The hypertrophy of the M2 monetary aggregate in the United States is considerable: more than $5 trillion of unearned money was still unduly in the accounts of Americans at the end of April 2025… This is unmanageable and lethal!
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As a reminder, sound money is the first pillar of Reaganomics, according to Arthur Laffer, which means that the ratios of monetary aggregates to current annual GDP (as a percentage) must not exceed certain limits derived from observing their evolution since the post-war period in the United States.
As a reminder, the total money supply of a nation, known as M3, is the result of three monetary aggregates…
The monetary aggregate M1 is the sum of the positive balances of current accounts and banknotes, and this M1/GDP ratio (as a percentage) must not exceed 15% of GDP.
The M2 monetary aggregate consists of the sum of the M1 aggregates and the M2-M1 aggregate, which includes deposits in savings accounts. It must be less than 40% of GDP.
Finally, the M3-M2 aggregate corresponds to the total cash holdings of companies and their equivalent in money market funds. It must represent less than 25% of GDP.
Document 1:
Thus, the total money supply M3 of a nation must not exceed 80% of GDP.
However, this M3/GDP ratio has been exceeded since the end of July 2007, with a historic peak of over 120% at the end of June 2020, because the authorities then banned Americans from working while giving them more than $6 trillion so that they could continue to live normally, which was obviously a historic mistake (and manipulation of public opinion).
Document 2:
Small problem: the Fed has not published M3 money supply figures since Ben Bernanke took over as chairman in early February 2006, but I have managed to reconstruct them, represented here by M3r with an r for reconstructed, see my articles on this subject.
Only M2 data is published monthly. The evolution of the M2/GDP ratio (as a percentage) is very similar to the previous one above.
Thus, the main rule is as follows: the M2 monetary aggregate must not exceed 55% of current annual GDP… but it stood at… 72% of GDP at the end of April, the latest figures published to date!
Document 3:
Corporate cash holdings are playing an increasingly important role (especially through deposits in money market funds), with the result that the two ratios are diverging more and more.
Document 4:
Below, we will only consider data for the M2 monetary aggregate, as it is published monthly…
Obviously, the M2 monetary aggregate jumped in 2020, but after a slight decline, the all-time high of $21,750 billion reached in April 2022 has been exceeded since the end of March, peaking at the end of April at $21,862 billion, the latest figures published to date!
Document 5:
A closer look at the evolution of the M2 aggregate since the beginning of 2019 shows that at the end of April, it broke its previous record high of $21,862.5 billion, which had been reached… the previous month!
Document 6:
Month-on-month variations in the M2 monetary aggregate have increased since the early 2000s, with extraordinary swings in both directions since 2020.
Document 7:
A closer look at the period from 2022 to the present shows that the M2 money supply is increasing month by month, with a clear upward trend, reaching $155.7 billion at the end of April, according to the latest figures published to date.
Document 8:
The big problem now facing the US authorities is how to burst this huge monetary bubble!
According to statements by Jerome Powell and other former and current members of the FOMC, the measure that previously made it possible to burst such a developing monetary bubble was (relatively) simple: all they had to do was raise the Fed’s base rate to the point of creating an inverted yield curve, which inevitably caused a recession of varying severity but sufficient to restore the right ratios.
However, this solution no longer works because the monetary bubble is too big!
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The velocity of money (velocity), measured using the M2 monetary aggregate, is the ratio between current annual GDP and this M2 monetary aggregate, i.e. the inverse of the ratio of M2 to GDP (as a percentage), see documents 1 and 2 above.
This concept is rarely used because it is difficult to understand. In fact, only the principle is relevant: the faster money circulates, the stronger the growth, and vice versa.
This velocity of money has been declining since a peak in 1997, plunging to a historic low in June 2020 because of those who created this coronavirus story!
Document 9:
Given these unusual monthly variations in the M2 monetary aggregate, its year-on-year variations are no longer significant.
Document 10:
The increase in banknotes in circulation after 2020 is significant but not catastrophic.
In fact, the hypertrophy of the money supply does not stem from the untimely use of the famous money printing press, but from the distribution of $4 trillion in the form of bank transfers to many Americans and some of their companies.
The share of these banknotes in circulation relative to GDP is marginal. It has returned to normal levels.
Document 11:
For information, here is the evolution of the total number of banknotes in circulation, most of which are actually outside the United States in hands that are not always very clean…
Document 12:
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An excessive money supply in a nation has the major disadvantage of being lethal in the long run, as it always causes a major and lasting crisis, cf. among others, Germany between the two world wars and Pierre Jovanovic’s book (in French) on this subject: Hitler ou la revanche de la planche à billets !
On the other hand, this same hypertrophy of the money supply has the advantage of providing banks with short-term liquidity that allows them to… continue their activities without going bankrupt!
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As a reminder, the analysis of monetary aggregates is the best solution for steering the evolution of a nation’s economy and therefore for understanding the mechanisms that drive it.
Ben Bernanke ended the weekly publication of monetary aggregate figures and the M3 monetary aggregate when he took over as head of the Fed, and Jerome Powell changed the definition of the M1 monetary aggregate, publishing only monthly figures for M2, which remain the only reliable data on this subject.
Ben Bernanke and Jerome Powell have therefore done everything they could to mislead all monetary analysts.
Their desire to stop publishing all useful monetary aggregate figures on the grounds that they are not important means that they are so important that they refuse to share them with the general public!
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Ronald Reagan, who was in contact with Milton Friedman, had a good understanding of monetary policy and surrounded himself with competent advisors, the Reaganomics team, who were instrumental in the success of his economic policy, which brought about a lasting recovery in the US economy.
This is not the case with Donald Trump.
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Click here to read my previous article on this subject, in French.
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