Tracking The Wave Of Central Bank Money------Europe, Japan And US


Money Supply Growth Surges Across the World

Michael Pollaro has recently updated his global TMS data up to the end of December 2014 (more up-to-date figures aren’t available yet). He delves into far more details than we usually do, and there are a number of things worth mentioning about the most recent data.

First of all, it is worth noting that in the final three months of 2014, and especially in December, money supply growth rates have accelerated sharply on an annualized basis in all three major currency areas (US, euro area, Japan). Here is a summary of the main data points (note, this is monthly growth annualized, quarterly growth annualized and y/y growth):


US: TMS-1: 1 month: 62.1%,   3 month: 21.9%, year-on-year: 8.8%

TMS-2: 1 month: 21.8%,   3 month: 13.8%, year-on-year: 7.8%


Euro Area: TMS: 1 month: 28%,  3 month: 19.6%, year-on-year: 9.3%

M3: 1 month: 15%,  3 month: 9.8%,   year-on-year: 4.7%

ECB credit was rising at a 73% annualized rate in December 2014 – a result of the CBPP3 (covered bond) and ABS purchasing programs and TLTROs, but not yet including the new sovereign QE program


Japan:   TMS: 1 month: 29.1%,  3 month: 13.7%, year-on-year: 4.5%

M3: 1 month: 12.2%, 3 month: 8.0%, year-on-year: 2.8%


As can be seen above, year-on-year growth rates are quite high in the US and the euro area, but not at an exceptional level (yet) compared to previous peaks. It could be that the acceleration in annualized growth rates in the fourth quarter and the month of December has partly to do with seasonal effects, but it seems actually more likely that there is more to it than that.

 全球货币Image credit: Matt Collins



Japan – Is Something Changing?

Especially intriguing is the short term acceleration in Japan’s money supply growth at year-end (since fiscal year-end in Japan is in March, we can probably rule out seasonal effects in this case). The BoJ is the only one of the three major central banks that apparently purchases the bulk of the securities it buys in its “QE” operations directly from commercial banks. It only creates bank reserves in the process, but no new deposit money enters the system concurrently.

In short, the BoJ is mainly relying on banks expanding their inflationary lending, which the banks have thus far stubbornly refrained from doing. Hence the quantity of yen has not increased as much as one would expect in light of the massive “QQE” program, as the tame 4.5% y/y growth rate in TMS attests to. The 19.6% annualized quarterly and 28% annualized monthly growth rates recorded at year-end are however surprising.

Something may be changing in Japan’s monetary inflation landscape, although it is too early to come a definitive conclusion (short term monetary growth rates are often highly erratic in Japan). Still, while commercial bank deposit creation remains at a negative 10% y/y, it has expanded at a positive 12.5% annualized rate in December. It seems also possible that the BoJ has begun to increasingly buy securities from non-bank sellers and as a result has created more deposit money in addition to bank reserves. One reason to think so is that a number of large Japanese banks have let it be known that they no longer want to sell JGBs from their inventory, as they need them as repo collateral. Japanese pension funds on the other hand are shifting their investment allocations from bonds to stocks and are probably the biggest sellers the BoJ can buy from at the moment.


1-TMS-M1-JapanTMS Japan: steadily growing since 2009/2010, but the rate of the ascent is still fairly slow compared to that observed in other major currency areas.


2-BoJ assetsAssets held by the BoJ – as can be seen, this vast expansion in central bank assets (which is matched on the liabilities side with explosive growth in bank reserves) so far has not translated well into money supply growth.


As we have previously remarked, by stuffing its balance sheet with government debt, the BoJ has certainly been lowering the yen’s quality, even if it has – so far anyway – failed to increase the quantity of yen much. We should soon know whether the year-end acceleration in Japan’s money supply growth was just another flash in the pan or a harbinger of a more lasting new trend.


Euro Area – Current Leader in Monetary Inflation

The data from the euro area are just as remarkable, if not more so. Both the ECB and commercial banks in Europe are currently driving money supply expansion in the euro area, which actually leaves us with a bit of an enigma (see further below on this). Since November, the ECB is buying about €3.75 billion in covered bonds per week under CBPP3. By the end of December, these purchases had added up to nearly €30 billion (the ABS program is too small to matter – only about €3 bn. in total so far). About 80% of the purchases take place in secondary markets, while the remaining 20% are bought directly from banks upon issuance.


3-TMS-euro areaEuro area money supply (red line=total stock, blue line=y/y growth): soon we can get the €6 trillion party hats out, making up for the revisions-induced postponement of the $60 trillion party in US total credit market debt. The ECB is “very worried” about deflation, even while the euro zone’s money supply is going increasingly parabolic – click to enlarge.


Far larger amounts have been allotted to European banks via the TLTRO program since September, which is however only creating a temporary liquidity boost (the duration is limited to three years, but presumably can be extended “if required”). TLTRO allotments between the end of September and end of December have amounted to €253.14 bn. Since then, another €199.5 bn. in TLTROs have been allotted at the new and improved interest rate of 0.05% (also known as “zilch” among experts). That makes €452.64 bn. in total, which even the most jaded liquidity junkies would probably agree is quite a big chunk of moolah, even by today’s inflationary standards. No wonder the SNB chucked its ill-fated peg.

However, we want to remain focused on the fourth quarter of 2014 for the moment. According to Michael’s data, commercial bank creation of fiduciary media (uncovered money substitutes) in the euro area accelerated to 30.3% annualized in December, to 24% annualized in Q4, and amounted to a still hefty 11.8% year-on-year. The only question is (this is the above mentioned enigma): Where the hell has this money been going? It certainly hasn’t been lent to European non-financial corporations or households – credit growth of both sectors remains in negative territory year-on-year as of January 2015.


4-Euro area, loans to NFCs and householdsEuro area bank credit to households (total outstanding=blue line; y/y growth rate=yellow line) and to non-financial corporations (total outstanding=red line; y/y growth rate=green line). Bank credit to the private sector has continued to shrink, if more slowly than previously – click to enlarge.


The only explanation we can think of is that commercial banks must have lent money to governments (presumably by a combination of bond monetization and direct lending to central governments, regional authorities and other government agencies), as well as to assorted financial speculators. Bingo, as the next chart shows. Since 2008, euro area bank lending to general government (all central and regional authorities plus social security funds) has rocketed higher, a trend that has resumed with gusto in 2014 after a brief lull in in the second half of 2013.


5-Euro area, loans to general governmentEuro area bank loans to general government (red line), and annual growth rate (blue line). Definition of general government: “Resident entities that are engaged primarily in the production of non-market goods and services intended for individual and collective consumption and/or in the redistribution of national income and wealth (i.e., criminal gangs waving flags). Included are central, regional and local government authorities as well as social security funds. Excluded are government-owned entities that conduct commercial operations, such as public enterprises.” – click to enlarge.


Riddle solved – European banks have mainly expanded loans to government entities in the euro area (note that their lending to public enterprises is not included in the above chart, but presumably also adds up to quite a bit, as these entities as a rule sport credit ratings similar to the sovereign ratings of the countries where they are domiciled). This is likely to be augmented by increased lending to companies this year, as the TLTRO allotments are tied to conditions with respect to such lending.

As an aside, given the repayment of most of the original LTRO funding allotted in 2012, covered money substitutes as a percentage of total money substitutes outstanding in the euro area have shrunk back to just 4.3%. This is still more than four times the risible 1% minimum reserve requirement set by the ECB, but it means that European banks are theoretically far more vulnerable to crises, bank runs and genuine monetary deflation than their US counterparts. Of course, as we have just seen again in Greece, this doesn’t really matter in practice, as they will simply be funded with ELA (emergency liquidity assistance) if too many depositors should want to withdraw their money (only up to a point though, as the ECB is – also theoretically – not supposed to extend ELA to institutions in danger of insolvency).

Lastly, it is remarkable that the explosion in money supply growth documented above has happened before the ECB’s latest – and biggest ever – “QE” program has even begun. The euro area seems set to positively drown in new money over the coming two years.


United States: Commercial Bank Lending Takes Over from “QE”

We have already discussed the US monetary backdrop last week (see “Montary Aggregates Compared” for details). It remains to be mentioned that based on Michael’s data, the rate of growth of fiduciary media due to inflationary bank lending amounted to 13.1% annualized in December and a hefty 32% annualized in Q4 overall. Also, as of January, the year-on-year growth rate of US TMS-2 (broad true money supply including saving deposits available on demand) has accelerated to 7.97% from 7.8% as of December, returning to the upper end of the range it has oscillated in over approx. the past 18 months (see this chart).

Below is a comparison of total loans and leases outstanding at all US commercial banks with the broad money supply measure TMS-2. During the brief and barely noticeable deleveraging phase that has become known as “the biggest financial crisis since the Great Depression”, money supply expansion was driven by the Fed’s “QE” alone. Since the end of QE3, commercial bank credit creation has accelerated, keeping money supply growth overall on an even keel between 7% to 8% per year.


6-US TMS 2 plus total bank creditTMS 2 (black line) vs. US commercial bank credit outstanding (blue line) – click to enlarge.


The sheer vastness of the money supply expansion since 2008 remains as breathtaking as ever. Given that the great bulk of it was due to “QE”, the mechanics of the expansion have led to most of the money ending up in financial assets. It is little wonder that financial asset prices have exploded and that stocks and corporate bonds have become more overvalued than at any time in history by a number of measures.

This huge monetary inflation has been almost to the exclusive benefit of government (which has greatly expanded its debt, while the cost of servicing it has collapsed), commercial banks and former non-bank financial institutions that have become banks in order to avail themselves of Fed support (the de facto insolvency of the big banks has been successfully masked by a mixture of accounting tricks and the Fed’s debt monetization largesse) and the rich (as the prices of stocks, bonds, artworks, fine wine, high end real estate, etc. have increased enormously both in absolute terms and relative to other prices in the economy).

One could of course argue that the decline in unemployment rates has benefited the common man, but to this it must be noted that 1. the government simply no longer counts long-term unemployed people as unemployed – instead they have simply been dropped from the labor force (as evidenced by the chart of the employment population ratio below) and 2. since a great many of the jobs that have actually been created are the result of bubble activities, there is at best a temporary reprieve. Once the bubble bursts, workers will very likely find themselves in even worse position than during the last downturn. Oil industry employees are currently getting a bitter reminder of what it means when selected bubble activities suddenly implode.


7-Employment population ratioThe employment population ratio has fallen sharply – click to enlarge.



It certainly appears as though a lot more tinder is being thrown on the fire by central banks, providing the means for additional bubble expansion. However, things may not be quite that simple. Stay tuned for Part 2, in which we discuss the peculiarities of the current echo boom compared to previous boom periods, the difficulties this creates for forecasting, and several areas of vulnerability that are at present probably not getting the attention they deserve. In Part 3 we will take a closer look at developments on the “price inflation” front and production.


Charts by: Bank of Japan, ECB, St. Louis Federal Reserve Research


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