Huge recession coming. A tide of inflation is coming again. As opposite as night and day.
Every day I talk to investors, and what I hear sounds like investor sentiment is equally divided between those who think the sky will soon fall, and others who are waiting for inflation to drive up their real estate even more than their stock portfolio.
This had me thinking about the indicators we can look for to understand where the waves of our economy are pulling. The M2 money supply is one such indicator.
Straight from the stats of the Federal Reserve Bank of St. Louis: in 2000, M2 money supply was $4.68 trillion. By 2025 it had grown to $22.32 trillion — a 4.76x increase over 25 years. In contrast, the U.S. population grew by only 17% over the same period.
So if our money supply has increased almost 5x in the past 25 years, what does this mean for our monetary value going forward?
What Is M2 Money Supply (In Plain English)?
If you are like me, maybe you didn’t get an MBA in finance and needed to brush up on what M2 supply is. M2 is a broad measure of how much money is available in the economy and ready to be spent or invested.
It includes:
- Physical cash and coins
- Checking account balances
- Savings accounts
- Money market funds
- Small time deposits (like CDs)
Think of M2 as money that can move. It’s not locked away in long-term instruments or obscure balance sheets — it’s money that households, businesses, and investors can deploy fairly quickly.
How M2 Actually Grows (or Shrinks)
M2 doesn’t grow by accident. It expands and contracts primarily through monetary policy and banking activity.
1. Central Bank Policy
When the Federal Reserve lowers interest rates or buys assets (like Treasury bonds), it injects liquidity into the banking system. Banks suddenly have more capacity, and incentive, to lend. In periods when the Fed has expanded its balance sheet dramatically, pushing more money into the system, dramatic inflation has tended to follow.
2. Bank Lending
Every time a bank makes a loan, new money is effectively created. That mortgage, construction loan, or credit line didn’t exist before — it does now.
3. Government Spending
Deficit spending puts money directly into the economy. Stimulus checks, infrastructure spending, and subsidies all increase M2. When rates rise, lending slows, and government spending tightens because of increased debt payments, M2 growth stalls, or even reverses.
Bottom line: M2 expands when borrowing is easy and contracts when borrowing becomes expensive.
A Note on AI
It was interesting to note in researching this that there were several periods when the money supply increased but inflation remained low. This was true in the 1880s, during great advancements like the lightbulb, the combustion engine, and electrification. In a similar vein, in the 1990s, as the internet gained prominence and transformed our world, a deflationary period in wages followed.
Could an AI-driven productivity wave lead to a similar increase in productivity, making our lives wealthier (with more money) but without sparking inflation, because of downward pressure on wages? It’s a question worth watching.
Why Investors Should Care About M2
Real estate is a capital-intensive asset class. It thrives when money is plentiful and struggles when liquidity dries up.
Historically, periods of strong M2 growth have aligned with rising asset prices, easier refinancing, cap rate compression, and increased transaction volume. Periods of flat or declining M2 tend to bring higher cap rates, slower deal flow, price discovery and volatility, and distress among over-levered owners.
You can track the money supply through the Fed’s website at fred.stlouisfed.org/series/M2SL.
How M2 Filters Into Real Estate Markets
M2 doesn’t flow evenly across the economy. It tends to hit financial assets first, then move outward. The typical progression: stocks and bonds reprice, institutional real estate absorbs capital, private real estate follows, and rents and property values adjust.
That’s why real estate cycles often lag financial markets, but once capital arrives, pricing can move quickly. For commercial real estate specifically, multifamily tends to benefit early due to income stability, industrial follows via business expansion, retail responds as consumer spending rises, and office is usually last and most sensitive to tightening.
Conclusion
When the Federal Reserve is actively putting liquidity into the market, it tends to put upward pressure on inflation in the following period. The open question worth watching is whether an AI-driven productivity boom could produce another unusual shift in that relationship, the way the internet and earlier technological revolutions once did.
Many clients we work with are forward-thinking and benefit from our resources to think outside the box and understand the dynamics around our economy. If you are looking to make portfolio moves, contact us to schedule a strategy session.
