Some commentators seem anxious that early 2016 feels like early 2007. But banking systems are not over-stretched and do not face heavy loan write-offs because of bad debts, while inflation is exceptionally low. Governments and central banks can readily implement expansionary policies (such as QE) if they have to. The overall prospect is for steady, if rather slow, growth of banking systems in the major countries, and so for moderate growth of broad money, and also of nominal GDP. There are worries (e.g., the oil market), but the world economy is not characterized by major macroeconomic instabilities
In qualification, officialdom seems committed to imposing extra capital requirements on banks across the globe, in the belief that highly-capitalised banks are safe banks and that another Great Recession could not happen if all banks were ‘safe’. Key central bankers and regulators seem not to understand that the Great Recession of 2008 – 10, like the Great Depression in the USA 1929 – 33, was caused by a collapse in the rate of change of the quantity of money. They seem further not to appreciate that the effect of tightening bank regulation will be to depress the rate of growth of the quantity of money, with wider disinflationary/deflationary consequences. Although oil prices must be expected to spike upwards at some point in the next three years (as Saudi Arabia again restricts production), underlying, ex-energy inflation will still be low/negligible in 2017 and early 2018. Money growth has turned upwards in China and India in the last few months, which argues against too much pessimism about the global outlook for 2016. A truly alarming message is that officialdom still cannot see the connections between regulatory tightening in the banking industry and weak broad money growth, and then between weak broad money growth and sluggish economic activity. [private]
Money trends in late 2015 in the main countries/jurisdictions
What are the latest money growth trends in the main countries? And what is the message for global economic activity over the next year or so, and for inflation/deflation over the medium term thereafter? The table below summarizes the key numbers. Beneath the table I make an overall assessment, and later make some comments on recent banking and monetary developments in the USA.
For most of the post-war period “the West” – meaning the advanced countries with high incomes per head – was dominated by North America, Europe and Japan, plus the Australasian offshoots. On a current prices and current exchange rate basis (which is not the same as the purchasing-power-parity basis used in the table above), the USA, the Eurozone, Japan and the UK still account for almost half of world output. (On a PPP basis, the proportion is much less, at about 35%.) As the table above shows, the latest annual growth rates of broad money in the four jurisdictions are 4.5%, 5.1%, 2.8% and 4.5% respectively. These are not the lowest figures in recent decades, as even more modest growth rates or even outright declines in broad money were seen in the Great Recession. All the same, the numbers are very moderate and refute media scare stories about monetary excess, financial imbalances, etc. The monetary situation today is not at all similar to that ahead of the wrenching upheavals that occurred from mid-2008.
An interesting talking point is the Federal Reserve’s attitude towards “quantitative easing” or its opposite, “quantitative tightening”. I pointed out in September that US banks’ cash reserve assets (which soared from mid-2008, as the Fed incurred these liabilities to the banks in order to purchase securities from non-banks and so increase the quantity of money) had been slipping in the preceding months. In early October the Fed made very large purchases of securities, and the cash reserve asset figure jumped. (It went up from $2,442b. on 30th September to $2,766b.on 7th October.) I was told that the Fed’s policy is to keep the stock of QE assets stable.
I now have to point out the same issue again. From a local peak of $2,782b. on 21st October, US banks’ cash reserves had slid to $2,455b. on 30th December. That fall of about $300b. off banks’ assets implies a corresponding fall in deposit liabilities (i.e., money) and was the main influence, at least in terms of arithmetic, on a slowdown in US broad money growth in late 2015.
Let me say immediately that this may be a storm in a teacup. A high proportion of the QE securities held by the Fed may have had end-2015 redemption dates, explaining why they disappeared from balance sheets. The Fed may in January and February 2016 buy more securities to restore the stock of QE assets. There may be upward blips in broad money in January and February, as there was one in October. Well, good, if that is what happens. But it is the analyst’s job to keep people on their toes and I have to say that I do wonder whether “the Federal Reserve” does in fact understand how QE affects the economy. (“The Federal Reserve” is written inside quotation marks, as it is a diverse and rather incoherent institution, with a multiplicity of views, attitudes, opinions and so on.) I gave a thumbnail sketch of QE in my November global round-up, as follows,
- in its purest form (i.e., asset purchases from domestic private sector non-banks financed by bank borrowing), QE adds pound for pound, dollar for dollar, and euro for euro to the quantity of money, and
- over the medium and long runs an x% rise in the quantity of money raises equilibrium national income (and national wealth and hence asset prices) by a more or less identical x%.
Although the details can be complex, the essence of QE’s impact on money and the economy is as simple as that. But – unbelievably – the Fed stopped preparing data for M3 in February 2006, even though it is a broad money measure that is mostly relevant to macroeconomic analysis. (In my latest video, I do indeed use M3 – as calculated by the US research company, Shadow Government Statistics – to make statements about the connection between QE and the cyclical course of the American economy in the last few years.)
However, I am fairly confident that US money growth will be moderate (at about 5% a year) in 2016 and am sanguine that domestic demand in the world’s largest economy will grow at a trend or above-trend rate. The numbers must be watched month by month.