The M2, a measure of money supply that tracks checking accounts, saving accounts, money market accou

• 01/25/23

The M2, a measure of money supply that tracks checking accounts, saving accounts, money market accounts and short-term certificates of deposit as well as other liquid deposits has turned negative on a year-over-year basis for the first time since at least 1960, according to Fed data, tumbling $1.35 trillion from the peak in March to $12.4 trillion in December, a drop of 9.8%. In other words, the money supply is shrinking. The money supply growth rate for December was a negative 1.3% versus a year ago. The drop in money supply is contributing to the slowdown in inflation as there is less cash in the economy to be spent on goods and services, reducing the supply-demand imbalance that helped push prices higher. So I'd like to take the time to discuss what M2 is, why it's important, and how it affects you both in the market and in your day to day life. What Is M2? According to Investopedia "M2 is the U.S. Federal Reserve's estimate of the total money supply including all of the cash people have on hand plus all of the money deposited in checking accounts, savings accounts, and other short-term saving vehicles such as certificates of deposit (CDs). Retirement account balances and time deposits above $100,000 are omitted from M2." "M2 is a more comprehensive calculation than M1 because it includes assets that are highly liquid but are not intended to be routinely used as cash. Consumers and businesses don't usually use savings deposits or certificates of deposit when making purchases or paying bills, but in a pinch, they could convert them to cash in short order." Why is it important? According to Investopedia "M2 is a critical factor in the forecasting of inflation. Inflation and current interest rates have major ramifications for the general economy, as they heavily influence job availability, consumer spending, business investment, currency strength, and trade balances." Rate hikes from the Federal Reserve are putting pressure on M2. Higher rates mean consumers have to pay more interest on their mortgages, auto loans, and credit card, thereby depleting their cash reserves. In an effort to avoid high interest rates people are taking two different approaches. The first is avoiding loans, preferring cash instead. The real estate market is a prime example. Some 30% of homes purchased in December were bought with cash, the highest percentage in eight years, according to property research firm Redfin. The second way to avoid these higher rates is to avoid unnecessary purchases altogether. Some of this can be seen in the December retail sales report which released last Wednesday. It showed purchases among a control group of consumers tumbled 0.7% last month, the most since December 2021 and more than the double the 0.3% drop forecast by economists surveyed by Bloomberg. This can also be seen in the savings rate, which has fallen steadily, dropping to 2.2% in October from more than 7% a year earlier and marking the lowest level since 2005. The decline perfectly matches the drop in the broader measure of M2 from a high of $13.8 trillion in March to $12.6 trillion in November, the last month for which data are available. It's not just consumers who are making adjustments. The Fed’s total assets were down 5.3% on Jan. 18 since last year’s peak, yet the balance sheet remains more than double the $4.1 trillion in February 2020 before the onset of the pandemic. You hear a lot about the rate hikes but much less about so-called QT (Quantitative Tightening) which is a reduction in the Fed's balance sheet, in this case by gradually letting expiring US Treasuries "roll off" by not replacing them. It's important to understand that the Fed's balance sheet DOES NOT indicate liabilities or debts. Their balance sheet indicates assets. During the COVID collapse, the Fed began purchasing $120 billion in US Treasuries and Mortgage Backed Securities per month. These are assets with value which continue paying interest month after month. Previously, when these Treasuries reached maturity, they were purchasing more to replace them. Starting in March 2022 they stopped. This is why their balance sheet is dropping. As these assets continue to reach maturity, the balance sheet will continue to fall. Another area that we can expect to see this change in money supply is in the GDP numbers. GDP is a measurement of the total value of all the finished goods and services produced within a country's borders within a specified period of time. GDP is usually assessed as a comprehensive indicator of a country’s overall economic health. It should go without saying that the less money that's available, the slower growth is. The post COVID increase in the money supply led to almost a year of record corporate earnings. It should stand to reason that a fall in the supply of money will result in worse corporate earnings. The GDP numbers release tomorrow (Jan 26 8:30a EST). So to summarize: Due to the shift in Fed monetary policy There's less money in the economy. This is leading to people spending less which is why inflation is dropping. It will also reflect in declining corporate earnings and lower GDP growth. Interested in learning more? Join my Discord community and get your questions answered! https://discord.gg/GaUxA4dvZs ///// https://www.investopedia.com/terms/m/m2.asp ////// https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/fed-tightens-money-supply-as-us-inflation-falls-from-2022-peak-73547811 //// #learn #tcardizzle

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