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Economy in Brief

Global and EMU Money Supply Slows…but Gradually
by Robert Brusca June 27, 2008

Money growth is slowing on a gradual pace. In EMU credit growth is slowing more rapidly, undoubtedly helped along by banks’ own credit tightening moves.

The table shows that nominal money supply growth rates are slowly deteriorating in various key money-center countries. The growth in real balances (inflation adjusted money and credit amounts) is decelerating faster than for nominal balances as the domestic price level has shot up across all these nations even as nominal money growth has slowed. We show the increase in the price of oil (WTI) to the far right of the table.

Money and credit slow…
In EMU money and credit real balance growth (bottom of the table) is in the 4% to 5% range over three months compared to the 7% to 8% range over 12-months. In the US, the UK and Japan money growth is in the 0.5% to 2% range over three months. In each case there is a deceleration from the 12-month pace that is significant. These are growth-impeding polices.

Policy risks may not be what they seem…
A slowing stimulus from real balances will help to slow growth in these countries. Meanwhile, the myriad factors that remain in play from high energy prices to banking sector problems continue to crimp growth. At this point real money balances are simply slowing but their growth rates remain positive. Still, there could be a substantial dose of slowing that is in the pipeline from current policy restrictiveness due to sluggish real balance growth let alone any tighter policy.

Still central banks are focused on interest rates and real interest rates as they struggle to keep inflation expectations ‘anchored’. The ECB that places more weight on money and credit aggregates than does the Fed in the US has the aggregates that are growing the fastest even when adjusted for the effects of inflation. The ECB is preparing to hike rates, a move that should further slow money and credit growth there and could pressure other countries to follow suit event though they seem farther along the road to credit restrictiveness than the ECB – despite the fact that other countries have cut rates when the ECB has not.

Too easy or too tight?
Based on the actual slowing of real balances the risk of being too tight with policy seems quite plausible despite the obvious worry in the tone from central banks that are concerned with inflation that is over the top of its target ceiling or guideline. Slippage in inflation expectations is not a price that any central bankers are wiling to pay. But the policy risk now may be turning to the potential for overkill on the side of restrictiveness when the credit crunch and depressing effect of oil prices are both fully accounted for. Don’t look for it in many central bank speeches, however. So far, only the UK’s Mervyn King has said explicitly that to get control of inflation will require slowing growth. He had previously said that controlling inflation would involve pain. In the US its dual mandate does not allow the Fed purposefully dish out pain to slow inflation. So look for the Fed’s analysis of the economy to be too-cheery in order to permit it to be tighter than it needs to be. The Fed is already cheerily saying that spending has firmed, while it has jettisoned language about expecting oil prices to flatten or fall yet it still expects inflation to fall. Nice if you can get it. But will it be that simple?

Look at Global and Euro Liquidity Trends
Saar-all Euro Measures (E13): Money & Credit G-10 Major Markets: Money Memo
  €-Supply M2 Credit:
Loans $US M2 ££UK M4 ¥¥Jpn M2+Cds OIL:WTI
3-MO 9.2% 9.0% 8.5% 5.5% 7.3% 0.7% 203.4%
6-MO 10.0% 10.9% 9.8% 7.9% 10.8% 2.0% 73.0%
12-MO 10.9% 12.0% 10.3% 6.3% 10.1% 2.0% 96.5%
2Yr 10.2% 11.4% 10.3% 6.3% 12.0% 1.7% 32.8%
3Yr 9.9% 11.7% 10.8% 5.8% 11.8% 1.6% 35.9%
Real Balances: deflated by Own CPI. Oil deflated by US CPI
3-MO 4.9% 4.7% 4.2% 0.6% 2.2% 0.7% 189.2%
6-MO 6.2% 7.2% 6.1% 3.7% 5.9% 1.6% 66.3%
12-MO 7.0% 8.0% 6.4% 2.2% 6.5% 1.2% 88.8%
2Yr 7.2% 8.4% 7.3% 2.8% 8.7% 1.3% 28.4%
3Yr 7.1% 8.8% 7.9% 2.1% 8.9% 1.3% 31.2%
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