Broad money growth slows – but

  • Broad money growth is slowing in the five largest world economies
  • But, apart from in China, it remains rapid by historical standards
  • The risk of sustained above-target inflation remains very much alive

The last time I looked at broad money growth in the five largest world economies (the United States, the Euro Area, China, Japan and the United Kingdom) was in early 2021. At that stage, broad money growth in four of them was still in the double digits, and in the fifth (Japan), it was close to that at 8.1% in the year to February. 

Inflation is ultimately a monetary phenomenon. Currently, at least the Fed and the ECB are busy telling anyone who wants to listen that the current bout of accelerating inflation in their economies is transitory. For this reason alone, it is worth looking at recent monetary trends.

Overall, there is indeed a clear slowdown in broad money growth. 

In four of these economies this slowdown is from previously very rapid growth rates. In the year to February, US broad money (the Stein Brothers recreation of M3), grew by 14.2%; in July, the number was 10.6%, but in the interim, it had dipped into single digits. On a three-month annualised basis, a better guide to the most recent trends, the July number was 7.8%

In the EA, M3 growth was 12.2% in February and 7.6% in July, with the three-month annualised rate down to 6.9%. The British equivalent numbers for M4x were 15.3% in February, and 7.9% in July, with a three-month annualised rate of 5.3%.

The Japanese numbers are slightly lower throughout. In February, M3 growth was, as noted, 8.1%. By July, this had slowed to 4.6%, and three-month annualised rate was 4.5%.

The one outlier is China. True, M2 growth has slowed from 10.1% in February, but only to 8.3 in July. However, three-month annualised growth has dropped to 4.8%. This may not sound too bad – but although Chinese trend GDP growth probably has slowed to around 5% per annum, this would still (on past performance) necessitate M2 growth in the 8-10% range. Unsurprisingly, the Chinese monetary authorities are already easing monetary policy and, perhaps more importantly, sending signals of further easing to come.

Japanese broad money growth has slowed sufficiently to prove no inflationary danger (although, presumably, inflation is just what Japan both wants and – to some extent – needs). But in the US, the EA and the UK, although broad money growth has slowed, it has certainly not slowed to levels which would be consistent with current inflation being transitory. In fact, in the US, as noted above, broad money growth accelerated back into double digits in July; and a pick-up in weekly deposits growth and in real estate and consumer loans in August implies that it may have accelerated further in that month. 

There are other short-term influences on inflation. For instance, another variant of the corona virus could cause further lockdowns and clamp down on activity again. But, based on the money numbers, the view that inflation, at least in the US, the EA and the UK, is only transitory, seems a very risky proposition. A far more likely outcome is that inflation numbers will remain elevated well into 2022.

On a completely different issue, some months ago I published a Comment on El Salvador’s decision to make Bitcoin legal tender. This decision has now taken effect and we will see how it pans out over coming months (I will not say years, as I doubt if the experiment will last that long). However, in the meantime, I have been dismissed on Twitter for my scepticism. The tweeters note that I am 70 years old (not for another five years, actually) and hence completely ignorant of both Bitcoin and of macroeconomics, making my views irrelevant. I’m not sure if I should laugh or cry.