Financial markets are concerned about ‘recession risk’

Posted by Tim Congdon in News Archive | 0 comments

Financial markets are concerned about ‘recession risk’, or so the newspapers tell us. When the world’s leading economies are viewed objectively, it would be hard to imagine circumstances in which recession was less likely. All recessions since the 1930s have begun with monetary policy tightening to curb inflation. This is true even of the 2008 � 2009 Greeat Recession, although officialdom’s reaction was disproportionate and misguided, and led to a few months of outright deflation. (Government, central banks and regulatory agencies imposed new regulations that acted like a punitive shock on banks, and stopped the growth of their balance sheets and hence of the bank deposits that constitute most of the quantity of money.) But today inflation in the leading economies (excluding India, and also such places as Russia and Brazil beset by corruption, political adventurism, misgovernment, etc.) is virtually zilch. The concern is not too much inflation, but the danger of deflation. In effect, there is no constraint on expansionary monetary policy.
Objections to this argument are two-fold. The first is that in the United States of America the recovery is so mature that the labour market is showing signs of over-heating and a normalization of monetary policy (with higher interest rates) has become necessary. The weakness of this claim is that, although the unemployment rate has dropped to beneath long-run averages, many people have left the labour market temporarily because of lack of demand. The employment rate is still well below the 2008 level. Meanwhile the strong dollar is hurting manufacturing, reducing import costs (over and above the impact of low oil prices) and dampening inflation. Talk of four Fed rate rises in 2016 is starting to look very silly.


Secondly, it is sometimes suggested that central banks are ‘running out of ammo’. Interest rates are almost zero in Japan, the Eurozone and the UK, and cannot go much lower. So what can now be done if economies suffer persisting demand weakness? The answer here is very simple. The growth of national expenditure, income and output in nominal terms is a function of the growth of the quantity of money, where the quantity of money is broadly-defined to include bank deposits. Further, the state can readily create new bank deposits. Either the central bank or the government have to borrow from the banking system, and to use the loan proceeds to purchase something “anything ” from the non-bank private sector. This is sequence of transactions will add to the quantity of money, and nominal national expenditure, income and output will then rise in proportion (more or less) to the quantity of money.

The creation of money by the state is straightforward and mechanical, and can be easily explained by the hundreds of rascals who have debauched the finances of Latin American republics over the last 150 years. (Even in early 2016 Venezuela has an official inflation rate of about 70% and a true one, when rationed items are priced correctly, of over 150%.) The running-out-of-ammo notion implies that policy-makers are impotent to counter the threat of deflation. That is tripe. As I said, all that is required is for either the central bank or the government to borrow from the banking system and to use the loan proceeds to purchase something “anything”…! Of course, the operations need to be on a large enough scale, but I assume that central bank research departments have enough common sense and gumption to work out a programme of the right size. (I also assume they are not such chumps as to lurch in the opposite direction, to reach Venezuelan excesses.)

Given that inflation is not far from zero almost everywhere ‘in the main countries’, recession in 2016, or even in 2017 or 2018, is very unlikely. I am not a great admirer of the current senior personnel in international financial officialdom (central banks, regulatory agencies and so on), but I don’t think they are so stupid as to initiate a downward lurch in the world economy from here. To repeat, there is no constraint on expansionary monetary policy in the main countries. The bears have been warned.

But I must make a concession. Money growth has been stable at a low or moderate rate, or even decelerating slightly, in the main countries in recent months. (China is a possible exception.) In this month’s global money round up I have called attention to the effect of ‘quantitative tightening’ in the USA on broad money there. The latest figures show “depressingly” that in the opening weeks of 2016 the Fed has not bought securities in large enough amounts to counter the QT that undoubtedly occurred in late 2015. In the three months to January US M3 (on the measure prepared by Shadow Government Statistics) rose by only a bit more than ½% or at an annualised rate of 2.6%. Eurozone M3 fell in December, although that was after good rises in the previous two months. In Japan banks seem to have forgotten the meaning of balance-sheet expansion altogether, so that in the three months to January – as in the USA : M3 was up by only a tiny fraction above ½%% or at an annualised annual rate of 2.1%.

To look at the latest video on global monetary trends, find the International Monetary Research Ltd. website (, go to the ‘World Money Map’ and press the globe icon in the middle of the South Atlantic.


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