M2 Money Supply: Track the Money Printer

M2 Explained Simply

M2 = All the money that can easily be spent or turned into cash

What’s Included in M2?

• Cash (physical bills and coins)
• Checking accounts (demand deposits)
• Savings accounts (can withdraw anytime)
• Money market accounts (sweep accounts, retail)
• Small time deposits (CDs under $100k)

What’s NOT Included?

• Large institutional deposits
• Long-term CDs
• Locked retirement accounts (401k, IRA)
• Home equity (not liquid)
• Stocks, bonds (not money, just assets)

Why M2 matters: This is the money people and businesses can actually spend. When M2 grows, there’s more money competing for the same goods → prices rise.

The M2 Growth Rule

Historical Average (1960-2020)

• GDP growth: ~3% per year (real)
• M2 growth: ~6-7% per year
• Inflation: ~3% per year
• Stable, predictable

The Rule

M2 Growth - GDP Growth = Expected Inflation

Examples:

• M2 +7%, GDP +3% → Expect 4% inflation ✅ Normal
• M2 +25%, GDP +2% → Expect 23% inflation 🚨 Crisis
• M2 -4%, GDP +2% → Expect -6% deflation ⚠️ Recession

Historical M2 Spikes and What Happened

Period	M2 Growth	Reason	Result
1970s	10-13%/yr	Vietnam War, oil crisis	Stagflation, 15% inflation
2001	10%/yr	Dot-com bubble response	Housing bubble, 2008 crash
2008-2009	10%/yr	Financial crisis, QE1	Slow recovery, asset inflation
2020-2021	+40%	COVID stimulus, unlimited QE	8% inflation, asset bubble
2022	-4%	Fed tightening, QT	Stock crash, recession fears

COVID: The Biggest M2 Spike Ever

What Happened

Date	M2 (Trillions)	Change	What Fed Did
Feb 2020	$15.4T	Baseline	Normal operations
Mar 2020	$16.2T	+5%	Emergency QE announced
Apr 2020	$17.9T	+16%	Unlimited QE, 0% rates
May 2021	$21.1T	+37%	Peak printing
Today (2024)	~$21T	Flat	QT (money destruction)

In 14 months, the Fed created more money than in the previous 100 years combined.

The Predictable Result

Year	What Happened	Why
2020	Stock market V-recovery	New money flooded into assets first (Cantillon Effect)
2021	Housing +20%, stocks +30%	Asset inflation before consumer inflation
2022	Groceries +15%, gas +50%	Consumer inflation arrives 18 months later
2023	Fed hikes rates to 5%+	Trying to slow down spending (reduce velocity)

Classic MV=PQ: M went up 40%, Q went down (lockdowns), so P had to rise massively.

How to Track M2

1. FRED Database (Federal Reserve Economic Data)

• URL: https://fred.stlouisfed.org/series/M2SL 
• Free, official source
• Updated weekly

2. What to Look For

M2 Growth Rate (YoY):

• 5-7% = Normal (healthy economy)
• 8-10% = Moderate concern (mild inflation coming)
• 10%+ = High alert (significant inflation in 12-18 months)
• 0% = Warning (stagnation/deflation risk)
• Negative = Danger (recession likely)

M2 Velocity (GDP ÷ M2):

• Rising = Money changing hands faster → Inflation
• Falling = Money sitting idle → Deflation pressure

3. Investment Implications

M2 Situation	What It Means	Investment Strategy
Fast M2 growth (10%+)	Inflation coming in 12-18 months	Buy stocks, real estate, commodities, Bitcoin
Accelerating M2	Bull market ahead	Maximum risk-on (growth stocks, crypto)
Slowing M2 growth	Market top approaching	Take profits, reduce leverage
Flat/negative M2	Recession risk	Cash, Treasuries, defensive stocks
Declining M2	Liquidity crisis	Cash is king, wait for bottom

M2 vs Stock Market

Historical correlation: 0.85 (very strong)

The stock market follows M2 with a 6-12 month lag. Why?

1. Fed prints money (M2 rises)
2. Banks lend cheaply (low interest rates)
3. Investors borrow to buy stocks (margin debt rises)
4. Stock prices rise (more dollars chasing stocks)
5. Eventually consumer inflation (M2 effect spreads)

The Pattern

M2 Accelerates → Stock Market Rallies (6-12 months later)
M2 Decelerates → Stock Market Tops (6-12 months later)
M2 Declines → Stock Market Crashes (3-6 months later)

2020 Example:

• March 2020: M2 +5% → Stock crash (panic)
• April 2020: M2 +16% → Stock V-recovery
• Summer 2020-2021: M2 +40% → Stocks up 100%+
• 2022: M2 -4% → Stocks down 25%

The lesson: Follow the money supply, not the headlines.

M2 Velocity: The Other Half

Velocity (V) = How many times each dollar is spent per year

Velocity = GDP ÷ M2

Current velocity: ~1.3 (historically low)
Historical average: ~1.7-2.0

What Low Velocity Means

People and businesses are hoarding cash instead of spending:

• Saving for uncertainty
• Paying down debt
• Not investing or consuming

This is why massive M2 printing (2020-2021) didn’t cause immediate hyperinflation:

• M went up 40%
• V went down 30%
• MV only increased modestly at first

But velocity eventually recovers → Then all that printed money starts circulating → Inflation explodes (2022)

Common Mistakes

❌ “Fed is printing money, so buy gold immediately”

• Wrong: Velocity matters too. If V falls, M printing may not cause inflation yet
• Right: Watch M2 AND velocity. Buy inflation hedges when V starts rising

❌ “M2 is up 40%, so expect 40% inflation”

• Wrong: Inflation = (M2 growth - GDP growth). If GDP grows 3%, then 40% M2 → 37% inflation (over time)
• Also: Velocity changes affect timing

❌ “M2 growth is always bad”

• Wrong: Need some M2 growth to match economic expansion
• Right: Excessive M2 growth (>10%) is bad. Moderate (5-7%) is normal

❌ “Stock market is about earnings, not money supply”

• Wrong: Short-term, yes. Long-term, liquidity drives markets
• Right: Fundamentals matter, but liquidity determines multiples

Action Steps

For Investors

1. Bookmark FRED M2 chart: https://fred.stlouisfed.org/series/M2SL 
2. Check M2 growth monthly: Calculate YoY % change
3. Compare to GDP growth: M2 - GDP = inflation expectation
4. Adjust portfolio:
   • Fast M2 growth → Overweight stocks, real estate, Bitcoin
   • Slow/negative M2 → Overweight cash, bonds, defensive stocks

For Traders

1. Track M2 changes weekly: Acceleration/deceleration
2. Watch Fed balance sheet: Leading indicator for M2
3. Follow liquidity indicators: RRP, TGA, Fed reserve balance
4. Trade the lag: M2 change → Market reaction 6-12 months later

For Everyone

1. Understand the trend: Is money supply expanding or contracting?
2. Protect purchasing power: Don’t hold cash during high M2 growth
3. Time major purchases: Buy house/car during tight money (lower prices)
4. Stay informed: M2 tells you more than any economic report

Next Steps

• Understand MV=PQ equation →
• Learn about money velocity →
• See Cantillon Effect (who benefits) →
• Discover inflation hedges →
• Study Fed policy tools →

Resources:

• FRED M2 Chart 
• FRED M2 Velocity 
• Fed Balance Sheet 

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Bottom Line: M2 growth rate is the single best predictor of inflation and asset prices. Track it monthly, compare to GDP, adjust your strategy accordingly.