What is M2 and how is it related to the markets?

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## Important Aspects- M2 measures the money supply in the economy. It includes cash and money in checking accounts.- Also covers less used but quickly accessible money. Savings accounts. Money market funds.- It is a key indicator. It seems that without it, economists and politicians would be somewhat blind to the availability of money.## What is M2 ( money supply )?M2 measures how much money is circulating out there. It includes the very liquid: cash and checking accounts (M1). It also includes the less liquid: savings accounts, deposits, and money market funds.Important people are constantly watching it. Economists. Officials. Investors. A lot of money circulating usually means more spending. Little money, less spending. Simple logic.## What composes the M2?The Fed makes calculations. It uses various ingredients. It is not an exact science, I would say.### 1. Cash and checking accounts (M1)The basics:- Physical bills and coins.- Money in accounts for daily expenses.- Traveler&#39;s checks. Almost nobody uses them anymore, but they are still on the list.- Other checking accounts. They are used with cards or checks.### 2. Savings accountsWhere you keep what you no longer need. They earn interest, yes. There are restrictions. You can&#39;t always withdraw whenever you want.### 3. Fixed-term depositsThe famous CDs. You leave your money idle for a while. The bank pays you for that. Usually less than 100,000 dollars. Nothing out of the ordinary.### 4. Money Market FundsSafe investments. Short term. Better return than normal savings. They have their rules. Not everything is perfect.## How does M2 work?Reflects the available money. M2 rises: there is more money. People save more. They take out more loans. They earn more. They buy more things. They invest more.M2 decreases: less circulation. The economy cools down. Companies earn less. Unemployment rises. That&#39;s how things are.## What does the M2 change?### 1. Central banksThey play with the rates. They set rules. The Fed lowers rates: cheaper loans. More people asking for money. M2 grows.### 2. Government expenditureThe government distributes checks: M2 rises. Cuts spending: M2 falls. Quite straightforward.### 3. Bank loansMore loans: money is created. M2 increases. Fewer loans: M2 grows slowly or falls. This is how the system works, interestingly.### 4. Human behaviorPeople decide to save more. Money stays still. M2 grows more slowly. It&#39;s not that complicated.## M2 and inflationMore available money means more spending. If the economy does not produce enough to satisfy that spending, prices rise. Inflation.M2 stops growing: inflation could decrease. But if it falls too much, we could have a recession. It&#39;s a delicate balance.Those in charge are watching it. M2 is growing a lot: rates rise. M2 falls: rates drop. A continuous dance.## How M2 Influences Financial MarketsIt affects everything. Crypto. Stocks. Bonds. Rates. Everything.### CryptocurrenciesM2 rises, low rates: people seek returns in crypto. Prices go up. M2 contracts: flight from risk. Crypto drops. It has happened several times already.### SharesSimilar to crypto. M2 rises: more money to invest. Markets go up. M2 falls: markets likely drop.### Bond marketBonds are "safe". M2 is growing: investors are looking for something reliable. M2 is declining: bonds also suffer. It&#39;s not as safe as it seems.### Interest ratesThey go the opposite of M2. M2 rises a lot: rates up to cool down. M2 drops: rates down to stimulate. A strange dance.## A real example: COVID-19 and M2During COVID, stimulus checks. More unemployment. Fed lowered rates. M2 skyrocketed.Early 2021: M2 rose 27%. A record. In 2022, the Fed raised rates. M2 slowed down. It turned negative by the end of the year. A sign of cooling. Perhaps less inflation.## Why M2 MattersSimple yet powerful tool. Rapid growth: possible inflation. Decline: possible recession.The powerful use it to decide. Rates. Taxes. Expenses. Investors look at it to guess the future of the market.## ConclusionsM2 is not just a number. It shows the money available in the system. It includes the everyday and the most liquid.Looking at it helps us understand the economic direction. It grows fast: more jobs, more spending, high prices. It grows slowly: controlled inflation but slower business.It&#39;s complicated and simple at the same time. Like the economy itself.