money supply

Robin Harding

Some commentators have their knickers in a twist about the rise in the monetary base since February. The reason for it, of course, is that the Treasury has suspended its Supplementary Financing Programme in in order to buy time for Congress to raise the debt limit. The correlation between the SFP and bank reserves (and hence monetary base) is very clear.

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China has temporarily increased the reserve ratio required from six large commercial banks banks. For two months, the banks will need to keep 17.5 per cent of depositors’ balances on hand, instead of 17 per cent. With banks hoarding more cash, money supply and credit availability will fall in China. In two months’ time, the reserve ratio is expected to return to 17 per cent.

The surprise move, reported by Reuters from four unnamed sources, may be a response to rising capital flows, rather than a prelude to monetary tightening. It could also be intended as a warning to banks rumoured to have stepped up their lending in September, above government targets. Read more

Adam Posen, an external member of the Monetary Policy Committee, has just sounded the alarm: not about a temporary double-dip recession, but about Japanese-style prolonged economic weakness, high unemployment, trade conflicts, and extremist politics.  It is strong stuff. Monetary policy needs to do more to foster a stronger recovery, he says. Now.

His argument is worth reading in full because it is directed much wider than solely to other MPC members in the UK.

The one sentence summary. Policymakers should not settle for weak growth out of misplaced fear of inflation.

In a paragraph. Mr Posen believes output is clearly below any reasonable measure of potential, so worrying about an inflation problem is absurd. We must also not underestimate the potential for the economy to grow. If we do, that will destroy workforce skills and potentially productive machinery as well as inhibiting investment, creating a self-fulfilling bad outcome. Read more

Adam Posen, one of the more outspoken external members of the Monetary Policy Committee, has dangled the intriguing possibility of the Bank shifting into “heavy-duty credit easing” if necessary.

The Bank had promised to release the remarks he made in the US last night and I understand the reason they have not is cock-up not conspiracy. That means we have to rely on wire reports of his words. Without much context, Bloomberg is reporting Mr Posen saying:

“Because we have only done quantitative easing up till now, our plan B or our next page in my opinion, and I’ve said this, is to shift into heavy-duty credit easing.”

For Bank of England watchers, this should come as little surprise. While the bank has usually emphasised the amount of money it has created (a liability on its balance sheet), Mr Posen has regularly highlighted the effect of QE on the assets markets. It is also not much of a departure. Mr Posen has repeatedly said similar things. In a speech last October he bemoaned the fact that:

“Other central banks were able to buy a wide range of assets from the private sector, under the heading of ‘credit easing,’ as described in Bernanke (2009), to good effect.”

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Argentina’s central bank on Thursday relaxed key monetary targets after overshooting annual goals for growth in monetary aggregates, heralding a stance that favours stoking growth over reining in inflation.

It is the first time the central bank has failed to meet the monetary programme since Argentina introduced the method in 2003, and points to a central bank increasingly at the service of a spendthrift government, which ejected the former central bank president earlier this year for refusing to hand over reserves to pay debt. Read more

James Politi

The latest warning on the fate of the global economic recovery today came from the International Monetary Fund, which rather ominously stated that the risks of a slowdown have risen considerably in recent months.

In that context, I came across a fascinating – and worrying - note by John Makin, a visiting scholar at the American Enterprise Institute, a Washington think-tank, and former consultant to the Treasury department.

Mr Makin, who is also a partner at Caxton, the hedge fund, is firmly in the camp of economists who believe deflation is emerging as the biggest danger to the economic recovery, and he eloquently lays out his case.  Read more

People with a free-market orientation believe that the economy has a strong tendency towards equilibrium. Over the long term money is “neutral”: a rise in the money supply merely raises the price level. In the short term, however, monetary policy may have a big impact on the economy. A big question, however, is over how to measure the impact of monetary policy in an environment such as the present one, when short-term interest rates are close to zero and the credit system is damaged.

The difficulty arises because of the huge divergence between what is happening to the monetary base (the monetary liabilities of the government, including the central bank) and what is happening to broader measures of money (principally the liabilities of the banking system). The former has exploded. But the growth rate of the latter is extremely low. (Look at the chart that accompanied my column, “Why it is right for central banks to keep printing”)

People worried that governments are “printing money” point to the balance sheets of central banks with horror and insist this is bound to be inflationary. Inside the eurozone, Germans are particularly concerned Read more

Robin Harding

Some of the broader measures of Japan’s money supply are now rising at their fastest rate since the current series started in 2003.

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Ralph Atkins


Eurozone banks are parking record sums overnight at the European Central Bank in the latest sign of heightened nervousness across the 16-country region’s financial sector. Read more

James Politi

Ben Bernanke, Federal Reserve chairman, heads to Capitol Hill on Thursday for a hearing on the US central bank’s exit strategy.

With the latest FOMC statement out only a week ago, few economists are expecting any significant changes to the monetary policy outlook of “exceptionally low” rates for an “extended period”. But that does not mean there won’t be news coming out of Mr Bernanke’s mouth. One guess of several economists, such as Michael Feroli of JPMorgan, is that the headlines could be made by a discussion of the discount rate – the rate at which commercial banks can borrow from the Fed in a pinch.

References to the discount rate were notably absent from the FOMC statement last week – but that doesn’t mean the committee did not discuss it. Read more

Talk about rationalisation after the fact. The one thing consistent about the Bank of England’s communications over QE has been its inconsistency.  Officials always insist the policy has worked, but have repeatedly changed their stated intermediate objectives for QE and how they were judging its success. The Bank’s communication around QE has been a classic example of “policy-based evidence-making”. Gordon Brown, the master of the dark art, would approve.

Today, as the Monetary Policy Committee has just announced a pause in the creation of money and purchases of assets, it has said almost nothing about QE, except that £200bn was the “appropriate” amount to “to keep inflation on track to meet the 2 per cent inflation target over the medium term”. QE and low interest rates would, in any case, “continue to impart a substantial monetary stimulus to the economy for some time to come,” the MPC continued.

I am deeply indebted to Jessica Winch, who analysed all Bank communications over the past year for the Financial Times. She has compiled the following evidence on the QE and the Bank.

This first chart compiles the intermediate objectives for QE that the MPC  has declared are important in 2009 with colour coding to represent the proportion of the total times in a month a particular objective was aired. Red means that objective was not mentioned in the month and the proportion of mentions rises through orange, yellow and lime until bright green represents a reason that was used more than 30 per cent of times in a particular month.

Without getting bogged down with the precise figures – there was a dearth of statements for example in September and December so those months have been excluded – it is obvious the Bank has flipped and flopped over the intermediate objectives for QE last year. It was all about expanding the money supply and the price of corporate bonds until it wasn’t; it had little to do with Read more

Export-dependent Japan wants the carry trade back, apparently. A carry trade involves borrowing in a cheap currency to invest in one with a decent rate of return. The cheap currency of choice has been, for years, Japan. Recently there was much excitement that the mantle was passing to the USA. But Gillian Tett says Japan is fighting back.

The Japanese want the yen to be borrowed because it increases the quantity of yen and decreases its price. A lower yen means Japanese exports become more attractive internationally. Read more

The Chinese central bank has said that mainly focusing on inflation is not enough. “China’s monetary policies are aimed at achieving multiple goals, rather than just a solitary effort to control inflation,” said governor Zhou Xiaochuan. Other goals include ensuring economic growth, keeping a relatively high employment rate, and securing the international balance of payments, he said.

The People’s Bank of China says it will target “moderate” loan growth this year, in contrast to the extremely sharp expansion of credit last year. Loan issuance to industries facing overcapacity must be strictly controlled to avoid credit risks, governor Zhou saidRead more

Ralph Atkins

Jean-Claude Trichet, European Central Bank president, has just announced the next – and last – offer of unlimited 12-month liquidity will be at an interest rate linked to future changes in the main policy rate. I blogged on the attractiveness of such a move yesterday. Mr Trichet insisted the move sent no signals about a future tightening of monetary policy. More on later…

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Mure Dickie

With deflation entrenched and the yen’s rise against the dollar worrying exporters, speculation swirled that the BoJ was about to announce a return to “quantitative easing” or at least an increase in its government bond-buying programme. So when all the policy board offered was a sideshow offer of cheap three-month loans to commercial banks, the sense of anti-climax was palpable. Read more

The Bank of England’s Mr Quantitative Easing predicted this morning normality returning to the Bank’s balance sheet “at some point”. England is likely to win the world cup “at some point” too. In contrast, Chris Giles of the Financial Times writes that normality will not return for years.  Read more

Mure Dickie

Ryuzo Miyao, a 45-year-old professor at Kobe University, is seen as being broadly in tune with such tenets of current BoJ policy. Read more

The Bank of England has raised the total amount of quantitative easing by £25bn to £200bn. This should be seen as a gradual ending of the flow of QE, with gilt purchases over the next three months now considerably slower than the issuance of new government paper, writes Chris Giles of the Financial Times. The MPC has also revised again how it believes QE is working and made dovish comments about inflation.  Read more

Money Supply, a Financial Times blog, rounds up the news for Monday, October 19 Read more

Krishna Guha

Krishna Guha of the Financial Times discusses the FOMC’s dovish minutes Read more