Image Source: Pixabay

A reader doubted there would be a recession this year because M2 was still rising.

What is M2?

M2 money supply is a measure of the total amount of money in circulation within an economy, including cash, checking accounts, savings accounts, and other liquid assets like money market funds.

Real M2 is inflation adjusted in billions of 1982-84 seasonally-adjusted dollars.

The chart shows M2 and Real M2 nearly always rise. Since recessions are defined in real terms, let’s hone in on real M2.

Real M2 vs Recessions

M2 and Real M2 Percent Change from Year Ago

Even on a percentage basis it is difficult to make any consistent claim that ties M2 to recessions.

All Ears on This One

ALL EARS ON THIS ONE. https://t.co/dq5R06IMX8

— Danielle DiMartino Booth (@DiMartinoBooth) April 25, 2023

If your definition of inflation is an increase in money supply then deflation must be the opposite.

Does anyone think we had 12.7 percent deflation when real M2 fell from 7.658 trillion to 6.687 trillion?

The decline is due to the Fed’s Quantitative Tightening (QT) program.

But if you are going to scream about Quantitative Easing (QE) being inflation, then you have no choice but scream deflation between September 2021 and April of 2024.

Did it feel like deflation?

Real M2 During the Great Recession

That is a very instructive chart.

Despite slowly rising M2 ahead of the recession, then rapidly rising M2 during the recession, we had a the worst recession since the Great Depression.

What Happened?

The short answer is debt deflation. The value of credit on the books of banks was overstated.

This is what gave rise to my proposed definition definitions of inflation and deflation as related to whether or not debt could be paid back.

In practice, there is no way to use my definitions because the Fed suspended mark-to-market accounting in March of 2009 and we still don’t have it.

They are all liars about the likelihood of defaults, anyway.

Regardless, debt deflation is a key idea, not Fed-manipulated declines in M2.

So ….

Q: What Does M2 Money Supply Say About Recessions?
A: Nothing

The Fed always trying to expand credit even when it does its feeble QT operations. Congress does its part.

How Much Credit Expansion Does It Take to Grow Real GDP?

Please consider the important question: How Much Credit Expansion Does It Take to Grow Real GDP?

Let’s explore expansion in Total Credit vs expansion in GDP over time.

The unsettling answer is that it takes an expansion of $10 in credit to produce $1 in GDP.

For details and discussion, please click on the above link.

Will all that debt be paid back? How? By inflation or default? Fed bailouts?

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