U.S. M2 Money Supply Nears Record as Central Bank Policies Drive Asset Prices Higher

Economy Politics John Brightwater September 25, 2024

U.S. M2 Money Supply Nears Record as Central Bank Policies Drive Asset Prices Higher

The U.S. M2 money supply is nearing record levels, boosted by global central bank monetary policies, resulting in significant asset price increases, especially in equities and cryptocurrencies. The relationship between M2 and financial performance underscores the impact of liquidity in market dynamics, highlighting gold and the S&P 500 achieving all-time highs. However, the ongoing support from central banks raises questions regarding the sustainability of these trends.

The M2 money supply in the United States is nearing all-time highs, which correlates with unprecedented financial asset performance. The expansionary monetary policies implemented by the Federal Reserve and other global central banks have been pivotal in driving asset prices higher. In August 2023, the M2 money supply increased almost 1%, coinciding with a reduction in interest rates by 50 basis points from the Fed, with expectations for another cut in November. This monetary easing, particularly by the United States and China, has significantly affected markets, leading to cryptocurrencies leading in asset performance following the recent Federal Open Market Committee (FOMC) meeting. As of late September, financial assets reached record highs, with the S&P 500 and gold achieving remarkable valuations, reflecting a strong correlation with the M2 money supply, which has experienced a compound annual growth rate (CAGR) of 7% over the past five years. Notably, on September 24, the S&P 500 hit an unprecedented 5,735 points, while gold surged to $2,670 per ounce, marking a 30% increase for gold year-to-date. The rising liquidity and money supply are core factors behind these continual rallies, as evidenced by the combined balance sheets of leading central banks surpassing $31 trillion, indicating a substantial influx of liquidity into global markets since July. Moreover, the M2 money supply, which encompasses currency in circulation and various deposits, has grown consistently since February, with significant month-on-month increases illustrating ongoing monetary expansion. Historical analysis reveals a strong link between the M2 money supply and the S&P 500. For instance, during the early pandemic in 2020, the M2 supply and S&P 500 progressed in tandem from significant lows. Although both M2 and the S&P 500 have shown impressive growth, Bitcoin, with a CAGR of 50% over the same period, highlights its rising status within the asset class. In sum, expansionary policies by central banks are crucial in driving asset price appreciation across various markets. As liquidity remains a key performer in the economy, continued support from central banks may further boost financial markets, although the sustainability of this upward trend warrants careful scrutiny.

The article examines the recent surge in the U.S. M2 money supply alongside record-level asset prices, particularly focusing on how central bank policies have influenced liquidity in financial markets. The M2 measure includes all physical currency in circulation, savings and time deposits, as well as money market accounts. As central banks, notably the Federal Reserve and the People’s Bank of China, have engaged in aggressive monetary easing, including interest rate cuts, this has led to notable appreciation in various asset classes, especially equities and cryptocurrencies. The backdrop of this analysis showcases the interrelationship between monetary policy and asset performance in a fluctuating economic environment.

In conclusion, the increase in the M2 money supply is closely intertwined with the performance of financial assets such as the S&P 500 and gold, which have reached record highs due to liquidity injections from central banks. The consistent monetary easing combined with a substantial growth in the money supply indicates that these economic measures play a vital role in driving asset valuations. While current trends suggest continued upward momentum in financial markets, it remains essential to monitor the sustainability of such growth amidst ongoing central bank interventions.

Original Source: www.coindesk.com