A measure of money in circulation including currency, demand deposits, savings accounts, and money market funds — a key indicator of liquidity conditions in the economy.
Deeper Explanation
M2 growth drives asset prices through the credit creation mechanism: when central banks expand M2 through quantitative easing or rate cuts, the additional liquidity flows into financial assets, compressing yields and expanding equity multiples. The 2020–2021 M2 explosion — the largest peacetime monetary expansion in history — preceded the inflation surge of 2022 by approximately 12–18 months, consistent with the historical relationship between M2 growth and CPI inflation. Contracting M2 (as occurred in 2022–2023) historically precedes asset price compression and economic slowing. Monitoring M2 year-over-year growth provides the macro investor with one of the clearest signals of future liquidity conditions.
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