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Friday, April 25, 2008

Money Supply Statistics Explained

I refer to money supply statistics frequently, especially M2 and M3. Someone asked me "What is M2?" I never fully explained what these are.

The most commonly cited Federal Reserve money supply statistics are M0, M1, M2, and M3. They are numbered consecutively, because each contains the previous plus more things added.

M0 is actual physical money. This is paper Federal Reserve Notes and Treasury-minted coins. M0 is a fraction of 1% of the total money supply. Most money is created electronically.

M1 is M0 plus "demand accounts", such as a checking account.

M2 is M1 plus savings accounts, money market accounts, and Certificates of Deposit worth less than $100,000.

M3 is M2 plus dollars held outside the USA and CDs larger than $100,000. When the Federal Reserve temporarily increases bank reserves via repurchase agreements, this money is included in M3 but not in M2.

The primary difference between M3 and M2 is that M3 includes what the "big boys" are doing.

The Federal Reserve publishes reports of M0, M1, and M2. The Federal Reserve stopped publishing M3 in March 2006. M3 was growing A LOT FASTER than M2 at that time. Some people have reconstructed M3 using other available information. Reconstructed M3 continues to grow at a much faster rate than M2.

The official reason the Federal Reserve gave for ceasing to publish M3 is that it was too difficult to gather the information. This reason is nonsense, because the Federal Reserve could have continued to publish M3 quarterly or annually, which would be cheaper and still be sufficient disclosure. The real reason the Federal Reserve ceased publishing M3 is that the Federal Reserve doesn't want people to know how bad inflation really is.

Another frequently cited statistic is MZM, which is M2 minus time deposits. I don't understand why people care about MZM. I consider M2 and M3 to be the most meaningful money supply statistics. Austrian economists have a weird fetish for MZM.

Recently, I've concluded that the price of gold is the least biased measure of inflation. The price of gold appears to be increasing slightly faster than reconstructed M3. "The price of gold is skyrocketing" is the same as "the value of the dollar is crashing". There is no "asset bubble" developing in gold. The price of gold/oil, gold/silver, and gold/copper is relatively unchanged compared to the price of gold/$. There has been manipulation of the gold price, but I consider gold to be the least biased measure of inflation


Ben said...

Excellent, and elegant explanation. I'll use it when explaining to others.

Thomas Blair said...

In your opinion, which is more damaging: cutting taxes while raising spending and monetizing the ensuing deficit or raising taxes to match rising spending?

Thomas Blair said...

I liked this post and found it very informative. In the same way that you broke apart money supply terminology, do you have a post on financial terminology (short, margin call, etc)?

Anonymous said...

Then how can central banks know the specific amount of M0(or M1,M2)at a given time?

Thank you.

szjimust said...

How can central banks get the specific data of M0(or M1,M2)at a given time?
——I'm thinking this question for a long time,but I'm still puzzled afer reading some materials.

Thank you.

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