The U.S. Money Supply is Shrinking to A Historic Low Ringing the Alarm Bell For Investors

In an unexpected twist that could herald significant changes in the stock market, the U.S. money supply is charting a path not witnessed since the era of the Great Depression. This historical pivot, particularly within the M2 money supply metric, presents a fascinating narrative that demands our attention.

Andrea / Pexels / Reports show that M2 slipped from $21.7 trillion in 2022 to an all-time low of $20.78 trillion in 2024.

Before we get to the heart of the matter, a quick refresher on what M1 and M2 represent will set the stage. M1 includes the most liquid forms of money, such as cash and checking account balances, readily available for immediate use. It is the essence of liquidity, encapsulating the money that flows freely in our daily transactions.

M2, however, broadens this definition by incorporating all elements of M1 plus less liquid assets like savings accounts, money market accounts, and certificates of deposit under $100,000. Thus, M2 offers a more comprehensive view of the public’s available funds, including those that require a few steps to convert into spendable cash.

The Unprecedented M2 Contraction Looms

It has been a longstanding assumption that the U.S. money supply would perpetually increase, paralleling economic growth and the corresponding need for more currency in circulation. However, recent data challenge this assumption head-on.

RDNE / Pexels / As of January 2024, M2 has experienced a noticeable contraction, descending from a peak of around $21.7 trillion in July 2022 to $20.78 trillion.

However, his decline is not merely a blip on the radar. It is a historic shift that marks the first substantial reduction in the money supply since the Great Depression.

Historical Echoes & Future Concerns

The significance of this downturn becomes even more pronounced when we consider the backdrop of the COVID-19 pandemic, which saw M2 expand at an unprecedented rate due to fiscal stimulus measures. While some might argue that the current reduction in M2 is a natural recalibration, history suggests that such declines could precede significant economic downturns.

Examining data stretching back to 1870 reveals that severe M2 contractions have often been harbingers of deflationary periods and high unemployment. With only a handful of similar occurrences in over a century, the present situation warrants careful scrutiny for what it might foretell about the future of the U.S. economy and the stock market.

Commercial Bank Credit Adds Salt to Injuries

Another dimension to this evolving story is the status of commercial bank credit. This includes the sum of loans, leases, and securities held by U.S. banks. Historically, as the economy expands, so does the demand for credit, making the consistent growth of commercial bank credit a generally expected phenomenon.

Karolina / Pexels / Apart from M2, Commercial Bank Credit is also shrinking!

However, just as M2’s decline raises eyebrows, any potential downturn in commercial bank credit could amplify concerns regarding the broader economic outlook.

What Should Investors in This Uncertain Financial Shift?

This intersection of a contracting M2 money supply and potential shifts in commercial bank credit creates a complex landscape for investors. Traditional wisdom and historical precedent suggest that these developments could be the precursors to a broader economic and market downturn.

In such times, the strategic importance of portfolio diversification, risk management, and staying abreast of economic indicators cannot be overstated.

Investors would do well to monitor these trends closely, considering adjustments to their investment strategies that might hedge against potential market volatility. Whether through reallocating assets, exploring defensive sectors, or considering the timing of investments, the goal is to navigate the uncertain waters with informed confidence.