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In the previous lesson, you learned about central bank balance sheets: the powerful short-to-medium-term driver of liquidity.

Now it’s time to zoom out further and understand M2 money supply, the indicator that shows where the economy is headed 12-18 months from now.

M2 measures the total amount of money readily available for spending, saving, and investing across an economy.

  • When M2 grows rapidly, it signals abundant liquidity that eventually flows into asset prices and inflation.
  • When M2 contracts, it warns of tightening conditions that typically precede disinflation or recession.

Here’s why this matters: M2 changes take 12-18 months to fully impact inflation and 6-12 months to move stock markets.

Fed printing money

This lag gives you a massive advantage.

  • When M2 surged 27% during 2020-2021, you could have predicted the 2022 inflation spike that didn’t arrive until 18 months later.
  • When M2 contracted in 2022-2023 (the first decline since 1959), you could have anticipated the disinflationary trend that started in the following year.

In this lesson, you’ll learn what M2 actually measures, how to track it for free, why the 2020-2021 expansion was unprecedented, and most importantly, how to use M2 as a leading liquidity indicator for your trading decisions.

What Is M2 Money Supply?

Global M2 supply

M2 measures all the money that’s reasonably liquid…cash you can access quickly without significant penalty.

The Components

M2 includes everything in M1, plus “near money”:

M1 (Most Liquid):

  • Currency: Physical cash and coins in your wallet (~$2 trillion).
  • Demand deposits: Checking accounts you can access anytime.
  • Other liquid deposits: Accounts you can withdraw from immediately.

Plus M2-Only Components (Near Money):

  • Savings deposits: Traditional savings accounts (~$13 trillion).
  • Small time deposits: CDs under $100,000.
  • Retail money market funds: MMFs held by individuals (~$4.5 trillion).

Total US M2: ~$22 trillion (2025)

Why M2 Matters More Than M1 or M3

M1 is too narrow:

  • Only includes immediately spendable money.
  • Misses the “near money” that people can quickly convert.
  • Less predictive of economic activity.

M3 is too broad:

  • Includes large institutional deposits and less liquid instruments.
  • The Fed stopped tracking it in 2006.
  • Too much noise from institutional flows.

M2 is the “Goldilocks” measure:

  • Captures money people can actually spend or invest soon.
  • Strong correlation with inflation (12-18 month lag).
  • Good predictor of asset prices (6-12 month lag).
  • Tracked consistently across countries.

The mechanism: More M2 = More money chasing goods/services/assets = Higher prices for everything

The Historic 2020-2021 Expansion

The Numbers Were Unprecedented!

M2 Explosion

Peak growth: M2 increased 26.9% year-over-year in February 2021. The highest growth rate since modern record-keeping began in 1959!

Total expansion: M2 grew from $15.5 trillion (January 2020) to $21.7 trillion (early 2022).
Increase: $6.2 trillion in ~2 years.
That’s 40% of all dollars ever created in US history!

For context:

  • 2008 Financial Crisis: ~10% M2 growth.
  • World War II: ~18% M2 growth.
  • Great Depression stimulus: ~10% M2 growth.

The 2020-2021 expansion dwarfed all previous crises combined.

What Caused the Explosion?

1. Quantitative Easing

  • Fed bought $4.76 trillion in assets.
  • Created new bank reserves.
  • Banks had more money to lend.

2. Fiscal Stimulus

  • $1,200, $600, $1,400 direct payments to individuals.
  • Enhanced unemployment benefits ($600/week federal supplement).
  • PPP loans to businesses (many later forgiven).
  • Total fiscal stimulus: ~$5 trillion!

3. Precautionary Savings

  • People saved stimulus checks instead of spending.
  • Businesses built cash buffers during uncertainty.
  • Deposits flooded into checking and savings accounts.

4. Regulatory Change (May 2020)

  • Fed removed transaction limits on savings accounts (Regulation D).
  • Reclassified savings deposits from M2-only to M1.
  • This accounting change inflated M1 massively.

5. Pandemic Behavior Shifts

  • Less spending on services (restaurants, travel closed).
  • More online shopping and goods purchases.
  • Cash hoarding and bank deposit growth.

The result: A liquidity tsunami that initially supported asset prices, then created the 2022 inflation crisis.

The Unprecedented 2022-2023 Contraction

For the first time since 1959, M2 began declining in late 2022.

M2 Contraction

Peak to trough:

  • Peak: $21.7 trillion (early 2022).
  • Trough: $20.8 trillion (mid-2023).
  • Decline: -4% to -5% year-over-year.

Duration: Approximately 18-24 months of negative growth

This had never happened before in the modern era. Even during recessions, M2 typically just grew more slowly. It didn’t actually shrink.

Why M2 Contracted

1. Quantitative Tightening

  • Fed began reducing balance sheet in June 2022.
  • Initially $95B/month, later slowed.
  • Removed bank reserves from the system.

2. Aggressive Rate Hikes

  • Fed raised rates from 0% to 5.25-5.50%.
  • Started March 2022, fastest hiking cycle in 40 years.
  • Deliberately draining liquidity to fight inflation.

3. Deposit Shifts

  • Savers moved money from M2 components to higher-yielding assets.
  • Money market funds outside M2 surged.
  • CDs and Treasury bills became attractive.
  • Money “left” M2 by moving to less liquid instruments.

4. Reverse Wealth Effect

  • Asset prices fell (stocks, crypto, housing).
  • People felt poorer, spent less.
  • Economic activity slowed.

The intent: The Fed wanted M2 to contract to reduce inflation pressures.

2024-2025: Stabilization and Recovery

M2 Recovery

M2 has bottomed and is recovering:

  • October 2024: $21.3 trillion
  • September 2025: $22.2  trillion
  • Growth: +4.2% from trough, approaching all-time highs

What changed:

  • Fed slowed QT dramatically (from $95B/month to $5B/month). And ended in December 2025.
  • Fed began cutting rates in late 2024.
  • Deposits stabilized as rates normalized.
  • Precautionary savings rebuilt.

Significance: M2 stabilization and modest growth suggest:

  • Inflation pressures should remain subdued through 2026 (due to 12-18 month lag).
  • Asset prices face less liquidity headwind.
  • Recession risk has diminished (M2 contraction often precedes recessions).

Where to Find M2 Data (Free)

FRED is a free, public database from the Federal Reserve Bank of St. Louis that provides economic data and analytical tools.

US M2 Money Stock:

  • Series Code: M2SL (monthly, seasonally adjusted)
  • URL: https://fred.stlouisfed.org/series/M2SL
  • Data: January 1959 to present, in billions of dollars
  • Source: Board of Governors of the Federal Reserve System

Alternative US M2 series:

  • M2NS: Monthly, not seasonally adjusted
  • WM2NS: Weekly, not seasonally adjusted (for more frequent updates)

How to use FRED:

  1. Search “M2SL” on fred.stlouisfed.org.
  2. Click “EDIT GRAPH” to customize.
  3. Change “Units” to “Percent Change from Year Ago” to see the growth rate.
  4. Overlay the S&P 500 or bitcoin to visualize correlation.
  5. Download data to Excel for your own analysis.

International M2 Data on FRED

Eurozone M2:

  • Series: MYAGM2EZM196N
  • Note: Eurozone primarily tracks M3, M2 is a component.

Japan M2:

China M2:

UK:

  • Series: MYAGM4GBM189S
  • UK primarily uses M4 instead of M2.
  • M2 series discontinued after Q4 2016.

Official Central Bank Sources

Federal Reserve H.6 Release:

European Central Bank:

People’s Bank of China:

  • Quarterly Monetary Policy Reports
  • URL: pbc.gov.cn (limited English translations)
  • Alternative: Use Trading Economics for easier access

Third-Party Aggregators

MacroMicro (Best for Global Comparisons):

TradingView:

  • Search “FRED:M2SL” or “Global M2” custom indicators
  • Community-built scripts aggregate multiple countries
  • Can overlay with asset prices for correlation analysis

Trading Economics:

  • Search “money supply“
  • Individual country M2 data with historical charts
  • Forecasts and analysis
  • Calendar of upcoming releases

The Critical 12-18 Month Lag

Why the Lag Exists

M2 doesn’t affect the economy instantly. Here’s the sequence:

Month 0-3: Money is created

  • Fed expands balance sheet, or fiscal stimulus arrives.
  • M2 increases as deposits flood into banks.

Month 3-6: Early asset price impact

  • Investors feel wealthier.
  • Some money flows into stocks, real estate, and crypto.
  • First signs of asset price inflation.

Month 6-12: Broader economic impact

  • Businesses start raising prices (they see demand).
  • Wage pressures build as employment strengthens.
  • Consumer prices start rising.

Month 12-18: Peak inflation impact

  • Full pass-through to consumer prices.
  • CPI inflation peaks.
  • Fed typically begins tightening in response.

The 2020-2022 Case Study

February 2021: M2 growth peaked at 26.9% year-over-year.

June 2022: CPI inflation peaked at 9.1%.

Lag: Almost exactly 18 months.

This wasn’t a coincidence.

It was the result of the money supply surge working through the economy.

If you were tracking M2 in early 2021, you could have expected the high-probability outcome of the 2022 inflation crisis before it became headline news.

Using the Lag to Your Advantage

As a leading indicator:

  • M2 growing >15% YoY: Expect inflation 12-18 months later.
  • M2 growing 5-7%: Healthy, sustainable growth.
  • M2 flat or negative: Expect disinflation/deflation 12-18 months later.

M2 and Asset Prices: The Correlations

Stock Market Correlation

Research shows a strong correlation between M2 growth and stock prices during expansion periods.

Typical lag: 6-12 months from M2 change to stock market movement

The mechanism:

  1. More M2 = More money available for investment.
  2. Investors feel wealthier, buy stocks.
  3. Corporate earnings rise as spending increases.
  4. Higher valuations are justified by abundant liquidity.

Sector sensitivity:

  • Growth stocks: Highest sensitivity (tech, biotech).
  • Small-caps: High sensitivity (need capital access).
  • Value stocks: Lower sensitivity (less dependent on liquidity).
  • Utilities/Staples: Lowest sensitivity (defensive, less cyclical).

Historical evidence:

  • 2020-2021: Record M2 growth → Explosive stock rally.
  • 2022: M2 contraction → Bear market.
  • 2024-2025: M2 stabilizing → Market recovery.

Real Estate Correlation

Long-term positive correlation confirmed across multiple studies.

Four transmission channels:

  1. Mortgage availability: More M2 = Banks have more to lend
  2. Lower rates: M2 expansion often accompanies rate cuts
  3. Inflation expectations: Real estate as an inflation hedge
  4. Wealth effects: Rising assets encourage more spending/buying

Important caveat: The correlation is stronger for owner-occupied housing than commercial real estate, and varies significantly by region.

Cryptocurrency

Bitcoin has often shown a positive, lagged relationship to global M2/liquidity, with lags on the order of a couple of months in some cycles,

Multiple macro/crypto analyses have found that bitcoin tends to move with global liquidity or global M2, with bull markets often aligning with periods of expanding money supply.

Why crypto is so sensitive:

  1. Store of value narrative: Bitcoin positioned as a hedge against currency debasement
  2. Pure liquidity play: No cash flows, so 100% liquidity-driven
  3. Small market cap: Global M2 at $123T vs Bitcoin at $2-3T = Small flows create big moves
  4. Millennial/Gen Z adoption: Younger traders are more crypto-native

Historical evidence:

  • 2020-2021: M2 up 27% → Bitcoin from $7K to $69K (+886%).
  • 2022: M2 down 4-5% → Bitcoin from $47K to $17K (-64%).
  • 2024-2025: M2 stabilizing → Bitcoin recovery to $60K-100K range.

Bitcoin bull markets historically coincide with rapid M2 expansion. The supply halvings get attention, but QE announcements matter more.

Limitations of the M2-Crypto Correlation

Six factors weaken the relationship:

  1. Market immaturity: Crypto’s tiny size means sentiment swings override fundamentals.
  2. Speculative drivers: FOMO, news cycles, and Michael Saylor tweets can dominate.
  3. Regulatory risk: Government actions can instantly break correlations.
  4. Supply rigidity: Bitcoin’s fixed 21M cap can’t absorb liquidity elastically.
  5. Geographic variance: US M2 matters most, but crypto is global.
  6. Competition: Other cryptos, stablecoins, and CBDCs may divert flows.

Bottom line: M2 provides directional bias for crypto, but use it alongside other indicators. Don’t rely on it exclusively.

Commodities and Inflation Hedges

M2 growth serves as a leading indicator for commodity prices with 12-18 month lags.

The logic:

  • Rapid M2 expansion → Eventually flows into real assets.
  • Commodities benefit as an inflation hedge.
  • Gold, oil, and agricultural products all respond.

Strategy:

  • Buy commodities when M2is  accelerating above 10% YoY.
  • Do this before CPI shows inflation (that’s the edge).
  • Exit when M2 growth decelerates below 5%.

How to Use M2 in Your Trading

Strategic Allocation (6-18 Month Horizon)

When M2 is growing >10% YoY:

  • Stocks: Overweight growth, tech, small-caps.
  • Crypto: Accumulate bitcoin and quality altcoins.
  • Real Estate: Favorable environment for property.
  • Commodities: Start building positions ahead of inflation.
  • Bonds: Underweight (yields likely rising due to coming inflation).
  • Cash: Minimize (being debased).

When M2 is growing 5-7% YoY (normal):

  • Balanced allocation across asset classes.
  • Focus on fundamentals and valuations.
  • Use technical analysis for timing.

When M2 is flat or negative:

  • Stocks: Reduce to neutral or underweight, favor quality/value.
  • Crypto: Minimal exposure or hold only long-term conviction.
  • Real Estate: Cautious, favor income-producing properties.
  • Commodities: Likely headwinds.
  • Bonds: Overweight (yields falling, prices rising).
  • Cash: Higher allocation (preserves purchasing power).

Leading Indicator for Inflation (12-18 Months)

The rule:

  • M2 growth today predicts CPI inflation 12-18 months ahead

Practical application:

Scenario 1: M2 surging (like 2020-2021)

  • Expect inflation to arrive 12-18 months later
  • Position: Buy TIPS (inflation-protected bonds), commodities, and real estate
  • Avoid: Long-term nominal bonds (they’ll get crushed)

Scenario 2: M2 contracting (like 2022-2023)

  • Expect disinflation/deflation 12-18 months later
  • Position: Long-term bonds benefit, growth stocks benefit eventually
  • Caution: Recession risk also increases with M2 contraction

Current reading (2025):

  • M2 stabilized after contraction
  • Growing modestly (3-4% YoY)
  • Implication: Inflation likely stays subdued through 2026
  • Fed has room to keep rates lower = Good for risk assets

Combining M2 with Balance Sheet Data

Best practice: Use both together.

M2 = Strategic, long-term view (6-18 months)
Balance Sheet = Tactical, medium-term view (1-3 months)

Example framework:

M2 Growth Balance Sheet Positioning Logic
>10% YoY Expanding 🚀 Maximum risk-on Double tailwind
>10% YoY Contracting 🟡 Selective risk Mixed signals, favor long-term
5-7% YoY Expanding 🟢 Moderate risk-on Healthy growth
5-7% YoY Contracting 🟠 Cautious Neutral conditions
<5% or negative Expanding 🟡 Selective Short-term boost, long-term concern
<5% or negative Contracting 🔴 Maximum defense Double headwind

Current environment (December 2025):

  • M2: Growing ~3-4% YoY (below normal but recovering)
  • Balance Sheet: QT ending, transitioning to stable
  • Position: Moderate risk-on, gradually increasing exposure

Common Beginner Mistakes

❌ Mistake 1: Confusing M2 with M1

  • Problem: M1 includes only the most liquid money (post-2020 definition is broader)
  • Better approach: Use M2 for inflation/asset price forecasting

❌ Mistake 2: Expecting immediate impact

  • Problem: M2 lags are long (6-18 months).
  • Better approach: Use M2 for strategic positioning, not tactical trading.

❌ Mistake 3: Ignoring the components

  • Problem: Not all M2 increases are equal (deposit growth vs regulatory changes).
  • Better approach: Understand what’s driving M2 changes.

❌ Mistake 4: Only watching US M2

  • Problem: Global markets require a global M2 perspective.
  • Better approach: Track combined M2 from the US, Europe, Japan, and China.

❌ Mistake 5: Using M2 in isolation

  • Problem: M2 is a leading indicator, but not perfect.
  • Better approach: Combine with balance sheet, SOFR, TGA, DXY for a complete picture.

Your Monthly Monitoring Routine

Fourth Tuesday of Every Month (M2 Release Day):

  1. Check FRED’s M2SL series (or wait for H.6 release at 1 PM ET).
  2. Note the absolute level.
  3. Calculate the year-over-year growth rate.
  4. Compare to previous months—accelerating or decelerating?

Analysis:

  • Is M2 above or below 5-7% YoY growth?
  • What does this suggest for inflation 12-18 months ahead?
  • What does this suggest for asset prices 6-12 months ahead?

Portfolio adjustment:

  • No need to act immediately (lags are long).
  • Adjust strategic allocation over 1-2 months.
  • Combine with balance sheet data for timing.

Time commitment: 20 minutes monthly.

Real-World Example: Using M2 as a Leading Indicator

Scenario: It’s early 2021. You’re tracking M2.

What you see:

  • February 2021: M2 growth hits 26.9% YoY (unprecedented).
  • Your reading: “This is extreme. Inflation is coming in 12-18 months.”
  • Most economists say “inflation is transitory.”

What you do:

  1. Month 1-3: Research inflation-protected investments.
  2. Month 3-6: Start building positions in TIPS, commodities, and real estate.
  3. Month 6-9: Sell long-term nominal bonds (yields will rise).
  4. Month 9-12: Position for Fed tightening ahead.

What happened:

  • June 2022: CPI peaks at 9.1% (exactly 16 months after M2 peak).
  • Your TIPS position gained 10-15%.
  • Your commodity positions gained 20-30%.
  • You avoided long bonds that fell 15-20%.

Key insight: You didn’t need to predict COVID or stimulus. You just needed to track M2 and understand the 12-18 month lag.

Key Takeaways

Prop Firm Key Takeaways

✅ M2 measures readily available money, including cash, checking, savings, small CDs, and retail money market funds—currently $21.9T in the US.

✅ The 2020-2021 expansion was historic: 27% growth, the fastest since modern record-keeping began in 1959

✅ The 2022-2023 contraction was unprecedented: First decline in modern era, down 4-5% YoY for 18+ months

✅ The 12-18 month lag is remarkably consistent: Peak M2 growth February 2021 → Peak inflation June 2022 (16 months)

✅ M2 predicts inflation reliably with a 12-18 month lead time, giving you an early warning before CPI confirms.

✅ Stock correlation is 0.60-0.90 with 6-12 month lags, strongest for growth stocks and tech.

✅ Crypto shows the highest sensitivity: 0.60-0.90 correlation with 70-107 day lags, Bitcoin bull markets coincide with M2 surges.

✅ Free data sources are excellent: FRED M2SL for US data, MacroMicro for global aggregates, Trading Economics for individual countries.

✅ Monitor monthly on the fourth Tuesday when H.6 releases at 1:00 PM ET, track YoY growth rate more than the absolute level.

✅ Current 2025 conditions are favorable: M2 stabilized and growing ~3-4% YoY, suggesting subdued inflation and healthy asset prices through 2026.

✅ Use M2 strategically, not tactically: Long timeframe (6-18 months) makes it perfect for strategic allocation, not day trading.

✅ Combine with balance sheet data: M2 for a strategic view, balance sheet for tactical timing, together they’re powerful.

✅ Global M2 matters too: Track US, Europe, Japan, China combined (~$123T total) for a complete picture.

✅ Normal healthy M2 growth is 5-7% YoY, matching nominal GDP; above 10% warns of inflation, negative growth warns of deflation/recession.

You’ve now completed the liquidity monitoring framework: From short-term indicators (SOFR, SRF, TGA) to medium-term drivers (Fed balance sheet, DXY) to long-term predictors (M2), you have a complete system for understanding liquidity conditions and positioning accordingly.

Next step: Use the Macro Liquidity Cheat Sheet provided in the next lesson to integrate all these indicators into a simple weekly routine. Track them consistently, follow the signals, and adjust your positions as liquidity conditions evolve.

The data is free. The tools are accessible. Now you have the knowledge. Use it to your advantage.