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Economy in Brief

Money Supplies Surge...Or Do They? 
by Robert Brusca August 27, 2009

The chart exhibits growth rates for money presented in national currency terms for several key countries. The table produces the same data with some different horizons for calculation. In the chart’s lower panel, the various series are inflation-adjusted (real balances).

Monetary expansions looks too strong - The picture on Yr/Yr money growth is a bit frightening. Japan’s growth rate for M2 plus CD’s, its preferred monetary measure, is at 2.7% and is quite contained. EMU’s rate at 5.5% seems high for its current growth state. At 8.1% and 12% respectively the US and the UK seem to have flooded their respective markets with liquidity. And in some ways they have.

Or is it decelerating too much? But if you turn your attention to the table instead of the chart you see a second phenomenon is in play. Money growth rates are and have been decelerating greatly from 12-months to 6-months and from 6-months to 3-months. In addition we provide some credit measures for EMU and they have the same properties.

Weak once inflation adjusted - Next if we turn to the lower panel of the chart to focus on the inflation adjusted flows there, we find a marked deceleration is in place and that monetary growth appears to be much less aggressive than it seems on the broader 12-month horizon and in a nominal framework.

EMU - In EMU 3-Month growth rates for money are at 2% while credit to residents is rising in real terms at a 1% rate and loans are shrinking by nearly 1% in real terms.

US and UK: Despite double-digit 12-month growth rates in both the US and the UK each has real money balances shrinking over three months.

Japan: Only Japan has relatively stable nominal rates of growth for money and a slightly expanded growth rate for real money balances over three months.

Policy confusion: All this just adds to the confusion about policy. Is it tight or is it loose? Is it as loose as it seems over 12 months or is it being tightened too rapidly as the 3-month trend seems to say? What about extracting ourselves from this overtly stimulative period? Is there inflation risk and can the central banks handle it?

Crosscurrents -On balance we see lots of opinions but few good ways to make a clear discriminating argument. We prefer to point out that the situation is complicated and in flux. We urge investors to weigh the issues and we believe that where you come down on the central bank issue depends on if you have trust in the central bank/bankers or not. We do not think that the data are very clear or that any course of action is baked in the cake. We see the excessive money growth followed by some too-hard squeezing as evidence that the central bankers are managing the risks – or trying to do so. After all, the Yr/Yr money supplies are bloated but that is what the bankers did to help blunt the crisis. It is in the past. To balance that we do not see explosive sequential growth rates for money, quite the opposite. We do not think this is a coincidence. Just as we are monitoring these flows, so the central bankers are monitoring the economy and the monetary trends. The data in the table are good remainders to be careful about only looking at Yr/Yr growth rates. That Yr/Yr growth in US and UK money supplies looks a lot different when you shorten the growth horizon and deflate the flows to adjust for the effects of inflation.

Look at Global and Euro Liquidity Trends
Saar-all Euro Measures (E13): Money & Credit G-10 Major Markets: Money Memo
  €€-Supply M2 Credit:
Loans $US M2 ££UK M4 ¥¥Jpn M2+Cds OIL:WTI
3-MO 1.8% 0.6% -1.1% 3.2% 3.1% 2.7% 171.5%
6-MO 2.7% -0.8% -1.9% 2.7% 2.4% 3.4% 136.3%
12-MO 5.5% 3.0% 0.9% 8.1% 12.1% 2.7% -52.0%
2-Yr 7.8% 7.0% 5.1% 7.3% 11.5% 2.4% -6.6%
3-Yr 8.8% 8.4% 6.9% 6.8% 12.1% 2.3% -4.7%
Real Balances: deflated by Own CPI. Oil deflated by US CPI
3-MO 2.0% 0.9% -0.8% -0.2% -0.6% 5.1% 162.5%
6-MO 2.5% -1.0% -2.1% 0.5% -0.9% 4.7% 131.3%
12-MO 6.2% 3.7% 1.6% 10.1% 10.2% 4.9% -51.1%
2-Yr 6.1% 5.3% 3.3% 5.5% 8.2% 2.4% -8.2%
3-Yr 7.0% 6.6% 5.1% 4.8% 9.2% 2.3% -6.5%
Japan CPI for July is an estimate; it uses the June value to produce the real balance figure  
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