Pick One: The Fed’s Tightening and M2’s Exploding
A record money supply in the middle of a supposed contraction.
Liquidity is supposed to be draining. Instead, it keeps refilling the pool.
End of quarter, risk desks go quiet, phones keep buzzing, and smaller accounts funnel cash into money market funds with yields that actually matter again. Across town, quantitative tightening keeps rolling off assets by schedule. The money stock still swells.
The system routes around the pipes.
M2 is not mystical. M1 buys groceries. M2 adds the parking lots—savings accounts, small time deposits, retail money funds. That is where fear parks itself. The more fear, the bigger the lot.
Definitions shifted in May 2020, when other liquid deposits were folded into M1, which smudges the long look-back. The basic picture holds anyway. The parking lot expanded fast, and it never truly emptied. Cash didn’t sprint into checkout lines. Velocity sagged.
A surreal round-trip followed. In 2020 and 2021, M2 exploded roughly 27 percent year over year, a burst that dwarfed the financial crisis. Then came the first negative year-over-year readings since 1959. Now a new peak landed in October 2025, with $22.24 trillion sitting in the system while QT was still on.
Official doctrine says QT shrinks liquidity and cools prices. Reality says private flows into savings and retail money funds can outrun the drain.
You don’t tighten your way out of a $22 trillion cash hoard.
Numbers & facts:
• $22.2437T: Weekly M2 all-time high, early Oct 2025.
• +27%: M2 growth at the 2020–21 surge; first negative Y/Y since 1959 during 2022–24 contraction.
• 4.3% vs. 4.5%: M2 growth roughly tracked nominal GDP in the year to June 2025—stabilization after the whipsaw.
• 911,000: Payrolls revised down (Apr 2024–Mar 2025). Private-sector core? Weak; government-linked sectors carried the totals.
• –71%: Collapse in the money multiplier 2007–2013—why traditional monetarist plumbing keeps misfiring.
The bull market in 2025 did not wait for a CPI print. Liquidity went hunting for returns. Tech and anything draped in AI stories took the bid. Wealth prices lifted first. Paychecks did not.
Then comes the respectable objection, and it deserves to be heard:
“M2 does not matter anymore.”
The money multiplier snapped after 2008. Banks parked reserves. Velocity cratered. The Fed stopped targeting aggregates because the link to inflation turned unreliable. In a liquidity trap, more cash is just ballast.
Good argument. It also leaves out the sequence just witnessed.
The post-2020 money bulge preceded the inflation wave. Not one-to-one, not clockwork, but enough to matter. If velocity stirs even modestly from the floor, stored fuel meets a live spark. That is the risk being priced, whether officials acknowledge it or not.
The labor market optics were juiced by public and quasi-public hiring while private payrolls lagged. Pair that with a record M2 and the picture does not scream strength. It looks like a defensive crouch. Households hoarded yield. Markets read the room and front-ran the next rescue.
It requires admitting incentives.
High, sticky M2 and stop-start tightening breed moral hazard. Debtors benefit. Savers subsidize. Asset prices get triaged long before real wages. That is the hierarchy.