Thursday, June 30, 2011

What is M3, M2, M1 Money Supply

M1, M2, M3 are all measures of money supply, that is the amount of money in circulation at a given time. Manipulating money supply is used in an attempt to control inflation, the idea being the more money in circulation leads to more money chasing fewer goods and hence prices increase to compensate and vice versa.

This ability for governments to control the amount of money in circulation allows them to stimulate demand by printing more money and reduce demand by removing money. This process is however difficult to achieve and governments often overshoot resulting in recessions and booms which form part of the economic cycle.

Often, in the financial press you hear the terms Broad money and narrow money. These are represented by M1, M2 and M3 (in US) with M1 being the narrowest measure and M3 being the broadest. In the UK there are only 2: M0 and M4. Narrow money refers to forms of money that are available immediately for use in transactions, broad those that are not immediately available.

More recently, the FED has stopped publishing information on the M3 money supply as it had been deemed no longer useful. Skeptics have argued however, that by no longer reporting the total amount of money in circulation the FED is hiding a huge amount of money creation which is being used to fund the US trade deficit. If you’re interested then you can read more about the feds manipulation of money supply here.

M1 = cash and checking account deposits
M2 = M1 + savings accounts & money market accounts
M3 = M2 +large deposits and other large, long-term deposits.

Quote from wiki:
M0: Physical currency. A measure of the money supply which combines any liquid or cash assets held within a central bank and the amount of physical currency circulating in the economy. M0 (M-zero) is the most liquid measure of the money supply. It only includes cash or assets that could quickly be converted into currency. This measure is known as narrow money because it is the smallest measure of the money supply.[6]

M1: M0 + demand deposits, which are checking accounts. This is used as a measurement for economists trying to quantify the amount of money in circulation. The M1 is a very liquid measure of the money supply, as it contains cash and assets that can quickly be converted to currency.[7]

M2: M1 + small time deposits (less than $100,000), savings deposits, and non-institutional money-market funds. M2 is a broader classification of money than M1. Economists use M2 when looking to quantify the amount of money in circulation and trying to explain different economic monetary conditions.[8] M2 is a key economic indicator used to forecast inflation.[9]

M3: M2 + all large time deposits, institutional money-market funds, short-term repurchase agreements, along with other larger liquid assets. The broadest measure of money; it is used by economists to estimate the entire supply of money within an economy.[10]
quote from Conspiracy Nation:
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 is a refinement of M1. It is a slightly less liquid measure, consisting of M1 plus savings deposits, basically.

M3 is a refinement of M2. Again, the liquidity is less. M3 consists of M2 plus larger denomination institutional deposits in money market funds, for example.

Since the root source of inflation has been defined as the creation of dollars (increased supply, see “The Squeeze of ‘79”, op. cit.), it is to be marveled at that the M1, M2, and M3 statistics are rarely even mentioned in the various news outlets. When the talk is of inflation, there is an aura of “a complex and mysterious world.” (“The Squeeze of ‘79”, op. cit.) Inflation is not something magical that just happens. It has a root source.


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