M2 Declining

At The Motley Fool Sean Williams points out something interesting—the M2 money supply is declining for the first time since the Great Depression of the 1930s:

M1 consists of money in circulation plus demand deposits. M2 adds savings accounts, money market accounts, and certificates of deposit (CDs) below $100,000. Mr. Williams observes:

Since a growing economy requires more cash and coins in circulation to complete transactions, rising money supply is something economists and investors tend to take for granted and assume is a given.

But on rare occasions, U.S. money supply contracts in a big way — and that’s historically portended bad news for the U.S. economy and stock market.

In July 2022, U.S. M2 money supply peaked at an all-time high of roughly $21.7 trillion. Based on the Feb. 27 data release from the Board of Governors of the Federal Reserve, M2 stood at $20.78 trillion, as of January 2024. All told, we’re looking at a year-over-year drop of 1.44% and an aggregate decline from the July 2022 peak of 4.21%. This is the first significant drop in M2 since the Great Depression.

It may be that after the astronomical increase in the money supply during COVID this is merely a reversion to the trend but that may not make any difference.

Fingers crossed that this development does not portend a deflationary recession. We may be running into a perfect storm.

8 comments… add one
  • Drew Link

    “It may be that after the astronomical increase in the money supply during COVID this is merely a reversion to the trend but that may not make any difference.”

    Thats the most important quote. Economic performance measured by GDP has been juiced by helicopter money. Huge amounts of money sloshing around. But….We also got inflation. (Sorry Joe. Sorry Steve) What now?

    Consumer debt is high. Credit cards are tapped, at 25% carrying costs. Home equity is suspect. Evidence is in the default rates.

    What now? The new jobs are min wage, almost all filled by immigrants.

    The interested student can go look at home sales, durable goods etc.

    Its a very weak economy. And for stock market geeks. Thats a relative valuation issue. And a benefit to the better off.

  • TastyBits Link

    M2 has been declining for months. It started with Quantitative Tightening (QT). If inflation is a monetary phenomenon, we are experiencing deflation, but a gallon of milk is not getting cheaper.

    Today’s inflation is the result of the COVID shutdown, but its origin is the 2008 Financial collapse and subsequent Zero Interest-Rate Policy (ZIRP). Hopefully, it will take only years, not decades, to recover, but Bidenomics is not helping.

    These policies caused the economies of the entire world to become distorted. ZIRP allowed buyers to purchase goods and assets they otherwise could not, and this allowed manufacturers to produce goods and assets they otherwise would not.

    Just-in-time (JIT) is a great idea, until “the shit hits the fan”. The COVID shutdown caused the fan to spew shit everywhere. The economy became like a huge traffic jam, but with JIT, there are no alternate routes.

    Everybody had the same back-up suppliers, but before the shutdown, they could not deliver that amount of goods. Like a traffic jam, it gets better and worse and better and worse.

    This is how we arrived at today, and the bozos who got us here are going to fix this mess.

    Money does not work the way it is taught in Econ 101 or graduate programs. M1 & M2 are meaningless numbers, and M0 is mostly meaningless. M3 is somewhat useful, but there is a lot that M3 does not catch.

    Money supply is mostly controlled by the financial industry, especially bond market plus its related activities (mostly various swaps). It began with LJB in 1968, and ended with Clinton and Graham in 1998. Regulations do control the financial industry, but they have been “thrown out the window”, by Republicans and Democrats.

    For years, I have gone over this. The money supply expands and contracts based upon lending and its related activities. Interest rates affect the money supply, and they affect economic activity. People with money to lend become richer.

    M2 is contracting because of QT. For QT, the Fed is selling the Mortgage Backed Securities (MBS) they have been buying for 20 years. This has propped-up the housing market, mortgage companies, and home builders. Without a buyer for all these loans, interest rates are increasing, and nobody wants to sell.

    Additionally, Commercial Real Estate (CRE) is cratering because of work-from-home and increasing crime in commercial districts. (It does not take much crime to scare people who think they are from relatively safe areas.)

    Where this is going is a complete mystery to me. It could be deflation, continued inflation, stagflation, stagdeflation, or most likely something new. I do expect the “experts” to make it worse.

  • bob sykes Link

    The federal government is running annual deficits of more than $3T, and the result is modest growth and modest inflation. There must be huge deflationary pressures in the economy.

    There is also the issue of 3 to 4 million illegal aliens entering the US per year. It has been noted that 80% of them are fit, military age men. They are also highly fit for all sorts of off-the-books labor. That has to be depressing working class wages.

    China has been optimizing its heavily automated manufacturing sector using AI running on 5G networks. (We use AI/5G for games.) Their manufacturing costs must be plummeting.

  • Grey Shambler Link

    If we’re heading into a recession the market doesn’t seem to believe it.
    One thing that stands out from my limited experience with retail investing is how astonishingly easy it is to buy equities on margin.
    Whether a cause or simply an amplifier of market volatility margin is at a high level today.
    I wonder if margin debt is classified as M2.

  • Just-in-time (JIT) is a great idea, until “the shit hits the fan”

    I doubt that most companies actually have “backup suppliers”. Indeed, I doubt that most “backup suppliers” are actually backup suppliers. I think that frequently they’re the same suppliers
    operating under different names.

    If we’re heading into a recession the market doesn’t seem to believe it.

    The connection between equities markets and the real economy isn’t as close as it used to be.

    There is also the issue of 3 to 4 million illegal aliens entering the US per year.

    We don’t actually know how many there are. I just read an article that documented that at least 300,000 entered last year that haven’t been accounted for in previous tallies. And then there are those we just don’t know about at all.

  • steve Link

    Agree on the JIT issue. It has been an issue for many years but with the larger scale it became more obvious.

    There has been a bit of focus on wage increases causing inflation to continue to not get back to 2%, especially wages in the lower quintiles. How does that square with the large number of new immigrants? Isn’t it your theory that this should cause wages to fall?


  • Econ 101 tells you that increasing the supply of entry-level workers will put downwards pressure on wages for entry-level workers. Is there any mainstream economist who does not think that’s the case? Certainly not Jared Bernstein, a member of President Biden’s Council of Economic Advisors. At this point I think the official statistics are so phony we can’t tell anything about anything with any real confidence.

    What do I mean by that? How many entry-level workers were there in the U. S. in 2019? How many now? I think the answer is that nobody knows. Some number of those who’ve applied for asylum have entered the labor pool; others have not. Some have entered the black market.

  • steve Link

    You didnt answer the question. Theory says with the huge number of illegals coming in, incomes at the low levels should not be increasing like it is. Why is that? (I dont see any particular reason why the number of entry levels workers would have changed, other than immigrants, over the last 5 years.)


Leave a Comment