M2 Money Supply Contracts: What That May Mean for Recession

You’ve probably heard of the term “M2,” which is often mentioned in discussions about the U.S. money supply.

M2 represents all the cash and coins in circulation, demand deposits in checking accounts, money market accounts, savings accounts, certificates of deposits below $100,000 and retail money market mutual funds.

M2 has been doing something which is quite rare — contracting.

Our May Elliott Wave Financial Forecast called attention to this with this chart and commentary:

The recently falling M2 has now joined some illustrious bear market company. The decline of 1878 marked the end of an economic disruption historians refer to as the “Long Depression.” The years 1893-1896, 1920-1921 and, most notoriously, 1932, were all accompanied by economic depression and deflation. While 1921 and 1932 marked the bottom of their respective economic contractions, 1893 was just the beginning of one. So, a decline in M2 has attended the beginning of a credit crisis before.

“Credit crisis” — as in, reduced ability to borrow money, a vital function for the U.S. economy. Indeed, here’s an August 2 news item from Inc.com:

Why Banks Keep Tightening Lending Standards for Small Businesses

A quarterly survey from the Federal Reserve shows the loan environment continues to be tough for entrepreneurs and will only get worse.

Consumers are also affected by this tighter credit environment. Here’s another headline (Car and Driver, July 29):

Car Loans Tougher to Get, More People Getting Rejected by Lenders

Even as the money supply contracts, there’s a widespread narrative that the economy will be just fine. As this Yahoo! Finance headline notes (August 2):

Bank of America now says the U.S. will avoid a recession and achieve a soft landing.

The opinion of those at the second-largest bank in the U.S. might turn out to be correct.

On the other hand, if you read our just-published Elliott Wave Financial Forecast, you’ll get an independent perspective on the economy that may prove to be very useful to you.

Learn more by following the link below.