Sunday, October 04, 2009

Monetary Divergence

While money supply growth (Whether you prefer the M2 or MZM measure) in America has been slightly negative for the last few months, the story is different in most other countries.

For example, in Sweden, the M1 measure of money supply (which is much broader than M1 in America and more similar to M2/MZM) rose to 9.1%, the highest since late 2007 and up from a low of 1.9% in October 2008.

In the euro area, M1 growth increased to as much as 13.6% , up from a mere 0.5% in the year to July 2008.

In China money supply rose by a record 28.5%.

In Australia, money supply growth (defined as M1 + "other" other deposits) has remained firm at about 13%.

In the U.K., money supply growth has remained more or less unchanged, but only moderately positive at only about 3%. Similarly, in Japan money supply growth has increased somewhat but is only moderately positive.

Two caveats should be immediately inserted here: First of all, in most countries seasonally adjusted money figures are not available, meaning you have to use changes in the annual change, and the risk with using that there is a risk that changes in money supply growth could reflect base effects rather than real increases. But usually it does.

And secondly, comparing absolute levels of money supply growth is not always fair as there are structural differences in economic growth and therefore also structural differences in sustainable money demand growth. China for example has a far higher structural economic growth rate than Japan.

Even so, it seems fair to say that at least in the first 4 examples (Sweden, the Euro Area, China and Australia) money supply growth is strong, while being weaker (but not weakening) in the U.K. and Japan.

That would suggest that the euro, Swedish krona and the Australian dollar are likely to weaken in coming months, while the USD should strengthen. The Chinese yuan's exchange rate is directly controlled by the central bank, so unless it changes its exchange rate policy or reins in money supply growth there we should instead see a big pick-up in China's relative inflation rate and a reduction its trade surplus.

The latter will probably limit but not completely cancel out the fall-out for the world economy from the renewed American economic weakness.


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