The US money supply has truly reached a historic level. According to the latest Fed data, M2 surged to $23.05 trillion in May, and on a weekly basis, it touched $23.06 trillion at the beginning of June. This is the highest reading ever, surpassing even the peak seen during the pandemic.

What's particularly interesting is that this increase is happening while the Fed's official rhetoric still emphasizes tight monetary policy. Interest rates are hovering near two-decade-highs, while the money supply continues to quietly expand in the background. Since 2020, growth has approached approximately forty-seven percent, with around seven trillion dollars of liquidity entering the system in six years. This creates a striking discrepancy between rhetoric and reality.

Several components stand out when looking at where this growth is coming from. Demand deposits have increased by nearly nine percent year-on-year, while money market funds present an even more striking picture. Retail money market fund assets have reached record levels, growing by approximately forty-seven percent since the end of 2022. A significant portion of this growth is concentrated in just five major asset managers – Fidelity, Schwab, JP Morgan, Vanguard, and BlackRock – meaning the abundance of liquidity is not evenly distributed, but clustered among large institutional players.

The implications of this for the markets are quite clear. Excess liquidity entering the system through the expanding money supply, federal budget deficit spending, and Treasury bond issuance continues to flow into speculative assets and equities. This partly explains why risk assets continue to climb to record levels despite recession fears, high Treasury yields, and sticky inflation. The total market capitalization of technology giants has exceeded twenty-three trillion dollars, and Bitcoin and other risk assets also appear to have benefited from this liquidity wave.

Of course, this kind of expansion also carries its own risks. Liquidity-driven rallies can become fragile when valuations significantly outpace earnings growth. The higher prices rise, the more dependent the market becomes on sustained money supply expansion, increasing the risk of a sharp correction when the liquidity tap is tightened. Some economists compare this to patterns seen during the dot-com bubble and the housing bubble, employing a similar, though not identical, dynamic: liquidity quietly expanding under tight policy rhetoric.

A similar picture emerges globally. The global M2 total, encompassing the US, Eurozone, China, and Japan, has reached $101.8 trillion, but the growth rate varies from country to country. Japan is experiencing significantly above-average expansion, while growth in China is relatively slower. For those tracking risk assets through Gate, the key point is that as long as this abundance of liquidity continues, it seems logical for both equity and crypto markets to continue their upward trend. However, the fact that such a rally is based more on money supply expansion than earnings growth serves as a warning about how fragile markets can be when liquidity conditions change.

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