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Economy in Brief

‘World’ Money Supplies at a Cross Roads Different Strokes for Different Folks...and How!
by Robert Brusca  September 27, 2011

The chart speaks volumes but despite the god-zillions of words used in this verbiage trained economists will look at that chart and have significantly divergent views of what it means. Like the story of the blind men feeling different parts of the elephant and describing the elephant from those brief but real encounters economists may be sure of that they encounter’ but that does not necessarily make their description or their prescriptions right.

First let’s look at the "what factor."
(1) US money supply is spurting
(2) UK money supply is still contracting
(3) Japan’s money supply is flat-lining or slightly eroding at pace below 3%
(4) EMU’s money growth is flatling Yr/Yr with a hint of short term improvement, short of a2.5% pace.

"Them’s the facts," as they say. So what do they mean?

The UK is an example of Boom-Bust monetary policy. UK inflation is still peaking in this cyclical currently at its maximum rate of 4.5% Yr/Yr. UK money growth has peaked back in February of 2009 with inflation at 3.1%. Subsequently UK money supply growth began to decline and it did so\so in an uneven way. In January of 2011 it turned negative. But UK inflation remained stubborn and pushed back above 3.1% by January of 2010. Money supply growth has been negative in the UK for eight months (Yr/Yr growth) and inflation remains stuck at its cycle high.

Of course this period is more than just about money supply and headline inflation as oil prices were rising, accelerating and decelerating during the period and the UK and other economies were recovering from a recession and financial near-melt-down. In response the UK adopted an austerity plan that has not combined well with the BOE policy of allowing an overshoot of its 2% inflation limit. The UK economy is still struggling and inflation is still stubborn and money supply is now contacting. The policy mix has not proved fruitful as inflation is still over the top and the UK economy is still not in gar and politicians seem to be poised to make a change in their fiscal tilt.

EMU money growth peaked well before that of other nation is the table at 11.8% in October of 2007. Nominal money growth had come down to a cycle low of 1.3% in April of 2010 and is back up to 2.4% in August 2011. Inflation in the Zone peaked at 4.1% in July of 2008 but in the span of only eight months was below 1% per year and in 11 months year-over-year inflation had turned negative. The rate was actually falling year-over-year at a pace of -0.1%. Yr/Yr inflation was sporadically negative in the Zone until November of 2009 when it jumped back to a pace of 1.9%. Of course, October 2008 was a watershed for oil prices which switched from a 30.8% Yr/Yr gain to an 8.3% Yr/Yr drop and continued to fall Yr/Yr until November 2009. After five months of negative headline inflation EMU inflation began to rise, also in the month of October as world oil prices began to rise again on a year over year basis. Inflation accelerated to a peak of 2.8% In April 2011 and has since backed off with the current pace at 2.5% in August 2011. Even with oil prices having risen by a 25% to 35% annual rate from March to July of 2011 EMU inflation has been contained.

For now the EMU area is still growing. The ECB alone among this group of banks has hiked rates during this period. But a debt crisis is sweeping through the Zone and has destabilized growth and has raised new concerns about banks. On the face of it the ECB policy has navigated the forces of rising oil prices well. But with Germany in the lead it has urged and foisted policies of austerity across the Zone at time that growth was not very strong to start. Eventually this resulted in sending Ireland, Portugal and Greece scampering for bail-out assistance. Spain and Italy have been of the periphery of trouble. While the monetary/growth metrics for the Zone seems to be in relatively good shape growth is actually tottering. Euro-Area growth is hanging in the balance depending on what policies can be implemented quickly enough to stem the tide of unrest among Euro-Area investors.

The UK has had the most gyrations in money growth with 20.6 percentage points of difference between its highest and lowest 12-month rate. The US and EMU are next with a gap of 10.5% for EMU and 11.6% for the US. Japan has had consistently weak money supply growth as it has fought off deflation; its largest gap between its strongest and weakest money supply growth has been only 6.2%.

During this same period the US money supply ran approximately the same cycles as did EMU with a later peak in money growth In January of 2009, a low in the first quarter of 2010 and a significant acceleration that followed to 10% currently. The US inflation experience finds a high of 5.5% in July 2008 as EMU inflation peaked, then crashing to a year-over-year decline in just SIX MONTH by January of 2009. Over the next 10 months as oil prices fell US headline inflation was sporadically negative. In November in 2009, as oil price began to rise year over year and as EMU inflation switched to Yr/Yr increases, the US CPI also rose to gain 1.9% Yr/Yr. The pace quickly ramped up to about 2% and has accelerated to 3.8% Yr/Yr in August 2011.

Clearly the US and Europe have been under the same sorts of pressures from oil as their synchronous inflation responses suggest. But the monetary policies have been very different. As we ask what lesson we might learn from these differing approaches the answer is far from clear.

Japan’s experience has been different than the countries discussed above. Its Yr/Yr inflation rate fell in 30 of the 47 months since Sept 2007. Japan’s CPI is now up for two months running to a pace of 0.5%. But Japan has also used changes in monetary policy the least judging from shifts in its month supply growth. The gap between the highest and lowest money supply growth rates in Japan has been 6.2 percentage points nearly that half of the smallest gap among the other countries/regions in this study. There seems to be some weight to the argument that Japan has not tried to use monetary policy as hard as it could.

While the UK seems stuck in ‘bad policy place’ with inflation too high and growth too low and the future uncertain, it also shares some of the same concerns in Europe since it’s banks lend more heavily in that region, especially to Ireland.

In EMU the moderate money supply swings have kept inflation contained and EMU has the best and steadiest inflation profile but it has bought that at a cost. The fiscal path it set is members on is tearing various member’s apart and it leaves the Euro-Area itself destabilized with - to some at least- an uncertain future. The US oddly has worried about deflation but now has ‘successfully’ raised the CPI rate the Core CPI is also accelerating. Yet some central bankers in the US still worry about deflation. Part of that is having a nose for the future as US growth has become quite wobbly and most economists agree that the odds for a double-dip have gone up but the majority of economists so far at least do not forecast that the US economy will cross that Rubicon.

What we see is a world economy with vastly different approaches to what have been similar economic shocks. The UK seems to be the most adrift. EMU has a much more threatened union and economy but seems to have inflation right where it wants it. Japan is still in its decade-long struggle with growth, and still is fighting off weak prices and balancing the effects of an earthquake, a tsunami and a nuclear accident as well as an unexpected sharp rise in the yen that has exacerbated Japan’s growth, deflation and rebuilding problems. In the US the economy is growing and is not threatened like in Europe as its financial sector is much healthier. Money supply has not gone boom-bust in the US but money growth is accelerating again. The Fed has used several novel programs, two rounds of ‘QE’ and now a new policy called ‘Operation Twist’ to try and revive growth, especially the growth in lending, with the objective to stave off deflation. US core inflation is still in ‘good shape;’ US headline inflation, which the Fed ostensibly does not pay much attention to, has risen rather high, Despite this the Fed’s concerns are about deflation given the economy’s turn for the worst made recently. The spurt in money supply growth has not been mentioned as a worry.

Perhaps we should the cut the Fed some slack since last time when the US saw inflation turn about more quickly than anywhere else. In a span of six-months headline inflation went from positive to negative. The Fed’s credibility appears to be still in good shape, despite the pressure it has been under with the rise of conservatism in the US from Ron Paul calling for a return to the gold standard to Texas Governor and Republican presidential candidate hopeful Rick Perry who called the Fed Chairman a ‘traitor’.

Europe is in a political mess with a bailout plus much more that is in need and still not agreed to. The ECB is about to switch heads as Trichet has come to the end of his term and Mario Draghi is about to take over. It is a fast moving stream in which to change horses. The differences in money growth rates across countries tell us that we are looking at regions with vastly different problems seeking extremely different solutions to their individual policy needs.

Is it any wonder that markets are so unstable in this environment? Are we surprised that IMF/World Bank G-20 meetings produced no policy but did manage a mangled communiqué? Are we reassured? Really?

Look at Global and Euro Liquidity Trends
SAAR-All EMU: Money & Credit G-10 Major Markets: Money Memo
  €-Supply M2 Pvt Crdt $US M2 £UK M4 ¥Jpn M2+Cds OIL:WTI
3Mo 4.6% 2.4% 25.4% -0.9% 1.7% -47.6%
6Mo 3.7% 2.2% 15.0% -0.1% 3.3% -6.9%
12Mo 2.4% 2.4% 10.3% -1.1% 2.7% 12.7%
2Yr 2.4% 2.3% 6.4% 4.1% 2.7% 10.4%
3Yr 3.3% 1.6% 7.0% 6.1% 2.7% -9.5%
Real Balances: Deflated by Own CPI. Oil Deflated by US CPI
3Mo 4.0% 1.8% 22.2% -3.5% 1.3% -48.9%
6Mo 1.9% 0.4% 11.0% -3.0% 3.6% -10.2%
12Mo -0.2% -0.1% 6.3% -5.4% 2.2% 8.6%
2Yr 0.3% 0.3% 3.8% 0.2% 3.0% 7.7%
3Yr 1.9% 0.3% 5.8% 2.9% 3.7% -10.5%
UK M4 uses July for August; Japan CPI uses July for August
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