Money Supply Measures (U.S.)

Measure	What It Includes	Meaning	Usage in Investing/Markets
M0 (Monetary Base)	Physical currency in circulation + reserves held by banks at the Fed	The most liquid form of money; direct measure of cash and reserves.	Rarely used by investors directly, but sharp changes reflect Fed liquidity injections (QE, emergency lending).
M1	M0 + demand deposits (checking accounts) + other highly liquid deposits	“Transactions money” – what people can spend immediately.	Spikes indicate surging liquidity; contractions can signal tighter credit. Useful for spotting short-term monetary shocks.
M2	M1 + savings deposits + small time deposits (<$100k) + retail money market funds	Broader measure of household & business savings + liquidity.	Historically correlated with inflation and long-term market trends. Investors watch M2 growth for inflation/asset bubble signals.
M3 (Discontinued in U.S. 2006, but tracked by other countries/estimates)	M2 + large time deposits, institutional money market funds, repo agreements, Eurodollars	Captures very broad liquidity including institutional holdings.	More relevant globally (ECB publishes). Investors sometimes use proxies for U.S. M3.
Divisia Money Indexes (advanced)	Weighted measures of money supply that account for liquidity differences	More nuanced view than raw M1/M2.	Academic/hedge fund use; not common in retail trading.

How Investors Use Money Supply Data

Inflation gauge: Rapid M2 growth often precedes inflationary pressure (e.g., 2020–21 stimulus-driven surge).
Liquidity proxy: Expanding money supply supports asset prices (stocks, real estate, crypto); contraction can stress markets.
Macro cycles:
- Rising M2 with low velocity → deflationary trap (money not circulating).
- Rising M2 with rising velocity → inflationary/boom conditions.
Long-term investing: Helps gauge whether markets are in a liquidity-fueled rally vs. fundamentally driven.
Short-term trading: Not a direct trading signal, but context for Fed policy expectations (rate cuts/hikes).