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This blog is one of the few places you will find information about the all-important M2 measure of the US money supply. I've been covering this since I first began this blog in the summer of 2008. The reasons that few follow M2 are several: 1) the Fed apparently pays no attention to the money supply, 2) not many Wall Street analysts pay attention to M2, and 3) making sense of money supply is difficult in the absence of any concrete measures of money demand. I try to fill in those gaps.
These links will take you to a more in-depth discussion of this topic, but to simplify: Inflation happens when the supply of money exceeds the demand for it. M2 is arguably the best measure of money supply. Currency is arguably a proxy for money demand, as is the ratio of M2 to nominal GDP. The reason surging money supply in 2020 through early 2022 didn't create inflation is that money demand also surged. The reason that declining money supply over the past two years has not been deflationary is that money demand also declined. Today, money supply and money demand appear to be in balance, which explains why inflation has been relatively low and stable.
Chart #1
Chart #1 shows the level of the M2 money supply. M2 grew at about a 6% pace from 1995 through 2019, a period characterized by relatively low and stable inflationm which further implies that money supply and demand were in balance. M2 then exploded from March 2020 through early 2022, but inflation started rising in early 2021; this implies that money demand started to collapse in early 2021. For the past year or so, M2 growth has picked up but inflation has slowed, which implies that money demand has begun to stabilize at a lower level (see Chart #2).
Chart #2
Chart #3
Chart #3 shows currency in circulation (a lot of which is held overseas, by the way). I have argued that currency is a proxy for money demand because people only hold currency if they want to; unwanted currency can simply be deposited in a bank, whereupon it disappears from circulation and is returned to the Fed. Like M2, currency increased at about a 6% annual rate from 1995 through 2019. It then surged over the next year or so, even though we saw relatively low and stable inflation. The growth of currency then began to slow (and inflation to pick up) in early 2021, and has now returned to its long-term growth path, coinciding with relatively low and stable inflation.
In sum, money supply appears to be growing at a moderate but sub-normal rate, while money demand appears to be somewhat soft. That's not a recipe for rising inflation, and instead signals, in my view, that inflation will remain low and relatively stable for the foreseeable future.
29 comments:
Been a reader since 2009 Scott.
Thanks for your blogs. Future blog post idea: sentiment indicator update, yield curve, swap spreads
Haven’t seen the swap spreads graph in a while!!!!!
Thanks again Scott
Big Al from Canada
My theory is that government spending is foundational to Keynesian economics.
Historically, all politicians need to continue spending money to get elected. The media needs access to politicians to get stories, so they keep the lie going.
Companies need the government to help them with global access, so they keep it going. The Fed is nowhere near independent and keeps the Keynesian narrative alive.
There are very few supply-side or monetarist voices in traditional media.
This is why consumer sentiment is so out of whack, why the Fed said COVID transfer payments were “transitory,” and why they keep using this Phillips curve myth.
All to keep the government spending grift afloat.
Another reason M2 is ignored is that most people fundamentally do not understand the concept of money, confusing it with wealth. Readers here understand but certainly the press, most politicians and the general public do not.
Should we be concerned that Chairman Powell cited "inflation expectations" as a critical data point? Maybe my monetarist instincts are misplaced, but I am skeptical that expectations can actually devalue the buying power of the currency.
@Norton II - expectations are key, they are a big part of individuals and organizations determining how much money they want to hold ( e.g. the ratio of M2 to Nominal GDP, Scott's chart #2 ). However, expectations aren't directly observable and are subject to rapid revision, so the Fed authorities often make claims about expectations that are questionable. See the corpus of Scott Sumner on "market monetarism".
I've followed the money stock for more than 50 years of my life. With our "means-of-payment" money supply growing at a 7 percent clip since September last year, any slowing in the economy will have to be the result of a "black swan".
There have been seismic changes in the money market propelling the economy forward. The O/N RRP facility being one. The flow of funds through the MMMFs another (representing the activation of monetary savings).
I.e., funds flowing through the MMMFs, from the payment’s system, increase the supply of loanable funds, but not the supply of new money – a velocity relationship.
That and the shifting of funds from “time deposits” to transaction’s deposits in the payment’s system increasing AD.
We are experiencing a supply demand shock in the price of oil.
Short-term money flows, the volume and velocity of our “means-of-payment” money supply is still positive.
There have been 12 boom/busts in real-estate since WWII (along with 13 recessions). But this one is different. This one wasn’t accompanied by disintermediation – a term that only applies to the nonbanks since 1933.
file:///D:/Spencer%20Hall/My%20Documents/nonbanks%20vs.%20banks%20liberty%20street.pdf
WHERE DO BANKS END AND NBFIS BEGIN?
As I said beforehand
The DFIs and their customers, the NBFIs, have a symbiotic fiduciary relationship. The soundness and prosperity of the DFIs is dependent upon the NBFIs putting savings back to work (the U.S. Golden Era's paradigm). And savings flowing through the non-banks (completing the circuit income velocity of redistribution), never leaves the payment’s system.
"Activities and related risks of banks and nonbanks remain intimately connected, indeed in a symbiotic relationship, even as banks withdraw from direct participation in certain activities owing to increased costs and restrictions stemming from capital and liquidity requirements, living wills requirements, and other measures"
sorry about that
https://www.nber.org/system/files/working_papers/w32316/w32316.pdf
@salmo trutta: I hope you will write in your http://monetaryflows.blogspot.com/ post about indicator that proxy for the "means-of-payment" money supply, inflation.
Debt Downgrade, Moody's
Boiling the frogs (taxpayers), slowly enough that they might not notice. The mandatory spending (mostly entitlement/social spending), is already the vast majority of the budget, and with interest, will get larger.
Discussion of Social Security, Medicare and Medicaid will have to occur. Medicaid is being discussed now, but not very seriously/effectively.
Thanks swamp/uniparty.
"Without adjustments to taxation and spending, we expect budget flexibility to remain limited, with mandatory spending, including interest expense, projected to rise to around 78% of total spending by 2035 from about 73% in 2024. If the 2017 Tax Cuts and Jobs Act is extended, which is our base case, it will add around $4 trillion to the federal fiscal primary (excluding interest payments) deficit over the next decade.
As a result, we expect federal deficits to widen, reaching nearly 9% of GDP by 2035, up from 6.4% in 2024, driven mainly by increased interest payments on debt, rising entitlement spending, and relatively low revenue generation. We anticipate that the federal debt burden will rise to about 134% of GDP by 2035, compared to 98% in 2024."
"How Did the U.S. Economy Do Last Year? Explaining Two Measures of GDP Growth"
https://www.stlouisfed.org/on-the-economy/2025/feb/how-did-us-economy-do-last-year-two-measures-gdp-growth
GDP targeting should be done at a yearly level and not based on quarterly results.
10/1/2019 21933.217 0.048539844
01/1/2020 21727.657 0.029180972 already too low
04/1/2020 19935.444 -0.068347427
07/1/2020 21684.551 -0.001502037
10/1/2020 22068.767 0.006180124
01/1/2021 22656.793 0.042762825 just right
04/1/2021 23368.861 0.172226764 too high
07/1/2021 23921.991 0.103181293
10/1/2021 24777.038 0.122719634
01/1/2022 25215.491 0.112932929
04/1/2022 25805.791 0.104281077
07/1/2022 26272.011 0.098236806
10/1/2022 26734.277 0.078994067
01/1/2023 27164.359 0.077288521
04/1/2023 27453.815 0.063862565
07/1/2023 27967.697 0.064543441
10/1/2023 28296.967 0.058452675
01/1/2024 28624.069 0.053736221
04/1/2024 29016.714 0.056928299
07/1/2024 29374.914 0.050315798
10/1/2024 29723.864 0.050425793
01/1/2025 29977.632 0.047287582 just right
@duongquy
I used that blogspot for storage as I lost a lot of data between data storage crashes. Money is the measure of liquidity (bank debits), the yardstick by which the liquidity of all other assets is measured. The G.6 release reflected money flows.
No money stock figure standing alone is adequate as a guidepost for monetary policy. The Pundit's "demand for money" has varied 2x that of the money stock over a 50-year period.
It would be interesting to read your insights on debt and debt service which is now approaching over 3% of GDP approaching the highest on record according to FRED. I'd like to think we could grow our way out of the problem, but debt growth is far out pacing GDP growth and the bond vigilantes seem intent on extracting 5% as the cost of doing business. Thanks
Scott, US dollar stablecoins (crypto) I believe now exceed $250b, and are growing gangbusters (some forecast $2T in a couple years). At some point (if not already) will that start to distort your currency in circulation chart?
Scott, could you confirm that the ~ $1.5T gap is the difference between the March 2025 M2 and the 6% trend line. Thank you in advance.
King Trump just came out and said he wants Apple to pay a 25% tariff on Iphones not made in the US PLUS a 50% tariff on the EU-again. If there's a more ignorant POTUS in US history I'd like to know who it was. Does he have a CLUE about how difficult and costly it would be to make phones here?
"A new book makes the case for putting money supply at the center of the U.S. economy and re-empowering commercial banks"
https://finance.yahoo.com/news/book-makes-case-putting-money-100000029.html
Al, re swap spreads: With the demise of Libor, the swap spread landscape has changed dramatically. Instead of Libor we now have SOFR (Secured Overnight Financing Rate). So the nearest thing to what used to be swap spreads is SOFR spreads (the difference between SOFR swap rates and Treasury rates). SOFR spreads have been in negative territory for years (the current 5-yr SOFR spread is -36 bps). There is no point in comparing these spreads to swap spreads, however. For one, regulatory constraints effectively prevent banks from arbitraging the negative SOFR spread by holding large Treasury positions.Two, liability-driven investors prefer receiving long-term fixed rates via swaps rather than buying long-term Treasuries because the swap avoids taking on the duration risk of long bonds. So there is extra demand for swaps, thus depressing their yield relative to Treasury yields.
Treasury debt currently is about 96% of GDP; the record was about 125% towards the end of WW II. Treasury interest paid is now about 3.8%; the max was 5% in the mid-80s. These numbers are disturbing, especially if they get much worse, but for now they are not calamitous.
That is correct.
Unfortunately, Trump does not understand how tariffs and international trade work. This ignorance probably works to his advantage, however, since adversaries view him as dangerously unpredictable.
I think you are asking whether crypto transactions are substituting for traditional dollar transactions by enough to make a difference. I honestly don't know, but my intuition says we haven't reached that point yet.
Today, in contrast, reserves are abundant and the Fed controls short-term interest rates by paying interest on reserves. Not only are reserves now abundant and interest-bearing, they are risk-free in the bargain, making them a very attractive asset. Flush with reserves, bank balance sheets are relatively strong and the banking system has plenty of rock-solid liquidity. Gone are the days when the Fed drained reserves from the system in order to force interest rates higher, while also restricting liquidity. Abundant reserves could well explain why the economy has avoided a recession even as the Fed has tightened monetary policy.
Scott - There is a cost to these "abundant" reserves and the cost or price is NOT found by market participants, it is set by a small number of beaurocrats who cannot possibly know with the millions of participants/traders/banks/etc...know day by day. By moving to "abundant" reserves we (our Government overlords) have set the price and are spreading the "cost" to those who don't understand money/currency. This is a grave injustice which the history books may not record correct but the carnage they will see and feel in the movements and tragedies of ordinary men.
In other words, this will not end well and will NOT be controlled (or under control) by regulatory and governmental bodies like the Fed.
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