M2 Money Supply

M2 is a measure of the U.S. money supply published by the Federal Reserve. It includes M1 (physical currency, checking deposits and other highly liquid balances) plus savings deposits, small time deposits such as CDs under $100,000, and retail money market fund balances. Economists and investors watch M2 as a broad gauge of how much money is circulating in the economy.

M2 grew at a historic pace after 2020, as the federal government and the Federal Reserve responded to the pandemic with stimulus spending, emergency lending and large-scale asset purchases. Over the following years, prices rose across the economy: groceries, cars, and especially housing. The Fed has also changed how M2 is defined over time, which makes long-run comparisons harder and is one reason some critics distrust official figures.

In Austrian economics, inflation is defined as an increase in the money supply itself, and rising prices are the consequence. When new money enters the economy, it doesn't reach everyone at once. Those closest to its source, such as banks, asset holders and large borrowers, benefit first, while wage earners and savers feel the higher prices later. This is known as the Cantillon effect. Assets like real estate and stocks tend to absorb new money early, which is why the post-2020 housing boom followed so closely on the expansion of M2. Home prices rose sharply in 2021 and 2022 while wages lagged behind, widening the gap between people who already owned assets and people trying to buy their first one.

Why It Matters

Watching M2 helps explain why prices rise even when nothing about the goods themselves has changed. For your own planning, it's a reminder that holding idle dollars loses purchasing power over time, and that the timing and type of assets you own determine whether money printing works for you or against you.

Hear this discussed in Between The Lies Episode 048. Get the free toolkit at PerfectSpiralCapital.com/podcast.