Liquidity - questions, not answers
As equity markets continue their charge higher across the globe, confounding the bears yet again, every pundit and blogger is seeking the reason why. Well, I am no different. If I could produce a convincing explanation for the continuing rise I would elevate myself above the rank of plain "blogger" to "pundit". Such is my ambition. However, not having a convincing explanation, all I bring to the party is a lot of questions:
My first is: Does the growth in monetary base in almost all countries have something to do with it? The following excerpt comes from an article on www.freebuck.com
Clearly monetary growth of 18% must go some way to explaining the increase in asset prices, as well as suggesting why we have low single-digit GDP growth with such startling monetary growth.
My second question is: If central banks are on a tightening cycle, why is money supply still growing so strongly? There must be a mechanism which is bypassing the restrictions being imposed by the central banks; this mechanism is probably financial engineering - derivatives, if you prefer a broad term for a loosely-related family of products. On an institutional level the development of Credit Default Swaps and the like has allowed obligations to be parcelled up and moved off balance sheet, thus allowing institutions to increase their lending. On the retail level, the development of interest-only mortgages, ARMs and other types of consumer lending products designed to roll out lending beyond previous norms, has allowed large numbers of new borrowers to run up debt - or put another way, spend money they have not earnt - yet. To me, this retail end of credit creation is where the rubber hits the road, where M3 is getting its afterburner-boost.
As always, the major reference point for this is the US; is it because Americans are the most creative when working out new ways to lend money to fresh consumers, as well as spreading the risk among larger groups of institutions? Or is it because the Federal Reserve has, since the 1929 crash, made it its duty not to let so many fingers get burned again? We have yet to see if the Greenspan Put has become the Bernanke Put, but I know where my money is.
However, although eyes turn to America whenever high levels of consumer debt are mentioned, the figures for money supply growth stated in The Economist show it is happening elsewhere. Here in the UK, whenever global warming or money-for-honours investigations move off the front pages, consumer debt takes up residence. Last week I saw a headline saying Singapore has decided to lower the level of income needed to borrow - not knowing what level they started from means I cannot tell how much difference this makes, but it does indicate that even traditionally thrifty nations are joining the trend.
And then there was this on MNS 2nd Jnuary:
So, good old Japan is still struggling to rid itself of deflation, yet it is shedding 20% of its monetary base as we speak. Now, I could try to understand the relationship between the monetary base, government borrowing, consumer credit and deficits, but I want to post this and get on with my supper. So, instead, here is my final poser: Is monetarism no longer important? Did the Great Relationship between money supply and inflation die with Milton Friedman? We have huge differentials in growth/shrinking of monetary bases, and very little difference (supposedly) in the things that matter, like inflation, growth etc. Hmmm... I will have to investigate this further.
Toodle pip
Jambutty
My first is: Does the growth in monetary base in almost all countries have something to do with it? The following excerpt comes from an article on www.freebuck.com
The economist magazine is reporting that money and credit expanded on an average of 18%, in 2006. As Gary Dorsch of www.sirchartsalot.com and Global money trends magazine puts it "Baby step rate hikes by central banks have failed to rein in explosive money growth. In Australia, the M3 money supply is 13% higher from a year ago, British M4 is 13%higher, the Euro Zone's M3 is 9.3% higher, a 16-year high, Korea's M3 is 10.3% higher, China's M2 is 16.9% higher, a 16-year higher, Russia's M2 is 45% higher, and the US M3 has been reconstructed to show 10.7%growth in 2006." This is a prescription for over 1 trillion dollars of new money and credit in the USA by next fall... It is a recipe for explosive growth.
Bernanke, and the other Central Bankers are on a mission, "Whip deflation now" and are being pushed by their local politicians looking to the next election who are willing to do anything to keep the party going. In Japan The LDP under Shinto Abe just stared the Central bank down and an interest rate hike was averted. Central Bank Chairman Fukai was forced to stand down from a well-telegraphed interest rate hike; the politicians are firmly back in charge, as they were before former Prime minister Koizumi took power. Central bank independence is dead in Japan, it is not a recipe for good things. So its off to the races for the carry trade and monetary stimulus. Do you think they would drain liquidity by 40% now like they did last spring when Koizumi was still in Charge? No way, Old school politicians are firmly back in control. So it's GO GO GO for now.
Clearly monetary growth of 18% must go some way to explaining the increase in asset prices, as well as suggesting why we have low single-digit GDP growth with such startling monetary growth.
My second question is: If central banks are on a tightening cycle, why is money supply still growing so strongly? There must be a mechanism which is bypassing the restrictions being imposed by the central banks; this mechanism is probably financial engineering - derivatives, if you prefer a broad term for a loosely-related family of products. On an institutional level the development of Credit Default Swaps and the like has allowed obligations to be parcelled up and moved off balance sheet, thus allowing institutions to increase their lending. On the retail level, the development of interest-only mortgages, ARMs and other types of consumer lending products designed to roll out lending beyond previous norms, has allowed large numbers of new borrowers to run up debt - or put another way, spend money they have not earnt - yet. To me, this retail end of credit creation is where the rubber hits the road, where M3 is getting its afterburner-boost.
As always, the major reference point for this is the US; is it because Americans are the most creative when working out new ways to lend money to fresh consumers, as well as spreading the risk among larger groups of institutions? Or is it because the Federal Reserve has, since the 1929 crash, made it its duty not to let so many fingers get burned again? We have yet to see if the Greenspan Put has become the Bernanke Put, but I know where my money is.
However, although eyes turn to America whenever high levels of consumer debt are mentioned, the figures for money supply growth stated in The Economist show it is happening elsewhere. Here in the UK, whenever global warming or money-for-honours investigations move off the front pages, consumer debt takes up residence. Last week I saw a headline saying Singapore has decided to lower the level of income needed to borrow - not knowing what level they started from means I cannot tell how much difference this makes, but it does indicate that even traditionally thrifty nations are joining the trend.
And then there was this on MNS 2nd Jnuary:
JAPAN: The monetary base fell 21.1% to Y90.05 trillion in January from a year earlier, down for the 11th consecutive month as a result of the
Bank of Japan's ending its ultra-expansionary monetary policy in March 2006, BOJ data show. It has been declining at or over 20% every month
since August 2006.
So, good old Japan is still struggling to rid itself of deflation, yet it is shedding 20% of its monetary base as we speak. Now, I could try to understand the relationship between the monetary base, government borrowing, consumer credit and deficits, but I want to post this and get on with my supper. So, instead, here is my final poser: Is monetarism no longer important? Did the Great Relationship between money supply and inflation die with Milton Friedman? We have huge differentials in growth/shrinking of monetary bases, and very little difference (supposedly) in the things that matter, like inflation, growth etc. Hmmm... I will have to investigate this further.
Toodle pip
Jambutty
posted by Jambutty at 11:06 am
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