Saturday, January 05, 2008

This is Tight Monetary Conditions?

It is generally agreed among pundits that the world has suffered a "credit crunch" since August. I am one of the few who have dissented from that view, pointing out that while the growth of some financial instruments may have slowed, this have been compensated by an accelerating growth in commercial bank lending. In the last reported week, for example, bank lending soared $49.6 billion, lifting the annualized growth rate since early August to a full 17% (6.53% during 21 weeks).

As a result, the overall level of debt just keeps rising and rising, not just in absolute but also in relative terms.

Here is a list of how various indicators have moved since the beginning of August:

Oil: +31%
Gold: +26%
CRB commodity price index:+14%
Bank lending: +6.5%
MZM money supply*: +6.3%
Baa Corporate Bond Yield:-0.15%:points
10-Year Government Bond Yield: -1.0%:point
2-Year Government Bond Yield:-1.7%:points
S&P 500: -4%
Dollar vs. Yuan: -4%
Dollar vs. Euro: -7%
Dollar vs. Yen: -9%

As you can see, every single indicator except for the stock market index S&P 500 clearly indicates looser monetary conditions. And even that indicates loose monetary conditions considering the dramatic decline in profits, which implies higher valuations. And while the spread between government bonds and corporate bonds have risen, this is entirely a result of falling government bond yields. Corporate bond yields have in fact fallen too.

*=Calculated by subtracting Small time deposits from and adding institutional MMMF:s to the M2 measure of money supply.


Anonymous Anonymous said...

But "The Monetary Base" growth during 2007 was only 1,7% (below economic growth).

FED is not going to make the same mistake they did in the 1970-1980.
When they ackomodated the increasing oil price with increased money supply.

Göran, Sweden

1:18 PM  
Blogger stefankarlsson said...

The monetary base is mostly currency in circulation (aka cash/notes & coins)and is irrelevant. During the great boom of the 1920s, the monetary base was nearly unchanged, but during the depression the monetary base soared. That certainly didn't imply that monetary conditions was more tight during the the stock market bubble of the 1920s than during 1930-32 when there was a deflationary depression.

1:46 PM  
Blogger Peter said...

Dear Stefan.
You have a very nice and interesting blog. I fully agree with you that people keep on borrowing and that monetary conditions are still very loose indeed. I am curious what the Euro money supply is like at the moment. I do not have much trust in the official numbers, if those are available. I estimate a m3 of around 10/12% p.a. which fits well into my real inflation picture of around 12%. The 3% inflation level is a real lie as far as I am concerned. Do you have any information about money supply? Btw what is your view on those overpriced european real estate markets? Thank you and regards.
Peter Ris

1:46 PM  
Blogger stefankarlsson said...

My favorite money supply measure is the MZM, Money of Zero Maturity, money available as a means of payment right now. Unfortunately, only the Fed publishes the MZM.

For simplicity I usually use the M3 for European countries, although it might very well be the case that M2 is a better proxy of MZM.

Information about that can be found at the European Central Bank web site:

And as for overpriced European asset markets, we are seeing some of them turning down. This is most clear in the cases of Britain, Ireland and Denmark, but there are signs Spain's housing market is weakening too.

2:09 PM  
Blogger Peter said...

Thanks for that Stefan. M3 showed an increase of over 12% in November. I really can not understand why "inflation" is determined at around 3/3,5%. By the way, excellent article you wrote called "Why is inflation so popular". It precisely explains what was and is going on in Euroland!

2:37 PM  

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