Money Growth Rates Lean Against Slowdown Hypothesis

Money growth trends and the major money center economies are not showing any clear indication toward economic weakness despite widespread pessimism on the part of economists and market prognosticators.

Money growth is accelerating as its growth speeds up over one year compared to its growth over either two or three years in the EMU, the United States, and the United Kingdom. Credit growth in the EMU also speeds up on this sequence- not usually a slowdown signal. The lone exception here is Japan where its fight against deflation is finally won and morphed into an inflation problem that the Bank of Japan is fighting with its usual gradualism. Japan’s money supply growth slows over two years compared to three years and over one year compared to two years. However, back in Europe, credit growth in the EMU is showing acceleration on this timeline. Japan is the only ‘slowdown signal.’

We can also peruse the growth rates for real money balances. The EMU, the U.S., and the U.K. show that ‘real money balance’ growth picks up for two-years compared to three-years and accelerates again over one year compared to two-years. Acceleration is in train as real money balance growth transitions from a shrinking profile to positive growth rates in these three countries. Japan is an exception here as it still logs all negative growth rates and these do get progressively weaker (-1.2% over three years to -1.5% over two years to -2.8% over one year).

Shorter terms trends (for the skeptical) Within the one-year horizons (12-month to 6-month to 3-month), the annualized nominal growth rate in the EMU weaken from 3.4% over 12 months to 2.0% over three months, but real balance growth is nearly unchanged at 1.1% over 12 months compared to 0.9% over three months annualized. Real credit on these time sequences accelerates in the EMU. U.S. real M2 growth generally accelerates from 12-months to 3-months. The same is true for the U.K. but not as steadily. Japan’s progress shows growth rate declines but not getting progressively weaker.

Through all of this, nominal oil prices are steadily falling. While the pace of decline lets up over two years, the 3-year and 12-month growth rates are nearly identical.

The signal from money Money growth is looked on by some as a harbinger of the future via Milton Friedman’s old adage that it impacts the economy with long and variable lags. On that view, there is no slowing in the pipeline. Others look at money from a money demand standpoint. On that basis if money growth is still firm, they observe steady demand for money balances and infer steady economic growth. On that view, the lags in money are relatively immediate.

One if by land...one if by sea Viewed either way, money growth rates are not signaling slower growth ahead except for Japan where the objective is to deflate the inflation balloon that had emerged. Despite all the hoo-ha about tariffs, we do not see in the data.

What’s a firm to do? On that point, when times get tough for companies, economists often think that they distance themselves from their profit maximizing behavior and evolve into something different known as mini-max behavior. This model of behavior, derived from game theory, implies that firms are trying to make the decision that will minimize the bad effects on their company if they choose the wrong policy. It is a different slant than trying to choose the policy that they think will maximize profits. The mini-max policy is by its nature a defensive policy, however, in an environment where there is uncertainty rather than risk the plan is unclear. With uncertainty, it's unclear what policy a firm ought to produce because uncertainty implies that you don't know what the future will be and there is more than one option… to me implication of this is that firms are probably going to simply play out the string and wait to see what kind of risk emerges. Is the risk is going to be that inflation will rise? Is the risk going to be that the economy is going to get weak? Each of these scenarios would require a different reaction on the part of active firms. There's also a question about what Donald Trump is looking for. Does he want to really hike tariffs sharply to get tariff revenue? Or is he looking to use tariffs to get other countries to reduce their own tariff barriers? These are very different things and so it's very hard for firms to craft a new strategy let alone stick with the old strategy to attack it. I think the best assumption under these environmental options is that firms continue to move ahead cautiously rather than pull back sharply. In fact, that sort of behavior is what's reflected in current money supply growth rates.