Bankers — facing a barrage of new capital
requirements, regulations and investigations — must feel as if they are
targets of a witch hunt. Well, if truth be told, they are.
requirements, regulations and investigations — must feel as if they are
targets of a witch hunt. Well, if truth be told, they are.
Indeed, it’s gotten so bad
that the Dutch authorities, who were clueless before the crisis, have
put the sinners (read: bankers) on public display and forced them to
repeat the following: “I swear that I will endeavour to maintain and
promote confidence in the financial sector ... so help me God.” So,
there you have it — “So help me God”.
that the Dutch authorities, who were clueless before the crisis, have
put the sinners (read: bankers) on public display and forced them to
repeat the following: “I swear that I will endeavour to maintain and
promote confidence in the financial sector ... so help me God.” So,
there you have it — “So help me God”.
The world’s politicians and
central bankers — the ones who enabled the excesses that led to the
financial crisis of 2009 — have to blame someone else for their
misdeeds. And what can be a more inviting target than hapless bankers?
central bankers — the ones who enabled the excesses that led to the
financial crisis of 2009 — have to blame someone else for their
misdeeds. And what can be a more inviting target than hapless bankers?
Beating up on bankers (and
banks) — the ones who produce most of the world’s money — creates a
problem: it constrains the growth of money broadly defined. In
consequence, Europe is in a slump, and so is Japan.
What happens when banks are everybody’s target | GulfNews.combanks) — the ones who produce most of the world’s money — creates a
problem: it constrains the growth of money broadly defined. In
consequence, Europe is in a slump, and so is Japan.
As for the US, it’s stuck in a growth
recession with nominal aggregate demand growing much more slowly than
the trend rate since 1987. Even China is sagging a bit. This is all
because of relatively slow money growth.
recession with nominal aggregate demand growing much more slowly than
the trend rate since 1987. Even China is sagging a bit. This is all
because of relatively slow money growth.
Let’s review the terrain and my themes of the past few years — themes that continue to be supported by the unfolding evidence.
First, take a
look at the US. The Center for Financial Stability, under the direction
of Prof. William A. Barnett, publishes Divisia monetary data. These are
now available via Bloomberg and provide the most accurate picture of
the US money supply that is available.
look at the US. The Center for Financial Stability, under the direction
of Prof. William A. Barnett, publishes Divisia monetary data. These are
now available via Bloomberg and provide the most accurate picture of
the US money supply that is available.
Even though the Fed has been
pumping out State Money at a super-high rate since the crisis of 2009,
it hasn’t been enough to offset the anaemic supply of money produced by
banks — Bank Money. Even after six years of pumping, State Money still
only accounts for 21 per cent of the total money supply broadly
measured.
pumping out State Money at a super-high rate since the crisis of 2009,
it hasn’t been enough to offset the anaemic supply of money produced by
banks — Bank Money. Even after six years of pumping, State Money still
only accounts for 21 per cent of the total money supply broadly
measured.
In consequence, the Divisia
M4 money supply measure is growing on a year-over-year basis at a very
low rate of only 1.7 per cent. And that’s why nominal US aggregate
demand measured by final sales to domestic purchasers is still growing
at below its trend rate of 5 per cent (see the accompanying chart).
M4 money supply measure is growing on a year-over-year basis at a very
low rate of only 1.7 per cent. And that’s why nominal US aggregate
demand measured by final sales to domestic purchasers is still growing
at below its trend rate of 5 per cent (see the accompanying chart).
Moving across the pond to
Europe, the picture starts to turn even uglier — thanks to Bank Money
austerity, not fiscal austerity. Here again, the cause is the regulatory
witch hunt aimed at banks and bankers by the political class and their
loyal troops — the central bankers.
Europe, the picture starts to turn even uglier — thanks to Bank Money
austerity, not fiscal austerity. Here again, the cause is the regulatory
witch hunt aimed at banks and bankers by the political class and their
loyal troops — the central bankers.
When it comes to measuring
the money supply, we must heed the words of Sir John Hicks, a Nobelist
and high priest of economic theory: “There is nothing more important
than a balance sheet”. Indeed, these sentiments were echoed by my
Parisian friend, the former Governor of the Banque de France Jacques de
Larosiere, in his April 17, 2013 lecture at Science Po.
the money supply, we must heed the words of Sir John Hicks, a Nobelist
and high priest of economic theory: “There is nothing more important
than a balance sheet”. Indeed, these sentiments were echoed by my
Parisian friend, the former Governor of the Banque de France Jacques de
Larosiere, in his April 17, 2013 lecture at Science Po.
Components of the money
supply appear on a bank’s balance sheet as liabilities. The money supply
is simply the sum all of the deposits and various other short-term
liabilities of the financial sector. On every balance sheet, the sum
total of assets must equal total liabilities.
supply appear on a bank’s balance sheet as liabilities. The money supply
is simply the sum all of the deposits and various other short-term
liabilities of the financial sector. On every balance sheet, the sum
total of assets must equal total liabilities.
In consequence, the money
supply (short-term liabilities) must have either an asset or longer-term
liability counterpart on the balance sheet (see the accompanying
chart).
supply (short-term liabilities) must have either an asset or longer-term
liability counterpart on the balance sheet (see the accompanying
chart).
One of these counterparts is
known as credit, and it includes various financial instruments, such as
private loans, mortgages, etc. Money and credit are often confused as
synonyms, but they are not the same thing — credit is a counterpart to
money.
known as credit, and it includes various financial instruments, such as
private loans, mortgages, etc. Money and credit are often confused as
synonyms, but they are not the same thing — credit is a counterpart to
money.
Any economist worth his salt
should have the money supply on his dashboard. But, it is also important
to look at what the financial sector is doing with these deposits — are
they lending this money back out to the economy, and if so, to whom?
should have the money supply on his dashboard. But, it is also important
to look at what the financial sector is doing with these deposits — are
they lending this money back out to the economy, and if so, to whom?
There is one very important
counterpart of the money supply that is particularly worth looking at —
loans to private individuals and businesses, known as “private credit”.
counterpart of the money supply that is particularly worth looking at —
loans to private individuals and businesses, known as “private credit”.
The money supply in Europe is growing, but credit has been contracting since late 2012 (see the accompanying chart). Why?
To answer this question it is
necessary to determine what driving money supply growth in the Eurozone
is. A large chunk of the contribution to the growth in M3 has come from
an increase in bank lending to governments.
necessary to determine what driving money supply growth in the Eurozone
is. A large chunk of the contribution to the growth in M3 has come from
an increase in bank lending to governments.
Another large chunk of this
growth in M3 has come from a decrease in banks’ long-term liabilities.
To understand how this would increase the money supply, consider the
following example: If I own a long-term bank bond, and the bank then
retires that bond, I will take the money I receive as a result of this
transaction and put it into my bank account.
growth in M3 has come from a decrease in banks’ long-term liabilities.
To understand how this would increase the money supply, consider the
following example: If I own a long-term bank bond, and the bank then
retires that bond, I will take the money I receive as a result of this
transaction and put it into my bank account.
Hence, the money supply (deposits) increases.
In short, government
borrowing and the restructuring of the liability side of bank
balance-sheets is pumping up the Eurozone money supply, while private
credit remains in the doldrums. And that’s why it’s not surprising that
Europe is on the verge of a recession.
borrowing and the restructuring of the liability side of bank
balance-sheets is pumping up the Eurozone money supply, while private
credit remains in the doldrums. And that’s why it’s not surprising that
Europe is on the verge of a recession.
To understand just how dire
things in Europe are, take a look at the accompanying chart for
Germany’s money and credit. In the absence of developed capital markets,
small and medium sized businesses depend on bank credit.
things in Europe are, take a look at the accompanying chart for
Germany’s money and credit. In the absence of developed capital markets,
small and medium sized businesses depend on bank credit.
And without bank credit,
these businesses, which account for the lion’s share of Europe’s job
growth, can’t grow and often can’t survive.
these businesses, which account for the lion’s share of Europe’s job
growth, can’t grow and often can’t survive.
China turns out to be one of
the few countries in which the authorities understand money, and one
that has refused to jump on the capital punishment bandwagon. Indeed,
China saved themselves from a slump in 2009 because it massively
increased the supply of money and credit (see the accompanying chart),
rather than embrace Keynesian fiscal nostrums.
the few countries in which the authorities understand money, and one
that has refused to jump on the capital punishment bandwagon. Indeed,
China saved themselves from a slump in 2009 because it massively
increased the supply of money and credit (see the accompanying chart),
rather than embrace Keynesian fiscal nostrums.
That said, China has allowed
its money and credit growth to drift below trend. So, it’s not
surprising that a recent research paper by Ma Jun of the People’s Bank
of China predicts a slowdown in China’s GDP growth — from 7.4 per cent
in 2014 to 7.1 per cent in 2015.
its money and credit growth to drift below trend. So, it’s not
surprising that a recent research paper by Ma Jun of the People’s Bank
of China predicts a slowdown in China’s GDP growth — from 7.4 per cent
in 2014 to 7.1 per cent in 2015.
The money and credit growth numbers suggest that such a slowdown might just be in the cards.
Money and credit matter. It’s
remarkable that the most influential press in the world (read: The New
York Times and the Financial Times) love to join the witch hunt and
repeat fiscal nostrums, but rarely mention what matters.
remarkable that the most influential press in the world (read: The New
York Times and the Financial Times) love to join the witch hunt and
repeat fiscal nostrums, but rarely mention what matters.
The writer is a professor of
Applied Economics at The Johns Hopkins University in Baltimore and a
Senior Fellow at the Cato Institute in Washington, D.C. You can follow
him on Twitter: @Steve_Hanke
Applied Economics at The Johns Hopkins University in Baltimore and a
Senior Fellow at the Cato Institute in Washington, D.C. You can follow
him on Twitter: @Steve_Hanke
Post a Comment