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Economy in Brief

World Liquidity
by Robert Brusca August 29, 2007

A look at global money and credit trends should be somewhat reassuring to those worried about the recent stock market downturn. Evidence shows that year/year money growth in countries/regions all around the globe had been quite plentiful coming into this period of financial market stress.

In the UK M4 growth has hovered at a 13% pace.

In the Euro area money supply has accelerated to over 11%.

In Japan money growth edged higher to 2.5%.

In the US growth had flattened at 6%.

Among major countries only the US shows a clear pattern of sequential growth rates becoming weaker (significantly weaker at that) as the pace of growth stepped down in its rate steadily from 3 years to 2 years, and from that to one year, then to six months and then to three months - with the three-month pace at just 3.6%. That is too low to fuel what has been strong nominal GDP growth in Q2 in the US (these figures are all through July 2007). But money generally acts with a lag on the real sector so it’s hard to blame the market problems on a slowing in money growth that occurs only in the US.

In the Euro area in particular, credit to residents and loan growth have remained strong and along with money (M2) have slightly accelerated through July despite some tepid steps by the ECB to hike rates.

On balance, there is no sense of there being deficient liquidity among this grouping of major global money centers. The liquidity problems markets now face are all of their own making, not due to the actions of the central banks.

The lesser ease of transactability is a function of the uncertainty over the value of some key assets in this system - that is far different from it being a quantity problem. There is no quantity problem. What there is, is a quality and an informational problem.

Until there is a way to clearly identify the troubled assets and to establish within reasonable grounds their true market value, markets and certain asset classes in particular – as well those who own them - will continue to suffer this liquidity problem of their own making. It’s a micro- not a macro-liquidity problem. Don’t blame the central banks.

Central banks rightly worry about the other sort of liquidity problem right now - have they made too much? The levels of the growth rates in the table below sure argue for the answer ‘yes’ to that question everywhere but in Japan – there, of course, there are special things in play. Unfortunately this is the wrong time for central banks to be taking up this fight.

Only the Fed seems to have taken action to date to squeeze some of the excess liquidity from the market. And with that, markets now are begging for the Fed to re-inject what it has taken out (or, more correctly, slowed down its injecting).

It’s a curious time for markets and central bankers alike.

Look at Global and Euro Liquidity Trends
SAARl Euro Measures (E13): Money & Credit G-10 Major Markets: Money
  €-Supply M2 Credit: Res Loans $US M2 £UK M4 ¥Japan M2+CDs
3-MO 11.4% 12.8% 11.6% 3.6% 13.1% 2.5%
6-MO 11.0% 12.7% 11.3% 5.6% 13.6% 2.0%
12-MO 10.6% 11.6% 10.7% 6.1% 13.0% 2.1%
2Yr 6.2% 11.5% 10.8% 5.4% 13.0% 1.4%
3Yr 13.9% 16.3% 15.4% 7.5% 19.0% 2.2%
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