After April’s drop to $20,867.3 billion, some economists linked this decline to the Great Depression. But, like any other economic concept, the money supply is nuanced. In fact, there isn’t even one single number to describe it.
In this article, I’ll cover the basics of the US Money Supply, what economists are saying, and what these numbers mean on a grand scale.
The US Money Supply is shorthand for the country’s currency and similar liquid assets measured on a specific date. But there’s not just one number—there are five different measurements, although only two are used frequently: M1 and M2.
For a quick reference, here are the 5 measurements and what they are generally used for:
Some of these metrics build on each other, making matters a little more confusing. For example, M2 is composed of M1 and M0.
Out of all of these metrics, M2 is the most commonly used for economic analysis. However, it hasn’t held much weight over the past several decades. The reason is simple: Until recently, its value has only gone up.
The M2 money supply has generally had an optimistic trajectory—reaching an all-time high in 2022, only to tumble in April 2024. That month, it dropped by 3%, something unseen since the Great Depression.
For those keeping up with the markets, this can dovetail with the recent stock market plunge, among other economic stressors. According to CNN, investors sold off more than $5.7 billion more than they purchased in the last week of May and early June. When combined with lower job openings, disproportionate CEO-to-employee pay, and a shrinking public market, it appears that we are charting unfamiliar territory. And that always comes with risk.
But before assuming financial collapse, let’s consider the reasons for M2 money supply fluctuations—and the 26% year-on-year gains. The fact that there is a minor retraction in the market could simply be a course correction. After all, 26% gains aren’t normal market behavior.
That said, there are other factors that can cause the money supply to retract, too.
According to research, there are a few different potential reasons for the M2 to shrink:
All of these phenomena can put stressors on the money supply. We can see where some of these features come into play in today’s economy:
The M2 metric is a useful supplement but not necessarily reliable. According to Goldman Sachs, the M2, and similar mechanisms fail to track other, more significant variables. For example, the rise of new financial technologies and new monetary policies don’t necessarily touch on the total assets of the Federal Reserve—-but they do have a lasting impact on the economy.
Economists are anxious because a decrease is rare, and with emotional hints of recession around the corner, it can easily trigger a downward spiral. After all, so much of the market is emotion, not logic or algorithms.
And while the money supply metrics aren’t necessarily key indicators, there are other signs that illustrate economic volatility. On top of many of the factors listed above, we are currently experiencing an increase in consumer debt and delinquency rates and declines in consumer spending.
All of these signs together recognize weaknesses in the current market. Lack of access to capital for individuals and businesses can stifle growth and lower spending, potentially leading to a recession.
Of course, the economy isn’t down and out yet. Things can change rapidly, for better or worse. But it’s important to be prepared for either scenario.
The US Money Supply offers some insight into the economy, but it isn't necessarily reliable outside of the larger market context. However, we can use its recent contraction as a point of reflection. How can one “weather-proof” their portfolio in turbulent times?
There’s no single answer. However, maintaining an emergency fund, having an “emergency” in liquid or short-term assets, and maintaining caution can help alleviate at least some risk. Having a contingency plan for a volatile economy is essential to keeping calm during an unstable or bearish market—and can help you find opportunities for when things improve.
Of course, it helps to have a second opinion on your portfolio, too. You can book a call with me today to review your financial goals, ask questions, and address concerns.
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