Smart Money Concepts: How Institutions Trade During Money Supply Changes
Learn how banks and institutions position themselves when central banks adjust monetary policy.
Money Supply Explained: Understanding M1, M2, M3 and How They Drive Markets in 2025
Table of Contents
- Introduction
- What is Money Supply?
- Why Money Supply Matters: From Crypto to Groceries
- Money Supply Types: M0 → M1 → M2 → M3 Explained
- Why M2 Money Supply Is the Most Important
- BEST Money Supply Tools (TradingView & FRED)
- M2 Chart Analysis: US & China M2 at Record Highs
- Advanced Money Supply Trading Strategies
- Practical Applications for Investors and Traders
- Common Mistakes to Avoid
- FAQ
- Quiz
- Conclusion
Key Takeaways
-
The Federal Reserve increased money supply by 40% in just 2 years, representing 40% of all money ever created, which has profound implications for inflation and asset prices
-
M2 money supply is the most important metric to track, representing the perfect balance between liquidity and economic impact for predicting market movements
-
Money supply categories build on each other: M0 (base money) → M1 (spendable money) → M2 (+ savings) → M3 (+ institutional) → M4 (broadest measure)
-
Both US and Chinese M2 are at record highs, which is extremely bullish for stocks, cryptocurrency, real estate, and commodities
-
TradingView and FRED are the best tools for tracking money supply, with TradingView offering superior charting and multi-country comparison capabilities
Did you know that the Federal Reserve increased the money supply by 40% in just 2 years? That's 40% of all the money ever created in just 2 years. And if you're trading or investing without understanding M1, M2, M3 money supply, you're doing it blind.
In this comprehensive guide, I'll show you exactly what money supply is, how it drives markets, and how it can help you make informed investment decisions. Whether you're tracking cryptocurrency movements, stock market trends, or simply trying to understand why your groceries cost more, understanding money supply is crucial.
Introduction
The money supply is one of the most critical yet overlooked metrics in economics and investing. It affects everything from the price of Bitcoin to your morning coffee, yet most traders and investors don't fully grasp its importance. As someone who's spent years analyzing market trends, I've found that tracking money supply can provide incredible insights into market movements before they happen.
In this article, we'll dive deep into the different types of money supply measurements—M0, M1, M2, M3, and M4—and explore how each impacts your investments. You'll learn why central banks track these metrics, how to monitor them yourself, and most importantly, how to use this knowledge to potentially improve your trading and investment strategies.
What is Money Supply?
What is Money Supply in Economics?
In simple terms, money supply refers to the total amount of money available in the economy at a given time. But here's where it gets interesting—we have many different measurements of money supply, and understanding these distinctions is crucial for any serious investor or trader.
The money supply includes:
Physical cash and coins in circulation
Digital money in various types of bank accounts
Bank reserves held at central banks
Other financial instruments that can be quickly converted to cash
It's worth noting that in many developed countries, physical cash is becoming less relevant. Here in Sweden, where I live, people barely use cash and coins anymore—pretty much all money is digital. This shift makes understanding broader money supply measurements even more critical.
Money supply is tracked by central banks like:
The Federal Reserve (United States)
The ECB (European Central Bank)
Bank of England (United Kingdom)
Bank of Japan (Japan)
These institutions monitor money supply to help measure how much money people and businesses can use, which affects everything from stock prices to cryptocurrency valuations.
Why Money Supply Matters: From Crypto to Groceries
Why Money Supply Matters
Too Much Money
Result: Inflation
2020 Example: 40% money printing → Double-digit inflation
Too Little Money
Result: Deflation/Recession
Economic contraction risk
Money Supply Affects Everything
💰 Your Investments
- 📊 Stocks often rise
- ₿ Crypto surges
- 🥇 Gold responds
- 🏠 Real estate climbs
- 📑 Bond yields adjust
🛒 Daily Life
- 🥬 Grocery prices
- 🏡 Housing costs
- ⛽ Gas prices
- 💵 Wage growth
- 🏦 Savings rates
Track money supply and 200+ economic indicators with AI-powered insights
Get InvestingPro Save 70% TodayUnderstanding money supply isn't just academic—it has real-world implications for your wealth and daily expenses. Let me break down why this matters so much.
The Inflation Connection
When there's too much money in the system (rapid money supply growth), it often leads to inflation. During the 2020 COVID pandemic, central banks worldwide printed unprecedented amounts of money. I watched as the money supply charts went parabolic, and sure enough, when people started spending that money, inflation exploded into double digits—something we hadn't seen in decades.
The Deflation Risk
Conversely, when money supply shrinks too much, it can lead to deflation or even recession. This is why central banks carefully balance money supply—too much causes inflation, too little causes economic contraction.
Impact on Your Investments
Money supply directly affects:
Stock prices: More money in the system often drives stocks higher
Cryptocurrency: Bitcoin and other cryptos often surge when money supply expands
Gold and precious metals: Traditional inflation hedges that respond to money printing
Real estate: Property values typically rise with increased money supply
Bond yields: Interest rates often adjust based on money supply changes
Everyday Life Effects
Beyond investments, money supply impacts:
Grocery prices
Rent and housing costs
Gas prices
Wage growth
Savings account interest rates
This is why I consider money supply one of the most important metrics to follow, whether you're a professional trader or simply trying to protect your wealth.
Money Supply Types: M0 → M1 → M2 → M3 Explained
Now let's dive into the different categories of money supply. Understanding these distinctions is crucial because each tells us something different about the economy and market conditions.
How Money Supply Layers Build Upon Each Other
M0
Base Money
• Physical cash & coins
• Bank reserves at central bank
M1
M0 + Spendable Money
• Everything in M0
• Checking accounts
• Demand deposits
M2 ⭐
M1 + Near Money
• Everything in M1
• Savings accounts
• Small time deposits
• Money market funds
M3
M2 + Institutional Money
• Everything in M2
• Large time deposits
• Institutional funds
⭐ M2 is the most watched indicator - it balances liquidity with economic impact
Track all money supply types (M0, M1, M2, M3) for multiple countries in real-time
Monitor with TradingView Free 30-day trialThe Building Block System
Money supply is grouped into categories called M0, M1, M2, M3, and sometimes M4. Here's the key concept: each level includes everything from the previous level plus additional types of money. Think of it like Russian nesting dolls—M1 contains all of M0 plus more, M2 contains all of M1 plus more, and so on.
Higher numbers mean:
Broader definitions of money
Less liquidity (money that's harder to access quickly)
More comprehensive economic measurement
M0: Base Money
M0, also known as base money, represents the most liquid forms of money:
Physical cash and coins in circulation
Bank reserves held at the central bank
This is the foundation of all other money types. It's money you can spend immediately without any conversion or waiting period.
M1: Spendable Money
M1 includes everything in M0 plus:
Checking accounts (demand deposits)
Other easily spendable deposits
Traveler's checks (though these are nearly obsolete)
All money in M1 can be used for daily transactions immediately. This is the money available for buying groceries, paying bills, or any immediate purchase.
Why M2 Money Supply Is the Most Important
According to my analysis and that of many economists, M2 is the most important money supply measurement. Here's why:
What M2 Includes
M2 contains everything in M1 plus:
Savings accounts
Small time deposits (under $100,000)
Retail money market funds
Money market deposit accounts
The Perfect Balance
M2 represents the ideal balance between liquidity and economic impact. It captures money that's readily available for spending while also including funds that represent genuine savings and investment intentions. This makes it the most accurate predictor of:
Inflation trends
Economic growth
Asset price movements
Consumer spending patterns
Market Correlation
In my experience tracking markets, M2 growth has shown the strongest correlation with:
Stock market performance
Cryptocurrency bull runs
Real estate appreciation
Commodity price increases
When M2 expands rapidly, these assets typically follow suit. When M2 contracts or growth slows, markets often struggle.
M3: Institutional Money
M3 includes everything in M2 plus:
Large time deposits (over $100,000)
Institutional money market funds
Short-term repurchase agreements
Other larger, less liquid deposits
This money moves more slowly and represents institutional rather than consumer activity. While important, M3 is less directly connected to immediate economic activity.
M4: The Broadest Measure
M4 includes everything in M3 plus all other private sector bank deposits. This measurement is primarily used in the UK by the Bank of England and isn't tracked in the United States. It provides the most comprehensive view of money in the financial system but is often too broad for practical trading or investment decisions.
BEST Money Supply Tools (TradingView & FRED)
Now that you understand what money supply is and why it matters, let me show you the best tools I use to track these metrics.
Best Money Supply Tracking Tools
TradingView
Recommended
✓
Multi-country M2 overlay
✓
Real-time data updates
✓
Technical analysis tools
✓
Custom alerts
Quick Access:
Markets → Economy → Money
FRED
Official Data
✓
Direct Fed source
✓
Historical analysis
✓
Research-grade data
–
Basic interface
Website:
fred.stlouisfed.org
💡 Pro Tip: US and China M2 at record highs = Bullish for risk assets!
Start tracking money supply like a pro with advanced charting tools
Try TradingView Free 30-day Premium trialTradingView: My Primary Tool
TradingView is my go-to platform for tracking money supply alongside other market indicators. Here's how to access money supply data:
Go to TradingView.com
Click on "Markets" in the top menu
Select "Economy" from the dropdown
Choose "All Indicators"
Navigate to the "Money" section
What makes TradingView exceptional for money supply analysis:
Multi-country comparison: View multiple countries' M2 on one chart
Real-time updates: Get the latest data as it's released
Technical analysis tools: Apply indicators and trend lines to money supply charts
Custom alerts: Set notifications for significant changes
The M2 chart on TradingView is particularly useful because you can overlay different countries. Recently, I've been watching how both US and Chinese M2 are at record highs—extremely bullish for risk assets.
FRED: Direct from the Source
The Federal Reserve Economic Data (FRED) website provides direct access to official Federal Reserve data:
Website: fred.stlouisfed.org
Advantage: Official source data
Best for: Research and historical analysis
Limitation: Less user-friendly than TradingView
While FRED provides authoritative data, I prefer TradingView for day-to-day monitoring due to its superior interface and charting capabilities.
M2 Chart Analysis: US & China M2 at Record Highs
Let me share what I'm seeing in the current M2 charts that has significant implications for markets:
United States M2 Analysis
The US M2 (shown as the red line on TradingView) is at an all-time high. This is incredibly bullish for:
Stock market continuation
Cryptocurrency appreciation
Real estate values
Commodity prices
The sustained growth in M2 suggests the Fed's monetary policy remains accommodative despite rate adjustments.
China's M2 Explosion
What's even more remarkable is China's M2 growth—it has absolutely exploded recently. This massive increase in Chinese money supply could:
Support global growth
Drive commodity demand
Boost emerging markets
Create inflation pressures globally
Global Coordination
I'm noticing that many major economies show similar patterns—coordinated money supply expansion. This global liquidity surge typically precedes:
Asset price appreciation
Economic growth acceleration
Inflation pressure building
Currency devaluation races
Advanced Money Supply Trading Strategies
For those ready to incorporate money supply analysis into their trading and investment strategies, here are some advanced techniques I've developed:
Strategy 1: M2 Growth Rate Analysis
Don't just look at absolute M2 levels—track the growth rate:
Above 10% annual growth: Highly bullish for risk assets
5-10% growth: Normal, sustainable expansion
Below 5% growth: Caution for growth assets
Negative growth: Recession risk, favor defensive positions
Strategy 2: M2 Velocity Monitoring
Money velocity (how fast money circulates) combined with M2 levels provides powerful insights:
Rising M2 + Rising velocity = Inflation acceleration
Rising M2 + Falling velocity = Asset inflation without consumer inflation
Falling M2 + Any velocity = Deflationary pressure
Strategy 3: Cross-Country M2 Divergence
When one country's M2 grows faster than others:
Currency typically weakens
That country's assets may outperform
Look for capital flow opportunities
Strategy 4: M2 and Crypto Correlation
Bitcoin and cryptocurrencies show strong correlation with global M2:
Use M2 expansion as a leading indicator for crypto
M2 contraction often precedes crypto corrections
China's M2 particularly impacts crypto markets
Practical Applications for Investors and Traders
Here's how to apply money supply knowledge to your investment decisions:
Money Supply Trading Playbook
💎
Long-Term Investors
▸
M2 Rising: Increase risk assets
▸
Inflation hedge: Buy real assets
▸
Avoid: High M2 currencies
📈
Active Traders
▸
M2 confirms: Market trends
▸
Buy dips: During M2 growth
▸
Cut leverage: When M2 slows
₿
Crypto Traders
▸
BTC: Accumulate on M2 rise
▸
Alts: Follow rising M2 regions
▸
Exit: When M2 peaks
🔑 Golden Rule: M2 Expansion = Risk On | M2 Contraction = Risk Off
Trade crypto with confidence during M2 expansion cycles
Start Trading on Bybit Up to $30,000 in bonusesFor Long-Term Investors
Portfolio Allocation: Increase risk assets during M2 expansion phases
Inflation Hedging: Buy real assets when M2 growth accelerates
Currency Diversification: Avoid currencies with excessive M2 growth
Rebalancing Timing: Use M2 trends to time portfolio adjustments
For Active Traders
Trend Confirmation: Use M2 direction to confirm market trends
Sector Rotation: Favor growth sectors during M2 expansion
Risk Management: Reduce leverage when M2 growth slows
Entry Timing: Buy dips during sustained M2 growth
For Cryptocurrency Traders
Bitcoin Accumulation: Build positions during M2 expansion
Altcoin Selection: Choose projects in countries with rising M2
Exit Strategy: Consider profits when M2 growth peaks
Stablecoin Allocation: Increase during M2 contraction
Common Mistakes to Avoid
Through my experience, I've identified several mistakes traders make with money supply analysis:
Mistake 1: Ignoring Lag Effects
Money supply changes don't impact markets immediately. There's typically a 6-12 month lag between M2 changes and economic effects.
Mistake 2: Focusing Only on One Country
In our globalized economy, you must monitor major economies' money supply, not just your home country.
Mistake 3: Overlooking M2 Composition
Not all M2 growth is equal. Growth from savings is different from growth from stimulus.
Mistake 4: Missing Trend Changes
Small changes in M2 growth rate often precede major market shifts. Don't wait for dramatic moves.
Money Supply Frequently Asked Questions
FAQ
What is the difference between M1 and M2 money supply?
M1 includes the most liquid forms of money like cash, coins, and checking accounts that can be spent immediately. M2 includes everything in M1 plus savings accounts, small time deposits under $100,000, and retail money market funds. M2 is considered the most important measurement because it balances liquidity with economic impact.
How does money supply affect cryptocurrency prices?
When money supply increases rapidly, it typically leads to more capital flowing into risk assets like cryptocurrencies. This can drive crypto prices higher as investors seek assets that may outpace inflation. Conversely, when money supply contracts, it can lead to selling pressure on crypto as liquidity dries up in the market.
Why did the Federal Reserve increase money supply by 40% during COVID?
The Federal Reserve dramatically increased money supply during the 2020 COVID pandemic to prevent economic collapse. This emergency measure aimed to provide liquidity to markets, support businesses and individuals during lockdowns, and prevent a deflationary spiral. However, this later contributed to the high inflation rates seen in 2021-2023.
How can I track money supply changes in real-time?
You can track money supply using two main tools: TradingView's economy section (Markets → Economy → Money) provides visual charts comparing multiple countries' money supply. The Federal Reserve Economic Data (FRED) website offers direct access to official U.S. money supply data. Both tools are free and update regularly with the latest data.
What happens when money supply decreases?
When money supply decreases, it can lead to deflation and potentially trigger a recession. With less money circulating in the economy, spending typically declines, asset prices may fall, and economic growth can slow. This is why central banks carefully monitor and manage money supply to maintain economic stability.
Test Your Knowledge Money Supply Economics Knowledge
Test Your Money Supply Knowledge
Conclusion
Understanding money supply—particularly M2—is no longer optional for serious investors and traders. As we've seen, the Federal Reserve's 40% increase in money supply over just two years has profound implications for markets, inflation, and your wealth.
By monitoring M2 money supply using tools like TradingView and understanding how different monetary aggregates (M0, M1, M2, M3) impact markets, you can position yourself ahead of major market moves. Remember, money supply changes often lead market movements by 6-12 months, giving observant investors a significant edge.
The current environment of record-high M2 levels in both the US and China suggests continued support for risk assets, but also warns of potential inflation challenges ahead. Use this knowledge wisely, always considering money supply as one factor among many in your investment decisions.
Start tracking money supply today—your portfolio will thank you tomorrow.
Disclaimer: This content is for educational purposes only and should not be considered financial advice. Trading and investing involve substantial risk of loss. Always conduct your own research and consider your financial situation before making any investment decisions.
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