The Echo Boom, Part 1

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.

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.