U.S. Money Supply Skyrockets As M2 Shrinks to the Great Depression Era

In a twist that is capturing the attention of economists and investors alike, the U.S. money supply is charting a course we haven’t seen since the tumultuous era of the 1930s. Yes, you read that correctly. We are witnessing a monetary phenomenon that echoes the days of the Great Depression, and if history serves as a guide, it could signal a seismic shift in the stock market’s trajectory.

The M1 and M2 Money Supply Metrics

To set the stage, let’s talk about M1 and M2, two key players in the realm of money supply metrics. M1 is the money that is immediately available for spending. Think cash, coins, and the balance in your checking account. It is the liquidity king, ready at a moment’s notice for your spending pleasure.

Cova / Unsplash / M1 and M2 are the leading key players in the U.S. money supply metrics.

M2, on the other hand, broadens the scope. It includes everything in M1 and then some, adding savings accounts, money market accounts, and certificates of deposit (CDs) under $100,000 into the mix. While M2 still represents money available to consumers, accessing some of it requires a tad more effort than the instantaneous liquidity M1 offers.

The M2 Alarm Bells Are Ringing!

Historically, the U.S. money supply has been on a seemingly endless upward trajectory. After all, a growing economy needs an expanding supply of cash and coins to fuel transactions. But here is where things get interesting – and a bit unnerving. For the first time since the Great Depression, we are seeing a significant contraction in M2 money supply.

In July 2022, M2 hit an all-time high of approximately $21.7 trillion. Fast forward to January 2024, and it is down to $20.78 trillion. This represents a year-over-year drop of 1.44% and a total decrease of 4.21% from the peak.

Such a downturn in M2 has not been observed since the early 1930s. Thus, this marks a historic shift in the U.S. financial landscape.

Karolina / Pexels / According to reports, M2 has shrunk down by a year-over-year drop of 1.44%—a historic low since the Great Depression of the 1930s.

When M2 Shrinks, Trouble Looms

The rapid expansion of M2 during the COVID-19 pandemic (a whopping 26% year-over-year increase) was unprecedented, making the recent contraction seem like a mere return to normalcy. However, history tells us that significant drops in M2 supply often precede economic downturns.

Research spotlighting instances from as far back as 1870 reveals that significant M2 contractions have historically led to deflationary depressions and skyrocketing unemployment rates. The current trend in M2 is not just a statistical anomaly. It is a red flag signaling potential economic turbulence ahead.

Beyond M2, Commercial Bank Credit Shows Signs of Strains

It is not just M2 that is sending shivers down the spine of the investment world. Another crucial metric, commercial bank credit, is also showing signs of strain. This measure, which encompasses loans, leases, and securities held by U.S. commercial banks, has grown consistently as the economy expanded. However, just as with M2, a reversal in this trend could spell trouble.

RDNE / Pexels / From around $567 billion 51 years ago to roughly $17.44 trillion by mid-February 2024, commercial bank credit has been a reliable growth indicator.

Yet, any significant downturn here, coupled with the M2 contraction, could further compound the economic challenges ahead.

What Does This Mean for Investors?

The convergence of these financial indicators paints a complex picture of the stock market. Historical patterns suggest that significant moves could be on the horizon, potentially mirroring the economic hardships of past eras marked by similar monetary trends.

For investors, this scenario underscores the importance of vigilance and adaptability. Diversifying your portfolio, considering safer asset classes, and staying informed is more crucial than ever. While the stock market has always been a creature of cycles, understanding the underlying economic signals can help you navigate the tumultuous times ahead with greater confidence.