding the free money supply M3r is well established, as shown by the arithmetic trend lines of the changes in the free money supply M3r and real GDP, which are nearly parallel (though slightly converging and declining), falling from approximately 5.5% and 4.0% in 1976 to 3.0% and 2.0%, respectively, at the end of last March,
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The line serving as the axis of symmetry between these curves declines from approximately 5.0% to 2.5% over this long 50-year period, which shows, among other things, that Paul Volcker managed the Fed’s monetary policy particularly well to keep the U.S. monetary system sound during this period of severe financial turbulence—a situation that has not held true since the early 2000s!
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The 5th-order polynomial trend curves clearly highlight the alternating opposition in the variations of the data in these series.
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A closer look at the recent period since the early 2000s confirms that changes in the free money supply M3r continue to generate opposite changes in real GDP, as before… except in the first quarter of 2026!
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The arithmetic trend lines for changes in the free money supply M3r and real GDP are nearly parallel (though very slightly converging, and upward-sloping for GDP) and flat (horizontal), at around 4% and 2% over this recent period spanning the first quarter of the 21st century.
The decline in real GDP that began in early 2024 should have continued to the present day, as indicated by the dotted line.
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Logically, the line serving as the axis of symmetry between these curves remains virtually stable at 3.0% over this period of the first quarter of the 21st century, which confirms the significance of this free money supply M3r!
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This law regarding the free money supply M3r—calculated based on the total money supply of the United States—is also valid for figures pertaining solely to the monetary aggregate M2 over the long period from 1960 to the present, according to figures published monthly by the Fed…
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… and the same holds true for the more recent period beginning in the year 2000, except for the first quarter of 2026, since the worsening of monetary hypertrophy is currently caused by the increase in deposits in money market funds and by exceptionally high corporate cash flows, that is, by components of the M3-M2 monetary aggregate alone, whereas the increase in the M2 monetary aggregate is slightly lower than current GDP growth.
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This law regarding the free money supply M3r, calculated based on the total U.S. money supply, is therefore equally valid with respect to figures pertaining solely to the M2 monetary aggregate over the long term through the end of 2025, according to official figures published monthly by the Fed.
The figures for the M2 monetary aggregate alone do not highlight the significant deterioration in the U.S. monetary situation at the beginning of 2026.
This is why it is essential to rely on the reconstructed M3 money supply to provide an accurate picture of the current state of the U.S. economy.
The fluctuations observed in the overall M3r money supply are more pronounced and occur earlier than those based solely on M2 figures.
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The gap between these two series for the first three months of 2026 has never been this wide since these data began being published!
It is therefore preferable to use the data derived from the redefined M3r money supply, reconstructed in this way, for analysis, as this provides the most accurate picture possible of the expected trend in real GDP growth.
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The Pearson correlation coefficient between the trend in U.S. real GDP and what I define as the free money supply M3r is -0.78 for the period from January 2000 to March 2021, which corresponds to a very strong inverse correlation—that is, a significant relationship that, under such circumstances, represents a cause-and-effect relationship.
Thus, to put it simply, it is clearly confirmed that when the free money supply M3r increases, U.S. real GDP decreases, and vice versa.
This Pearson correlation coefficient is -0.62 for the long period beginning in July 1976 and extending through March 2021.
However, the COVID-19 pandemic has completely and permanently disrupted the fundamental equilibria of America and most countries around the world, which explains the decline in this Pearson coefficient after March 2021.
Nevertheless, this Pearson correlation coefficient improves to -0.82 for the period beginning in April 2023—that is, after the major turbulence of the COVID-19 period—through the end of 2025, thus excluding the first three months of 2026, which are anomalous.
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Analyses and conclusions regarding the impact of changes in monetary aggregates on real GDP have not been taken into account by financial market participants for the past twenty years or so, even though these are the solutions to problems that underpin the economic activity of any nation.
This is precisely why Ben Bernanke took care to ensure that the Fed would no longer publish weekly figures for the M1, M2, and M3 monetary aggregates from the moment he took office as chairman of the Fed in February 2006.
Subsequently, Jerome Powell added another layer of opacity by publishing only monthly data for the M2 monetary aggregate.
Only those working within the Fed have access to this fundamental data, allowing them to manipulate financial communications and the financial markets as they see fit!
However, I have therefore managed to reconstruct the amount of the U.S. M3 money supply—denoted M3r for revised—based on the components that make up the M3-M2 aggregate, which are still published elsewhere; see my previous articles on this subject.
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Conclusion and Solutions
One currently feasible solution to burst this monetary bubble would be to drastically reduce the supply of Eurodollars—and more specifically, that of petrodollars.
Indeed, according to a reliable assessment by the Bank for International Settlements (BIS), the stock of these Eurodollars is estimated to be around 14,000 billion dollars, which corresponds to the excess money supply determined above (Document 12), which stands at approximately 13,400 billion dollars.
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Thus, contrary to widely held beliefs in political and economic circles, the massive use of the U.S. dollar (USD) outside the United States to monitor and sanction America’s alleged adversaries does not ultimately yield the expected benefits, especially when weighed against the drawbacks generated by this monetary bloat.
It would be possible to implement such a policy by no longer requiring the rest of the world to use the U.S. dollar in international transactions that do not involve Americans, particularly in the hydrocarbon markets.
The militarization of the dollar and international relations does not restore America’s greatness; conversely—and paradoxically—it is America’s return to the fundamentals of liberal capitalism that would make it possible to put the MAGA slogan into practice… and that is exactly what the leaders of… Communist China are successfully doing!
What will Kevin Warsh do?
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The data on money market mutual funds (MMMF) are those coded as MMMFFAQ027S by FRED of St. Louis.
Click here to access them.
Click here to read the BIS document estimating the amount of Eurodollars.
Click here to read my previous article on this subject.
Click here to read my article on my website in French.
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