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Economy in Brief

Money Supply Offers No Solace And Much Dilemma
by Robert Brusca August 26, 2010

The chart on money supply tells a good story about what is happening with global liquidity. Before the financial crisis, money supply growth in the major monetary center countries and regions was generally strong and excessive. In the US, the Euro-Area and in the UK, monthly growth rates for money supply were steadily advancing almost up until the crisis hit. Once in crisis, the US and the UK responded by stuffing even more liquidity into the system as money growth accelerated sharply. In the Euro-Area, money supply growth rates that long had been high, were reduced quickly. In the US and in the UK the bubble in money growth was unwound after a brief period of extreme stimulus.

These differences give us the sense of the US and the UK as monetary centers that were supply liquidity to strapped financial markets while the Euro-Area appears to be a region where demand for local funding was collapsing.

The US and the Euro-Area eventually reduced their money growth rates to levels below those in Japan. In the UK money growth moved lower in step with the US and the Euro-Area for a while then jumped back to hover around the 10.5% mark. Since early 2010 there has been precious little movement in the rates of growth of money supply in any of these countries.

Money growth in the US and in the Euro-Area currently is around 2%. In Japan it is between 2.5% and 3%. In the UK it is still around 11% but shows some hints at slowing.

While central banks are worried they are worried about too many different things to take any real action.

Japan has been fighting off deflation and the yen has soared putting more pressure on that economy. Japan needs growth and reflation but it, of course, has a problem in that its public debt is massive.

In the US the economy has been sputtering. The Fed had been getting prepared to unwind more of its easing steps after mothballing a number of its special facilities...when economic growth notched lower and economic indicators turned dodgy. So now the US has very moderate money growth, a yield curve that sees no inflation, a slope in the curve that sees no recession, a huge slug of bank reserves and a central bank that is carefully picking and choosing which risks to confront with next.

The ECB is in the same boat as the Fed although it had not created such a near terms liquidity bubble. Still the ECB had pumped up liquidity prior to the crisis and had overshot its own money targets for a series of years. Now the Euro-Area is facing what have been much better recent economic data but amid concerns for future growth as its member nations have been adopting austerity plans along with the UK.

In general the 3-Yr growth rates in real money balances (inflation adjusted money stock growth rates) are still pretty generous ranging from a high of 7.9% in the UK to a low of 2.7% in Japan. Progressive growth rates (growth rates annualized over progressively shorter periods) in real money balances show that only the US has demonstrable evidence of any real balance growth rate pickup. Still, no country or region’s money stock seems to be too stimulative recently apart for the persistent high money growth in the UK.

In the Euro-Area, loans and credit appear to have picked up a bit even after being inflation adjusted. But by and large the monetary side of the economic picture looks liquid enough to accommodate growth but not particularly stimulative. Still, after what some nations did in the crisis- I think particularly of the UK and the US- a period of milder monetary policy is probably reassuring. One thing money growth rates don’t tell you is what the accumulated past growth did. I the case of the US the attempt to re-liquefy its markets and its institutions has created a huge bulge in bank reserve balances that is not tipped off by any money stock or growth rate figures.

The dilemma for central banks is a real dilemma. They are logically by-the-numbers unsure of what to do next. While at this point central banks may not have the best tools to get growth re-started they will be on the hook for difficult decisions, should growth fail. That along with some lingering concerns about their generosity with past money and bank reserve growth defines the shape of their dilemma.

Look at Global and Euro Liquidity Trends
Saar-all Euro Measures (E13): Money & Credit G-10 Major Markets: Money Memo
  €-Supply M2 Credit:Resid Loans $US M2 £UK M4 ¥Jpn M2+Cds OIL:WTI
3-MO 2.6% 5.2% 4.6% 5.4% 1.8% 2.3% -33.9%
6-MO 2.8% 2.6% 3.2% 2.9% 1.4% 2.7% -5.9%
12-MO 1.8% 1.6% 1.6% 2.0% 10.8% 2.7% 18.2%
2Yr 3.6% 1.9% 1.2% 5.1% 11.7% 2.7% -24.7%
3Yr 5.6% 5.2% 3.9% 5.6% 11.2% 2.5% 1.0%
Real Balances: deflated by Own CPI. Oil deflated by US CPI
3-MO 2.4% 5.0% 4.4% 5.4% 1.8% 2.7% -33.9%
6-MO 1.5% 1.2% 1.8% 2.9% -0.4% 2.7% -5.9%
12-MO 0.0% -0.1% -0.2% 0.6% 7.5% 3.3% 16.7%
2Yr 3.1% 1.4% 0.7% 5.4% 9.0% 4.2% -24.4%
3Yr 3.9% 3.4% 2.2% 4.0% 7.9% 2.7% -0.5%
Japan's Latest CPI is estimated to complete this table
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