M2 Money Supply

Leading/Coincident/Lagging: Leading Economic Indicator
Type: Measurement

Summary: M2 money supply is an important economic policy measurement, and is worth tracking on a weekly basis if available. M2 measures increase or decrease in the money supply, and is controlled by central banks increasing or decreasing banking reserves.

Increasing the reserves allows retail and commercial banks to treat their deposits at the central bank as a multiple of their actual value. The central bank “credits” the deposit accounts commercial banks have at the central bank as larger than their prior value. The commercial banks can now originate more loans, which allows more money to go into circulation. This stimulates the economy’s growth by making credit and currency easier to obtain. Decreasing the reserves lowers the allowed multiple of deposits, restricting money from going into circulation, and slows from the economy.

Manipulation of M2 helps Central Banks control GDP growth and inflation more directly and directly changes currency value. A positive change in M2 money supply is caused by increased reserves and leads a rise in GDP and inflation. A negative change in M2 money supply is caused by decreased reserves and leads a fall in inflation and a fall in GDP.

Impact on Local Currency: A sharp rise in M2 money supply may cause foreign investors to sell a currency inflation is rising without a rise in GDP. A sharp fall in M2 money supply is deflationary, increasing the value of that currency relative to other currencies, but not if attached to declines in GDP. Note that M2 Money supply rarely if ever declines for the United States, and is usually intentionally accelerated by the central bank to help the economy recover.