Globally Money Supply Slows or Contracts in Real Terms

Money supply trends show that slowing is widespread across the major monetary center countries. In the European Monetary Area, for example, M2 growth logs 6.2% growth over 12-months, grows at a pace of 5.6% annualized over 6-months and by 3.4%, annualized, over 3- months - a clear deceleration in nominal money growth is in progress.

In the United States, the slowdown is much more dramatic, with the 12-month growth rate for M2 at 6.5%, slowing to a pace of 3.9% over 6-months, and to a skinny 0.1% pace over 3-months. In the UK money growth is at 5.4% over 12-months; it ticks slightly higher to 5.6% over 6- months then slows to 4.8% pace over 3-months. In Japan where inflation has been much less of an issue overall money supply statistics are much steadier and the growth rates of money are lower… Japanese growth show M2 plus CD's up at a 3.2% annual rate over 6-months, that becomes slightly stronger at a 3.6% pace over 6-months and then backs down to the 12-month pace again at 3.2% over 3-months.

Real balance growth is contractionary The growth rates cited above are nominal money growth rates. They are the same as the statistics that are plotted in the chart that accompanies this article. However, we can also calculate ‘real money balances’ which reflect the local currency value of money deflated for the effects of inflation and then we can calculate growth in these ‘real balances’ after inflation effects are accounted for.

In the European Monetary Area real money balances grow at a - 1.7% annual rate over 12-months, at a - 4.4% annual rate over 6-months, and at a -7.6% annual rate over 3-months. This is a progressive contraction that is not good for growth. Of course, The ECB is trying to slow the economy down and even in the European Monetary Area where official interest rates have not yet begun to rise, the impact on money supply growth – especially on real balances- is quite clear.

In the United States over 12-months real money balances (RMB) contract by 1.8%, over 6-months RMB contract at a 5.1% annual rate and over 3-months it contracts and a 9.6% annual rate. This is very rapid shrinkage in the real money stock.

In the UK. Real money balances fall at a 2.6% annual rate over 12-months, at a 6% pace over 6-months and then they contract at an 8.5% rate over 3-months. The UK pattern of contraction in real balances is also severe.

The more severe the contract of real money balances the greater will be the risk of recession and the less likely a soft landing will be generated…

In Japan real money balances grow by 0.7% over 12-months, they grow by 0.2% over 6-months but then they contracted a 0.8% annualized rate over 3-months. Japan is just starting to experience some monetary contraction over the last three months.

Credit trends in EMU In the European Monetary Area, we can also look at the impact inflation has had on lending as well. In nominal terms lending continues to accelerate as credit to residents grows at a 4.8% pace over 12-months, at a 6.2% annual rate over 6-months and at a 6.3% annual rate over 3- months. If we convert these to real terms, credit to residents is falling by 3% over 12-months, it's falling at a 3.8% annual rate over 6-months and it's falling at a 5% annual rate over 3-months.

Credit to residence is drying up as well and credit is one of the channels through which monetary policy is going to slow economic growth. Since businesses need to invest and pay for inputs and services in real terms the real balance trends are most important. Of course, firms will pay a nominal, dollar, pound, euro, or yen price, but that ‘nominal’ price is going reflect the inflation rate. By deflating the credit stock numbers for inflation, we get a sense of how much liquidity is available for firms to use in an inflationary economic environment. This is true for the credit data in each country, but we only present EMU data here.

The second measure of credit in the European Monetary Union is private credit. Private credit is growing at a 5.3% pace over 12-months, at a 6.5% annual rate over 6-months and at a 6.7% annual rate over three months. Nominal credit shows some acceleration. But, once again, converted to real balance terms, private credit growth is contracting by 2.6% over 12-months, it's contracting at a 3.6% annual rate over 6-months and it's contracting at a 4.7% annual rate over 3-months.

Inflation in the euro area continues to be relatively strong. Nominal interest rates have risen as the markets are bracing for policy changes by the ECB itself and those are still to be forthcoming. However, the impact on liquidity and on credit provision clearly have been contractionary for some time in fact in the euro area credit to residence is shrinking at a 1.5% annual rate over two years and private credit is shrinking at a 1.2% annual rate also over two years. That longer term shrinkage is created by the rise of inflation rather than by specific credit tightening actions by the Monetary Authority.

The global outlook continues to be for slowing. The IMF has recently reduced its forecasts and central bankers continue to talk about slowing inflation and avoiding recession as though it's possible. Such things are possible in the world of theoretical economics, but in the real world in which we live, significant inflation has never been slowed by anything other than a recession. So, if central bankers try to promise that there's a way to balance the needed austerity with the desire for growth, be sure to listen carefully to exactly what they're saying. Are they promising results, or speaking hypothetically or hyperbolically?

The French consumer is obviously struggling with conditions on the ground and with the various challenges in the wake of COVID with the war going on in Ukraine with the inflation rate fired as well as by upcoming by European Central Bank policy actions. The ongoing recovery of the economy is challenged. However, the survey for the consumer is demonstrably weaker than the survey for manufacturing and for industry. For example, the industry climate reading has the 78-percentile standing and a 44-percentile standing for manufacturing expectations. Manufacturers still share with consumers very high standings for their perceptions of inflation. But their assessments for business conditions continue to be firm to very strong. The consumer portion of the French economy is clearly much more damaged than the business sector.