US M2

Think of it this way

It is sea level. It determines how far high tide can reach, but it does not tell you when the next wave will break.

What is US M2?

M2 is the broad measure of money in the United States. It adds up, in this order: currency in circulation, demand deposits in checking accounts, savings deposits, time deposits and shares in retail money market funds. In other words: everything a citizen or a company can spend today or turn into spending within days. It does NOT include stocks, bonds, real estate, time deposits of 100,000 dollars or more, or institutional money market funds: that is wholesale funding, not money about to be spent.

How to read US M2

A monthly line that almost always rises, because bank credit creates deposits and the economy grows. What is informative is not the level but the slope, and above all the two moments when it broke: the vertical jump of 2020 and the first year-over-year decline in modern history in 2022 and 2023. Look at it in year-over-year change rather than in level. Lag: up to 90 days.

What US M2 means for the market

It is the ultimate source of demand for assets: if there is more money in the hands of the public, something ends up being bought. But beware of impatience, because the mechanism is slow. Between the time money is created and the time it shows up in an asset's price, quarters can pass, not days. It tells you what tide you are in, not when to enter.

Where the money flows

It is a snapshot of the money already in the hands of households and businesses, not a flow. It grows mainly when a bank grants a loan: when you sign your mortgage, the bank does not hand you another customer's money; it records the amount in your account, and money that did not exist before has just been born. When you repay installments, that money is destroyed. That is why this aggregate rises during credit expansions and stalls when banks turn off the tap. Who decides to create new money: the FOMC, the Fed's open market committee. It has twelve votes —the seven governors of the Board, the president of the New York Fed and four regional presidents on rotation— and meets eight times a year. Governors serve fourteen-year terms and regional presidents five: long, staggered terms, so that no single presidency can replace them all at once. Note the division of roles: what that committee creates is mainly bank reserves, which are not part of M2. They enter here when the Fed buys the asset from a fund or a company rather than from a bank, because then the credit lands in a checking account. That was the channel through which M2 jumped in 2020. And none of this is banknotes: new money is entries in accounts. The banknotes printed each year mainly replace worn-out ones, and when a bank asks for cash the Fed debits its reserve account. It is the same money changing format, not extra money.

What to watch in US M2

Before giving it weight, compare it with the TGA. M2 is huge but moves about 100 billion a month and arrives 71 days late; the TGA has moved as much as 272 billion in a single day and arrives the next day. To know what is happening this week, the TGA. To know which monetary decade you are in, M2.

All the money held by the American public. The underlying tide, not the waves.