M2 vs. M3

In this post I am going to talk about how the M3 is more accurate than the M2.

The main thing that the M2 misses is bonds and treasuries when it accounts for the amount of currency in inflation. For example, we export dollars to china for cheap goods. There is an unwritten rule between China and the U.S. They in turn, use the majority of those dollars to buy U.S. bonds and treasuries. They keep others in store to buy oil, because 70% of the oil traded is still denominated in U.S. dollars. When the dollars that are exported to China are printed or otherwise derived, they are counted in the M2. When they are sent back to the U.S. in exchange for treasuries and bonds, they are then retracted from the M2. That is a huge number of dollars that are sitting in China's bank account, in the form of bonds and treasuries, that aren't counted. Well, the M3 counts this and it explains that the M3 is approximately double that of the M2. The M3 shows that the amount of currency in circulation has been rising an approximate 10% every year since the late 90's, while the M2 has held steady and even retracted a little bit.

The bonds/treasuries market is such a huge part of the U.S. economy, that I feel it is quite necessary, if you want an accurate measure of money supply, to look at the M3.