Money Growth Trends Show Some Life Except in Japan

Year-over-year trends in nominal money growth show some improvement in the US, in EMU and even in the UK. But in Japan money growth is low and has even decelerated mildly.

In the UK money growth is still contracting but the pace of contraction has slowed marking a minor improvement there.

EMU money growth has been on a steady pace of acceleration and is up to 5% year-over-year.

In the US money growth accelerated in the recovery then ballooned showing a humped up growth rate that swelled then deflated; it appears to be expanding once again along its pre-balloon growth path more or less.

Japan's stagnant money growth goes some of the way in explaining why the Bank of Japan is suddenly getting more aggressive. Of course, that was not all the idea of the BoJ; it did get a sizeable push from the new administration. But the legacy of flat and slow money growth certainly has Japan standing by itself in this group. The UK, while having slower growth recently (outright monetary contraction), comes at that result after a period of booming money growth. UK fiscal austerity and monetary contraction have gone hand in hand. After a period of using quantitative easing aggressively the Bank of England seems to be less enamored of its potential and has backed off its usage.

Credit and private credit in EMU are contracting and that is relatively new. The contraction is over 12-months as well as for shorter periods whereas over two- and three-years the balance of credit has been steady or growing slightly. In inflation-adjusted terms, EMU credit measures have been contracting over the recent three years and the shrinkage has picked up its pace over the more recent periods. In contrast EMU real money growth has speeded up over 12 months and is steady at that higher pace over shorter periods compared to its two- and three-year growth pace. Around September 2011, money and credit in EMU began to diverge and have continued to diverge sharply (both in real and in nominal terms) with money accelerating and credit decelerating and shrinking.

In the UK real M4 money balances are of course shrinking, but the pace has not really picked up. Trends are a bit spotty but there is no clear new trend to real money balances in the UK; the pickup in growth displayed by the nominal series is no longer present in the inflation-adjusted series.

In real terms, Japan's money growth is better and more stable although a longer term, yet slight, downtrend is apparent. Oddly, even as Japan has endured deflation, Japan's real balances are the steadiest-growing among the group since 2009.

US real money balances show a steadier-looking acceleration; growth is moving up from very weak rates in late 2009 and in early 2010 to show its familiar hump from the nominal series and continued expansion in real terms recently.

On the whole, there is not much that is really very reassuring about money growth and EMU's credit trends. Japan still has a lot of work to do. Even the 5% growth in real US money balances has not been much stimulus to a still lagging economy and one where the political parties are at such odds over what to do that they are poisoning the political and economic environment. EMU nominal money trends are slighting encouraging and real balances are even growing slightly recently but the split between money and credit growth is an indicator that the money growth situation is not carrying the economy ahead. Many think that EMU monetary policy looks a lot more like fiscal policy; yet it is not having a positive impact on credit. The UK's contracting money stock is not much encouragement either but the real economy in the UK has been showing some better data despite slack and contracting monetary growth.

On balance, the global economy continues to struggle as 2013 draws to a close and 2014 begins. 2014 promises to be a year of some importance. If it is a successful one, the EMU will have to come to terms with its needs; just as politicians in the US will have to come to terms with the US excessive future spending promises. Just today in the wake of the fiscal cliff deal in the US that is being so maligned the IMF, Standard and Poor's as well as Moody's have issued separate statements about how the US still has to do more. These statements make it clear that the President's citing taxes as the economy's key need was a statement that was more political than it was economically factual. The recent deal raised taxes on only a few but cut the rising tax grab of the AMT. The resulting revenue stream is in no way sufficient to cover the bulging US government spending commitments in the decades ahead.

In addition, China has some real work ahead of it, as weak growth in the US and in Europe will make those markets inhospitable to Chinese exports and force China to generate some of its own demand if it wants to hit its growth target this year. Japan has a growth plan but its emphasis on weakening the yen could create conflict with other countries like the US where current account adjustment needs to be on the menu as well as fiscal austerity.

Even so this does not exhaust the list of challenges for the year ahead as China and Japan have a dangerous dispute in train and the Middle East is still a hot-bed of various sorts of instabilities.

As the year begins, we find equity markets in a forgiving mood or willing to suspend disbelief (good if you are at the movies; not so good if you are investing with real money in real life). Markets in the US and Europe rallied on, what most observers agree, was bad fiscal cliff deal, or at least a disappointing one. The credit-rating agencies and the IMF have made that even clearer in remarks today and yesterday. In the US, the debt ceiling still needs to be hiked and then there is the pending plan to make more substantial budget progress. Why markets were willing to rally on January 2 after a disappointing deal with all that still ahead of them and more.is beyond me. Perhaps 2014 will be the year of the optimist. But it still could be the year when the investor smells a rat.