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
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?
Related Posts
June 26, 2025: Unexpected Huge Negative Revisions to First-Quarter GDP and What it Means
The BEA revised GDP lower by 0.3 percentage points. The details are worse.
June 16, 2025: QCEW Report Shows Overstatement of Jobs by the BLS is Increasing
The discrepancy between QCEW and the BLS jobs report is rising.
June 17, 2025: Retail Sales Down Much More than Expected, Drop 0.9 Percent
Retail sales declined 0.9 percent led by autos down 3.5 percent.
July 3, 2025: The Rise in Continued Unemployment Claims Shows Difficulty in Finding a Job
If you lose a job, it is increasingly difficult to find one.
Much of that $10 gets exported.
Link: George Garvey:
Deposit Velocity and Its Significance (stlouisfed.org)
“Obviously, velocity of total deposits, including time deposits, is considerably lower than that computed for demand deposits alone. The precise difference between the two sets of ratios would depend on the relative share of time deposits in the total as well as on the respective turnover rates of the two types of deposits.”
DDs have double in ratio to TDs. Shadow stats labels this a “flight to liquidity”
Some people prefer the “devil theory” of inflation: It’s all “Peak Oil’s fault”, ”Peak Debt’s fault”, or the result of the “Stockpiling of Strategic Raw Materials/Industrial Metals” & Soaring Agriculture Produce. These approaches ignore the fact that the evidence of inflation is represented by “actual” prices in the marketplace
The “administered” prices (oligopoly, monopsony, and monopoly elements) would not be the “asked” prices, were they not “validated” by M*Vt (money X’s velocity), i.e., “validated” by the world’s Central Banks
There is only one instance when the money supply declined and we didn’t have a recession and that was 2021-2024. Maybe we shouldn’t count that one because there had previously been a big increase in M2. For the double recession in the early ’80’s, I wouldn’t call the money supply flat. The money supply decreased from 1978 – 1981. There is a lag effect which, at that time they said was 18 months. (I was following Milton Friedman at the time). So with the exception of the most recent M2 decline, which was a special situation, 100% of the declines in the money supply resulted in a recession. There are recessions that followed increases in the money supply because there are other causes of recessions.
Prof Spence Bradley Hall:1M SMA(10) M2. M2 is a sewer canal. When it’s
clogged waste products can cause stroke/heart attack. Pour liquidity in to keep the sewer canal slowing.
Engel is ignorant and arrogant.
Inflation causes Depression.
The dreaded big R recession affects the bloated equity class when inflation falters. They require big inflation to maintain their unearned ascendance.
As the depression engulfs more and more of the populace, some of the inflation is earmarked to maintain their hopefully peaceful existence.
Taken to extremity, this policy can result in massive shortages and possible unrest.
The entire economy could freeze up – with NO ONE spending a DIME and the FED would call it “fine.”
If we actually fell into a recession or worse a DEPRESSION – or even worse NUCLEAR ANNIHILATION – – the MSM and the FED would simply not mention it.
If it is not reported, it does not exist. The only way we find out now is in the news. People could look outside and see and entire City on fire and the Local news would be showing feel-good Kid-Kissing Stories.
The ONLY situation that cannot be papered over with lies is a TOTAL COLLAPSE, with everyone but the 100 Billionaires (they will go to their bunkers) and even then the Government would be lying about it as Transitory.
Let’s imagine that ALL loans were suddenly in default. Then, the Fed/BLS/GOVERNMENT would define defaults as “transitory” or some such bullshit.
I dared to question Lance Roberts the other day on his bullshit acceptance of the Inflation data (versus “realflation”) and he got downright nasty about it.
WHAT A WEAKLING.
Would you feel comfortable in a plane if the people in the cockpit were a team specialized in fidgeting with all the gauges and indicators to promote more desirable and stable values?
Do you feel safe with a driver who uses the brake & gas pedals simultaneously?
Do you think it’s a good idea during droughts to wet the streets using scarce water reserves because experience proves wet streets correlate with rain?
Welcome to the field of modern scientific economics !
Great points all. Our Government is now the CAUSE of all of this crockery!
Nobody understands money and central banking. Banks don’t lend deposits. All monetary savings originate within the system, not outside it. All monetary savings are lost to both consumption and investment period.
M2 is mud pie. Powell destroyed deposit classifications. Powell
“The connection between monetary aggregates and either growth or inflation was very strong for a long, long time, which ended about 40 years ago …. It was probably correct when it was written, but it’s been a different economy and a different financial system for some time.”
Nothing’s changed in over 100 years. The distributed lag effect of money flows, the volume and velocity of money, are mathematical constants.
Both the flash crashes in stocks 5/6/10 and the flash crash in bonds 10/15/14 was predicted 6 months in advance and within one day.
M2 is not the only thing to consider. We also need to understand what is happening to the velocity of money. it is easy to assume that velocity is constant, but during the early days of Covid, it fell like a rock.
Velocity is 100% totally proven useless.
Period!
Remember that in 1978 (when Vi fell, but Vt rose) all economist’s forecasts for inflation were drastically wrong. Put into perspective: There were 27 price forecasts by individuals & 9 by econometric models for the year 1978 (Business Week). The lowest (Gary Schilling, White Weld), the highest, (Freund, NY, Stock Exch) & (Sprinkel, Harris Trust & Sav.).
The range CPI, 4.9 – 6.5 percent. For the Econometric models, low (Wharton, U. of Penn) 5.7%; high, 6.6% U. of Ga.). For 1978 inflation based upon the CPI figure was 9.018% [and Leland Prichard, in his Money and Banking class, predicted 9%].
See: G.6 Debits and Deposit Turnover at Commercial Banks
bit.ly/2pjr81u
Vi is a “residual calculation – not a real physical observable and measurable statistic.” I.e., income velocity, Vi, is endogenously derived and therefore contrived (N-gDp divided by M).
Income velocity has moved in the opposite direction as the transaction’s velocity of money.
Income velocity is a contrived figure (fabricated); it’s the transactions velocity (bank debits – Vt) that’s statistically significant (i.e., financial transactions are not random).
However, the G.6: Debit and Demand Deposit Turnover (longest running Federal Reserve statistical release up to that point), was discontinued in Sept. 1996 (money physically exchanging counter-parities within the payment’s system).
The excessive increase in the primary money stock combined with a sharp rise in the transactions velocity of money (commercial bank demand deposit turnover) was responsible for high rates of chronic inflation (the Great Inflation). This in turn was wholly the cause of century highs in market clearing interest rates.
During the decade before 1965 the annual compounded rate of increase in our means-of-payment money supply was about 2 per cent. During the same period, the annual transactions velocity of money increased from c. 21 to 31. In ten in-year period since 1964, the money stock grew at an annual compounded rate of c. 6.5 percent and the transactions velocity of money reached an average level of 70 in 1973.
Velocity continued to increase to over 80 during 1974. Both money and velocity figures were taken directly from the Federal Reserve Bulletin. The impact of both an accelerated increase in the volume and velocity of money on prices is made even more evident if the rate of increase in aggregate monetary demand (money time’s velocity) is examined.
During the decade ending in 1964, money flows increased at an annual compounded rate of about 6 percent. In the nine years since 1964, the increase was more than 13 per cent, and in 1972-73, nearly 30 percent.
Because R-gDp and presumably, the volume of goods and services offered in the markets, was increasing at a rate of less than 5 per cent, it should have been no surprise that there was an intensification of our chronic rates of inflation to devastating levels.
The scariest thing I read was: “The short answer is debt deflation. The value of credit on the books of banks was overstated”. Without taking the time to prove it, as if that was even possible, I think we are without question, in this situation with many, many banks. There is no way the books have been kept positive, or even remotely close, when you look at the Consumers books.
I still suggest we are and have been in a recession for quite sometime now, but it was simply papered over. Printed money hides a lot, until you actually need money again, and there is none left but printed, and the presses ran out of ink… I wonder how the populous on the whole, has been financially crippled over the past few ears. Borrowing on the uptick, and repayments on the down tick. Loans not being paid back, or just not being honored. Homes, Automobiles, Campers and the like. being repossessed regularly but not on their balance sheet perhaps. So they punt like the Government, fortunately they can’t print money, but play around with it they certainly can and do…
How do we account for and/or see if this is occurring once again?
No printing. JP legally got the money for an IOU. He gave it to Trump for an IOU.
Trump sent it the poor and the middle class. Since the econ was closed little was spend. JP raided again (short selling), piling IOU debt to the banks and new gov IOU debt to the Fed. It produced a huge flood of money to spend, And a flood of gov debt. JP drained liquidity about a year before raising rates. During QT RRP poured in reducing QT effect. It produced QE !
Ben Bernanke plan to save the banks became law in Oct 2006 effective in 2010. Congress rushed it in Oct 2008. Mr. Bazooka poured $800B to the banks.
Yellen became the most powerful woman in the world. Before Oct 2008 the Fed only controlled the front end. Since Oct 2008 Yellen controlled the long duration. She suppressed mortgage rates to prevent RE collapse. That produced a RE bubble. It’s fading. In order to prevent recession we got another liquidity booster on July 4th.
So in essence the Banks are playing with borrowed money (IOU) and on borrowed time. Seems like the last time we did this…
So who makes up for the catastrophe on the way? Where and How do Banks borrow more money to lend and pay back what was already lent and not paid back? Sees to me we are in a quagmire of sorts.
I guess the Taxpayers will have to loan Trillions more to the banks or the Government will have to print it. Will any Banks be forced to close, or free to party on like last time, which is probably why we are here again in the first place.
Looks to me like the Banks are the problem now, and the Government is simply an arm of the Banks now as well.
The banks are fine. $18.3T are deposited in the banks. They stalled. Between Feb 2020 and May 2022 deposits increased from $13T to $18.1T. They dropped in 2023 by $1T during SLV bank run. No more banks run. People and businesses trust the banks. Currently the banks have $18.3 in cash to invest. With $18.3T the banks will finance the next expansion.
I hope you’re right, but I still have my doubts. I am looking at the numbers of just the people I know, that are in trouble. And it’s a decent % of Individuals.
It seems people are clinging on with the use of CC’s and other sorts of revolving credit. If you never tap it out, then you always have something to draw from. You just need to take time off now and again, with no spending, if that’s to continue. That is the dilemma I see.
Once you let that slip however, and tap it out, it’s nearly impossible to recapture that existence. It’s a precarious one at that, to begin with imo. I see a small % where this is occurring, and it’s picked up some speed. We shall see…
In 2008 and in 2020 JP raided bank accounts. In 2020 the econ was comatose. Liquidity amplified fast and built a tsunami of money. in Mar 2021 RRP sucked liquidity, before raising rates. While RRP was rising the Real M2 was falling. A drop in Real M2 usually indicate recession. There was no recession in 2023/2024, bc $2T of RRP was pouring in.
Yesterday BBB became a law. It might inject liquidity until the private sector takes over.
“The unsettling answer is that it takes an expansion of $10 in credit to produce $1 in GDP.”
I guess ~250 years really *is* the limit for how long a nation can last before it collapses.
depends on how much productivity can be squeeze out of the worker class too keep inflation down below 3% regardless (to some extent) of federal fiscal and monetary policies
DEPENDS on the empire. the eastern roman empire, the byzantines lasted 1000 years. their currency the Byzant was stable for 800 years. the American Empire as it currently is configured world wide has been this way since only 1865. i’m assuming we go the way of the ussr. the oligarchs will try and steal everything not nailed down…….and we’ll just bust up to our existing 50 states. i was in russia in 90s with a back bench seat at the tables in some of the oil company and gold company board rooms. it was quite interesting to observe. the young folks handled it, the over 40 crowd could not. i suspect the same in the crumbling evil empire of pax dumbfuckistan under our fearless leaders like biden and trump and mitch and chuckie…….
The only way to a sustainable economy is lowering prices. The only way to lower prices is to remove money from the money supply and regulate derivatives markets for commodities. Real estate will continue to become expensive as wealthy buy up assets. Trump is trying to kill off as many lower class folks as possible in order to make a permanent serf class that can only rent like they have in third world countries. There will be an economic boom at the high end that won’t trickle down. Killing those on Medicare and Medicaid will reduce government spending because it all means social security claims will go down. The US is increasingly looking like the British Empire did in a previous era.
I grew up in an era with no Medicare or Medicaid. Poor people weren’t dropping dead to my right and left. There were very few illegitimate children and people survived about as long as they do today. Despite all the free health care American men still die at an average of 73 (per the CDC).
the people when you were young expended huge amounts of calories and used their muscles to do mundane things like laundry and daily work. i think that was the cause of general health. in 2025 our people pay money to go lift weights as our lives are sedentary and quite bountiful, with much poison in our junk food diets…….
The average life expectancy in the United States is currently around 78.4 years. This figure represents a combined average for both males and females. Individual life expectancy can vary, with females typically living longer than males. For instance, in 2023, the average life expectancy for males was 75.8 years, while for females it was 81.1 years.
Are those numbers for those currently alive or for that “child born today?”
If you look at the chart of real M2 carefully, you do see that each recession (excluding the one caused by the Faucian dystopia) was preceded immediately by a negative real M2 period. And there is a logic to this.
However, the grotesqueness of the money creation from 2020-21 was so extreme, that the gradual reductions from the Monetary Base [bizarrely called QUANTITATIVE tightening] have left us with real M2 well-elevated above it 2019. The QT has not really produced tight money.
Add to that the effect of the Fed govt creating new debt (esp. short term I think) at a rate of 7% of GDP. In the very short run, that Keynesian stimulus thing might have some effect.
To wit, real M2 is generally a good indicator, but we are in an unusual time.
in all sincerity, I’d really just like to understand better how this all works with zero reserve requirements today.
Mish, it was the FASB (Financial Accounting Standards Board) that erased mark-to-market in 2009, not the Federal Reserve. The FASB is supposedly independent.
Re “no way to use my definitions because the Fed suspended mark-to-market accounting in March of 2009”
Mish knows that
FASB was under pressure from Congress to do that or Congress would legislate them out of business.
Not sure how you can have any recession of any type if you are about to borrow $5 trillion and inject it into any economy via govt. spending.
The ultra wealthy will hoover it up before anybody else lays a finger on it. Good time to be in the yacht or jackbooted thug industries.
It actually flows through the entire economy but ends up settling in the hands of the wealthy. The reason is that they own all the capital productive assets so they are the only ones who can capture it.
The amount of tax cuts signed into law today is flabbergasting.
I don’t see how the BBB doesn’t turbo charge the economy.
All Trump has to do is TACO a few more times on tariffs, and then we’re off to the races in early 2026.
I wonder how many months it will be before the CME Group starts tracking the odds of a rate increase?
Thank you – much to think about.
Originally it didn’t take any “loose money” or “easy credit” to grow the GDP. The question posed by Mish leads to another question, = “Is that still true, or have we reached max possible prosperity?” And that leads to more questions like “If the economy is no longer capable of growing, then don’t we have to engage in redistribution to improve each individual’s economic condition, collectively?
Interesting analysis.