M2: Unveiling Economic Liquidity

As an ordinary worker in an economy, I have always been curious about the term "M2". Isn't it just a combination of numbers and letters? Why do major economic media always talk about it? It was only later that I slowly understood that this thing is intricately related to my Wallet, investments, and even the future.

M2, in simple terms, refers to how much money is circulating in the economy. It includes the cash in my pocket, the money in my bank account that can be withdrawn at any time, as well as those things that are in fixed deposits or money market funds that are not so easily accessible but still count as "money".

Economists and government officials observe changes in M2 to assess the health of the economy, much like a doctor looks at a thermometer. When there is more money, people tend to spend more, and the economy may be active; when there is less money, consumption declines, and the economy may shrink.

What does M2 include?

1. Cash and demand deposits (M1): This is the most basic part, including the paper money and coins we usually carry in our pockets, as well as the money in our bank cards that can be used at any time.

2. Savings Account: These are bank accounts that can earn some interest, but have some restrictions on withdrawals.

3. Time Deposit: Money deposited in the bank for a fixed term in exchange for a fixed interest.

4. Money Market Fund: This type of investment offers a higher return than savings account interest, but there are some restrictions when using the money.

When M2 increases, there is more money in circulation, and people may be more willing to consume and invest; conversely, consumption may decrease and the economy may cool down.

What is manipulating M2?

To be honest, the tricks played by the government and banks behind the scenes are the real key to affecting M2:

1. Central Bank Policy: Adjusting interest rates by the central bank is like adjusting a faucet. When interest rates are low, loans are cheap, and M2 flows out like a flood.

2. Government Spending: Government spending (such as various subsidies during the pandemic) directly increases M2. Conversely, raising taxes or reducing spending will decrease M2.

3. Bank Lending: The more generous the bank is, the more loans it issues, and the more money there is in the market.

4. Public Behavior: When everyone is reluctant to spend money, even if M2 digital currency is high, the money just quietly sits in the account.

M2 and Our Lives

When M2 grows too quickly, the risk of price increases arises. Think about global inflation after the pandemic; hasn't it always been due to a surge in M2? Conversely, if M2 shrinks, the economy may cool down or even go into recession.

The financial market is particularly sensitive to M2. For example, during the pandemic in 2020, M2 surged by nearly 27% in the United States, which was unprecedented in history. Asset prices skyrocketed accordingly. However, in 2022, the growth of M2 slowed down and even turned negative, leading to a cooling of the market.

It is worth noting that in the sensitive field of the cryptocurrency market, changes in M2 typically lead to more exaggerated reactions. During periods of easing, funds flow into risk assets; during tightening periods, investors quickly flee.

This seemingly dull economic indicator is actually a key clue for us to understand the direction of the economy. M2 is not perfect, but it can indeed help us anticipate the possible next steps of the economy.

So, the next time you hear economists talking about M2, don’t rush to doze off. This could directly relate to your job, investments, or even cost of living!