CandleFocus

M2

Candlefocus Editor

M2 is a widely used measure of the money supply in the economy that includes cash, checking deposits, savings deposits, CDs, and other assets that are easily convertible to cash. The M2 money supply is important for central banks and governments to monitor because it provides a fairly reliable indicator of consumer spending, economic growth, and inflation. The weekly M2 number is closely monitored as it provides an indication of how the current monetary policy is impacting the economy.

Although M2 provides a strong indication of the money supply, it does not capture the full picture of the economy. The M2 number does not include large institutional cash deposits, or gold, which is a store of value, but not a currency. To capture these components, the M3, or “broad money” measure is used by central banks. The M3 includes M2 plus large institutional deposits and repurchasable assets such as certain government bonds. The M3 is generally reported quarterly.

The M2 and M3 money measures are important for central banks to use for keeping tabs on an economy. To ensure a stable currency and avoid runaway inflation, it is important for the money supply to remain steady and in good balance with the level of output. Too-fast growth in the money supply numbers can be a warning sign that the economy may be overheating and can lead to an increase in inflationary pressures. Similarly, a slow growth in the money supply can indicate an upcoming economic recession. Analysing the M2 and M3 money measures can provide valuable insights into the economic cycle, and help in the development of sound and effective economic policies.

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