Posts Tagged ‘Inflation’


The Relationship Between M2 and M3.

In Money Supply on March 13, 2011 by CQCA Tagged: , , , , , , , ,

In 2005, the Federal Reserve announced it planned to discontinue the publication of M3 monetary aggregate data.  M3 was supposed to report the total money supply.  According to their statement, “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.”  Ironically, they also mentioned the costs associated with inflating the money supply as a reason for discontinuing the M3 report.[1]

Using past data, there are various metrics to assess the possible relationship. The average multiplier was 1.221.  The maximum multiplier was 1.531 (February, 2006, the month it was discontinued).  The minimum multiplier was 1.005 (December, 1959).  All calculations are using non-seasonally adjusted numbers.  The M2 figure for January, 2011 was $8.840 trillion.[2]

The since 1994, the amount of M3 has been increasing at a faster rate than the amount of M2, so it may be useful to limit the metrics to later data.  Between January, 2000 and December, 2005, the average multiplier was 1.471, considerably higher than the number for all data.  The maximum was 1.523, slightly lower than the February, 2006 maximum.  The minimum was 1.419, much higher than the December, 1959 minimum.

The M3 aggregate was $10.221 trillion in January, 2006.[3] Using the 2000-2005 metrics to determine the total money supply for January, 2011, the true inflation rates could equal:

According to the money supply calculations, the average inflation rate over the last five years should be at least 5%.  The government’s data puts the number at a little over 2%.  Indicators of monetary weakness, such as gold, silver, and petroleum, indicate the rate should be much higher.

[1] Federal Reserve Statistical Release. “Discontinuance of M3.” Updated on March 9, 2006.

[2] Federal Reserve Statistical Release. “Money Stock Measures.” February 17, 2011.

[3] Federal Reserve. “Table A. M3 and Non-M2 M3.” March 23, 2006.

[4] U.S. Department of Labor, Bureau of Labor Statistics. “Consumer Price Index, All Urban Consumers, U.S. City Average.” Published February 12, 2011.

[5] Kitco data on historic gold prices.

[6] Ibid.

[7] U.S. Energy Information Administration. “Cushing, OK WTI Spot Price FOB.” Published February 16, 2011.

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