Clear Monetary Deceleration in Global Money Centers

The growth in nominal money supply is declining globally in the major money center areas. Japan shows the most resistance to deceleration while the U.S. is the strongest example of monetary deceleration.

United States: U.S. money supply growth has not only decelerated but it's contracting in nominal terms as it is declining at an accelerating rate. U.S. money supply falls by 4.6% over 12 months, its annualized growth rate is -7% over six months, the annualized growth rate over three months is -9.8%.

EMU: The European Monetary Union (EMU) also shows declining money supply growth and contracting money supply. Over 12 months money supply in the monetary union is still increasing by 1.3%, but over six months it's declining at a 2.8% annual rate and over three months it's declining at a 3.5% annual rate.

United Kingdom: The U.K. shows a somewhat more erratic deceleration in money supply with growth up by 0.5% over 12 months following at a -0.3% annual rate over six months and rising at a 1.1% annual rate over three months. The U.K. money growth rates are still substantially decelerated from what we saw over 2-years when money grew at a 3.2% annual rate and 3-years when it grew to 6.3% annual rate. Also, U.K. money stock data are one month behind the other countries because of data availability - that could explain some of their differences in pattern.

Japan: Money supply in Japan continues to grow and shows a very slight acceleration from 12-months, to 6-months, to 3-months with the growth rates progressing at annual rates from 2.5% over 12 months to 2.6% over six months to 3.2% over three months- they are tightly clustered more than trending. These rates compare to growth over two years of 3% and three years of 5%. Generally, growth in money has slowed in Japan but it is not as clearly slowing over this recent period as it is in the other monetary centers.

Real money balances erode Adjusting money supply for inflation puts just about all the money growth rates across all the countries in negative territory. In the EMU, negative growth rates extend back over two years. In the USA, negative real growth rates extend back over two years as well. In the U.K., negative real money growth rates extend back over two years. In Japan, over two years money growth is flat; falls by 0.9% over 12 months and then falls at a less-weak 0.4% annual rate over six months, and Japan manages to break with the rest of the group posting growth in real money balances at a 2% annual rate over three months.

Weak credit in EMU In addition to the weak money growth, the European Monetary Union is showing weak growth in private credit as well as in credit to residents. Both credit aggregates credit show declines in nominal credit extension over three months and over six months. Deflating the statistics for inflation, finds that real credit growth is falling over at least the last three years on both measures... and the pace of decline is accelerating.

Money and credit trends These sorts of trends in money and credit growth have economists thinking that inflation has peaked and that it's due to come down in the period ahead because money grows it's so weak and of course it's weak broadly across most of the major money center countries. However, it's also true that money supply is simply weakening after it had experienced booms in all these countries. In some sense, money growth is still only returning itself to a more sustainable long-term path and that's what makes money growth more difficult to interpret.

How certain does money weakness make inflation deceleration? There's a popular chart that circulates for the United States that shows CPI inflation growth with about a 16-month lag charted next to the growth in money supply. Such a comparison shows that the recent increase in money supply and drop off ‘predicts’ the increase in inflation and, since money is slowing, there's also a similar peaking and the dropping of the CPI inflation rate in the U.S. The problem with charts like this is that they can be made to look very good for short periods of time but if they are extended back in time, the relationship between inflation and money growth is found to be stable over very short periods of time and the lags that map money growth into inflation are never the same. In other words, money growth doesn't determine inflation anywhere nearly as well as these sorts of graphics suggest. Sometimes one moves and the other does not. In this cycle, the global economies were hit with the same force at the same time and that was the arrival of the virus Covid-19. Economies were largely shut-down; there were fiscal and monetary responses that occurred - at the same time! It's not surprising that shifts in money now turn out to be ‘well correlated’ with the rise of inflation during this time when so much stimulus was concentrated in the same short period – how could it be otherwise? It’s ‘proof’ of nothing. We know that the inflation that we've experienced during this period has had several different causes; money supply was certainly one of them. It may serve as a proxy for polices gone bad, but that does not make it the cause or sole cause.

But weak money suggests something…doesn’t it? The global monetary data do suggest that the path we're going to see for inflation in the period ahead should moderate. At the very least, the excesses in money supply growth are being wrung out of the system. However, the trends for oil prices and inflation adjusted oil prices still show a good deal of firmness so there are still other kinds of supply constraints that are probably still percolating in the background. Monetary policy, viewed another way, through the lens of ‘real interest rates’ that compares the level of interest rates to the pace of inflation, suggests that monetary policies globally are not restrictive or are only barely and recently restrictive. Of course, the boom/bust in money growth by itself is something to worry about. That sort of irresponsible policy often sets a bad chain of events in motion.

The challenge remains... On balance, it is not surprising that inflation ballooned as much as it did given all the fiscal and monetary excess that we have seen, given the disruption to supply chains, and given the impact Covid had on pulling people out of the labor force and creating what looked to be artificial, but may turn out to be permanent, labor shortages. All these things do not simply go away with the passage of time even though central banks seem to have been encouraging us to believe it. Central banks acted as if these inflation pressures were going to be short term and then they would for the most part heal themselves without substantial interest rate increases. That has not been the case and the tardiness of central banks in raising rates and then the speed of central banks that finally raised rates has created a new problem by destabilizing the banking system. This creates another major uncertainty in creating an outlook not just for growth but also for inflation. The future is dangerous.