There are a few ways to measure money. M1 is a measure of narrow money. It basically measures currency and checking accounts, among other, less significant things. M2, which is a gauge of broad money, consists of currency and checking accounts, as before, but also includes savings and money market accounts. For ease sake, let’s say that M1 more closely represents money in the financial system and M2 is money that more closely represents the people of an economy.
As far as the graph above shows, M2, or broad money, has yet to show strength vs. M1. This could mean that money in the financial system is not easily making its way to those who spend. As constantly noted by the media, this has been a problem for a while now. For conditions to be so loose in a monetary sense, and money to be stuck in the system is an issue.
What’s unique in the graph above is that M2 tends to grow at a rate above M1 in the second half of an economic cycle. We have not seen that yet which could suggest we are not running nearly as hot as we should to warrant a recession. When M2 crosses M1, it may be a sign of true recovery.
Sources: St. Louis Fed