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By Staff Reporters

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DEFINITION: In macro-economics, the money supply (or money stock) refers to the total volume of currency held by the public at a particular point in time. There are several ways to define “money”, but standard measures usually include currency in circulation (i.e. physical cash) and demand deposits (depositors’ easily accessed assets on the books of financial institutions . The Central Bank [FOMC] of a country may use a definition of what constitutes legal tender for its purposes.

CITE: https://www.r2library.com/Resource

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Though there are a few variations of money supply, most economists tend to focus on M1 and M2. The former takes into account cash and coins in circulation, as well as demand deposits in checking accounts and traveler’s checks. In other words, money that’s either in your hand or can be accessed very easily.

Meanwhile, M2 accounts for everything in M1 and adds savings accounts, money market funds, and certificates of deposit (CDs) below $100,000. It’s money you have access to, but it takes a little extra effort to put this capital to work. It’s M2 money supply that’s raising eyebrows on Wall Street and making history.

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What’s of interest is what’s happened to M2 money supply over the trailing year. Following a peak of $21.7 trillion in July 2022, M2 has fallen to a fresh reading of $20.81 trillion, as of May 2023. Although the May reading was higher than April and broke a nine-month downtrend, we’ve still witnessed a 4.1% aggregate drop in M2 from its all-time high. 

Considering that M2 enjoyed a historic expansion during the pandemic, it’s certainly possible that a 4.1% decline can be shrugged off as nothing more than money supply reverting back to the mean. But history suggests otherwise.

Though history rarely repeats itself on Wall Street, it often rhymes. We haven’t seen a meaningful year-over-year decline in M2 money supply since the Great Depression in 1933.

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And so, based on what we’re seeing from M2 money supply, commercial bank lending, and domestic banks tightening their lending standards for C&I loans, the ingredients for a U.S. recession are most definitely there. Stock losses have, historically, been most pronounced in the months that follow the official declaration of a recession by the eight-economist panel of the National Bureau of Economic Research.

However, Wall Street’s performance is largely dependent on your investment time frame. If you’re patient, these and other potentially worrisome money metrics represent nothing more than temporary white noise.

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Filed under: "Ask-an-Advisor", Accounting, CMP Program, Experts Invited, Investing, LifeStyle | Tagged: CASH, central bank, checks, Circulation, currency, FOMC, M1, M2, money, money stock, money supply, National Bureau of Economic Research, NBEC | Leave a comment »