EMU Money and Credit Decline Broadly in August; Globally Money Growth Remains Weak and Largely Contracts

Monthly money and credit developments in July hinted at a possible reversal in the ongoing global declines in money and credit trends one month ago. However, in August the data for money and credit in the European Monetary Union (EMU), as well as money supply data from the U.S. and the U.K., show that the declines in money on the month are back in force. Only Japan shows an increase in money supply in August and that's not surprising since Japan has a legacy of positive money growth rates unlike other major monetary centers in this table.

EMU conditions Nominal growth- The European Monetary Union shows negative money supply growth in both July and August as well as over 12 months, six months, and three months. Money supply trends are flat with growth declining mostly at about a 2% pace or a little more over the three-, six-, and 12-month intervals. Credit growth in the EMU remains weak and registers tiny growth rates over 12 months compared to negative growth rates of about -1% over both three- and six-month horizons for overall credit and private credit.

Real growth- Inflation-adjusted growth rates for credit and money in the EMU show a table full of negative numbers. The steepest negative growth rate is over 12 months at minus 7% for M2, that gives way to -5.7% over six months and then steps back up to minus 6.8% over three months. So, we're not able to say that the decline in real balances is tapering off in the monetary union. Credit to residents has its steepest sequential growth rate over three months at -5.9%, compared to -4.9% over 12 months. Private credit posts nearly identical growth numbers to total credit as well as nearly identical trends. Money and credit in the EMU, looked at sequentially, looked at in nominal terms or looked at in real terms, show significant ongoing weakness and possibly stepped-up weakening.

Global monetary trends U.S. trends- Global trends show money growth in the U.S. decelerating from 12-months to six-months to three-months as growth rates reduce their pace of descent and turn to increasing. U.S. M2 growth falls by 3.7% over 12 months, but then rises at a 0.5% annual rate over three months. The growth of real balances in the U.S. logs a -7.1% growth rate over 12 months, that's reduced to -3.4% at an annual rate over three months. The monetary braking in the U.S. shows signs of dissipating in both real and nominal terms. But inflation still runs hot.

U.K. trends- U.K. growth shows a slightly different pattern, but nominal M4 growth falls at a 0.4% annual rate over 12 months and six months, then the pace of decline steps up to -1.3% annualized over three months. However, the U.K. growth rate of real balances shows diminishing slowing as the 12-month growth rate at -7.1% is reduced to -3.6% annualized over three months.

Japan’s trends- Japan's nominal growth rates are simply unique among this data set, showing relatively steady growth over 12 months, six months and three months in the region of 2.5% to 3% growth- that’s in addition to showing small positive growth rates for money in both July and August. Japan's real money balance growth rates, however, are negative like the other major monetary countries on the table. Except, even here, Japan’s negative growth rates are unusual and extremely small. Finding a trend in them would require finding a needle in a haystack as the growth rates log numbers from three-months to six-months to 12-months at annualized growth rates in a range of -0.5% to -0.7%.

Oil prices step out of the shadows- During the sequential period from 12-months, to 6-months to 3-months, we have oil prices steadily accelerating as West Texas Intermediate oil prices fall by 11.5% over 12 months, rise at an 11.1% annual rate over six months, and then surge at a 61.5% annual rate over three months. For the first time in a while, oil prices are contributing positively to an inflation impulse globally instead of fostering quiescence.

Central bankers sport new stripes- Except for Japan, central banks have been raising rates and tightening policy, although Japan has been fiddling a bit with its yield-curve control policy that we could argue has tangentially the same effect. However, inflation itself continues to run too high relative to target in all these countries including Japan although Japan's inflation problem is clearly the least among all these countries. In fact, Japan has not yet decided if it has inflation that will persevere let alone whether it has an inflation problem after its extended battle with deflation. In the U.S., the EMU, and the U.K., central banks have slowed down or possibly even frozen their rate hikes as they wish to assess how inflation is doing after a series of significant rate increases. The path forward remains unclear in each of these countries, where inflation is, nonetheless, clearly still excessive.

Summing up Not in Kansas anymore? The wizards play the odds?- One observation we can make about global monetary policy is that this is not the 1980s. Inflation is not as high or entrenched as it was in the 1980s – or in the 1970s beforehand. In fact, the inflation of this period comes after an extended period of inflation stability and even flirtation with deflation. For that reason, central banks are less aggressive in going after the inflation rates which are nonetheless quite excessive relative to their targets. Central banks generally seem to have much more concern about the effect on the local economy should they raise rates too much. Meanwhile, central bank rhetoric continues to be focused on achieving long-run inflation targets. Yet, the actions that would achieve that result are simply watered down or lacking. A previous long period of price stability has either weakened central bank resolve, or weakened the political backing for central banks to reach these inflation targets, or led to complacency about what the bankers will have to do to restore inflation to targets. There seems to be an assumption that inflation will simply gravitate back to ‘target’ if central banks implement modestly restrictive policies.

Abandoning Technicolor™ for a world that’s black and white- In the wake of the Covid infections, the scare that it put into people, and particularly into older workers, labor markets have become much tighter in the post-Covid era. Many economists think Covid has created a sea-change, that will make pre-Covid and post-Covid environments starkly different. Central banks do not seem to share this view. Inflation already has undercut workers’ wages and, in this environment, workers have desires to restore their real wages to their pre-pandemic levels. In the U.S., there are multiple cases of increased worker militancy and striking actions by workers to try to achieve wage gains that could become not just industry-wide but economy-wide bellwethers. At the same time, a lot of the discipline from international competition is gone due to increases in trade restrictions and corporate supply re-routing. The Russia-Ukraine war has imposed other costs and disruptions. Central bankers don't seem to be too concerned about such developments. And, in the U.S., the Federal Reserve has looked in the eye a number of different and potentially conflicting risks and decided to ignore them all when implementing policy and giving policy guidance. As a result of these developments, we are left with much less actual information about what monetary policy is and how it's going to progress. This is because we are less sure about the commitment of central banks to short-run targets that are currently being smashed despite ongoing inflation progress. We know that commitments to long-term targets don't really mean very much – we live in the short run, not the long run as Mr. Keynes pointed out.