Euro Area Money Supply Growth Up-Credit Down
The growth rate of the European monetary aggregate most closely resembling MZM, M1, increased to 12.2% in July-the highest since 2003. In July 2008, the growth rate was just 0.5%. This increase can be explained by the fact that while the ECB raised its short-term rate from 4% to 4.25% in July 2008, it has since cut it to 1%.
Interestingly though, the ultra-broad M3 aggregate has however seen its growth rate drop from 9.3% to 3%, while lending to the private sector has dropped from 11.1% to 1.8%. Total lending has dropped somewhat less, from 9.1% to 3.3% as government lending has increased.
Because M3 includes almost all forms of financing of credit, it will more closely resemble credit growth than M1. Contrary to what Mish and his followers argue though, money supply (M1)is what matters, not credit (essentially M3), which is why we saw a big drop in economic activity and inflation in the euro area following July 2008 when money supply growth was low and credit growth was high and that is also why we are now seeing a economic recovery in the euro area and will soon see its inflation rate increase dramatically now that money supply growth is high and credit growth low.
Interestingly though, the ultra-broad M3 aggregate has however seen its growth rate drop from 9.3% to 3%, while lending to the private sector has dropped from 11.1% to 1.8%. Total lending has dropped somewhat less, from 9.1% to 3.3% as government lending has increased.
Because M3 includes almost all forms of financing of credit, it will more closely resemble credit growth than M1. Contrary to what Mish and his followers argue though, money supply (M1)is what matters, not credit (essentially M3), which is why we saw a big drop in economic activity and inflation in the euro area following July 2008 when money supply growth was low and credit growth was high and that is also why we are now seeing a economic recovery in the euro area and will soon see its inflation rate increase dramatically now that money supply growth is high and credit growth low.
posted by stefankarlsson at 11:59 AM
3 Comments:
If credit was all repaid overnight, how could it not have a deflationary (in terms of price falls, not austrian definition of deflation) impact. Fractional reserve multiplier would fly into reverse and we would see flipside to massive credit boom of last decades?
Perhaps I didn't express myself clear enough in this post. Credit can have inflationary/deflationary effects but only indirectly, which is to say to the extent it affects money supply. When I wrote in the post that it didn't matter I meant the direct effect.
Whether credit has an indirect effect also depends on how it is financed. To the extent it is financed through fractional reserve deposits it has an inflationary effect. But not to the extent it is financed by for example bonds or genuine time deposits.
I am not so sure the gap is as wide between Mish and his detractors. To my mind the difference seems to revolove around definitions of inflation. The Austrian one referring to supply of money and the widely understood one of price movements. I believe Mish's view is that the way credit will unwind will have deflationary price consequences... I tend to agree and this is what we have been seeing until recently. I am not sure a hard focus on Austrian definition of money is that useful in a market that is so overwhelmed with consequences of credit inflation.
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