M2 is a calculation of the money supply that includes all elements of M1 as well as “near money.” M1 includes cash and checking deposits, while near money refers to savings deposits, money market securities, and other time deposits (in amounts less than $100,000). These assets are less liquid than M1 and not as suitable as exchange mediums, but they can be quickly converted into cash or checking deposits.
Measuring the money supply of an economy is a challenging proposition. Due to the complexity of the concept of “money,” as well as the size and level of detail of an economy, there are multiple ways of measuring a money supply. These means of measuring a money supply are typically classified as “M”s and fall along a spectrum from narrow to broad monetary aggregates. Typically, the “M”s range from M0 to M3, with M2 typically representing a fairly broad measure.
M2 is a broader money classification than M1 because it includes assets that are highly liquid but are not cash. A consumer or business typically doesn’t use savings deposits and other non-M1 components of M2 when making purchases or paying bills, but it could convert them to cash in relatively short order. M1 and M2 are closely related, and economists like to include the more broadly defined definition for M2 when discussing the money supply because modern economies often involve transfers between different account types. For example, a business may transfer $10,000 from a money market account to its checking account. This transfer would increase M1, which doesn’t include money market funds, while keeping M2 stable, since M2 contains money market accounts.
The Money Supply
M2 as a measurement of the money supply is a critical factor in the forecasting of issues like inflation. Inflation and interest rates have major ramifications for the general economy, as these heavily influence employment, consumer spending, business investment, currency strength, and trade balances.2 In the United States, the Federal Reserve publishes money supply data every Thursday at 4:30 p.m., but this only covers M1 and M2. Data on large-time deposits, institutional money market funds, and other large liquid assets are published on a quarterly basis and are included in the M3 money supply measurement.3
Changes in Money Supply
In the United States, the Federal Reserve’s dual mandate is to balance unemployment and inflation. One of the ways it does this is by manipulating M2 money supply. M2 provides important insight into the direction, extremity, and efficacy of central bank policy. M2 has grown along with the economy, rising from $4.6 trillion in January 2000 to $18.45 trillion in August 2020. The supply never shrank year-over-year (YOY) at any point in that period. The most extreme growth occurred in September 2001, January 2009, and January 2012, when the rate of M2 expansion topped 10%.4 These accelerated periods coincided with recessions and economic weakness, during which expansionary monetary policy was deployed by the central bank.
The economic fallout from the COVID-19 pandemic along with the economic stimulus efforts that followed have also greatly expanded the money supply, with record quarterly increases in Q1 of 2021. In fact, February of 2021 saw a year-over-year increase of 27.12%.
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