The brilliant-if-generally-gloomy Ambrose Evans-Pritchard of The Telegraph argues that a falloff in the growth rate of the global money supply means that we’re headed for an economic slowdown.
Citing Simon Ward at Henderson Global, Evans-Pritchard says the growth of global M1 (a narrow measure of the money supply) peaked at 5.1% in November and has since fallen to 3.6% in January and 2.1% in February.
This is apparently similar to the falloff in the global money supply in the months leading up to the recession and financial crisis in 2008.
The weakness is coming from emerging markets, which have helped drive global economic growth in the past few years as the developed world has struggled with debt deleveraging:
Stephen Jen from SLJ Macro Partners said the world economy is weaker than it looks, with monetary stimulus losing traction in the West just as China, India, Brazil, et al, hit the buffers, constrained by inflation and their own credit woes.
“The risk here is that the credit cycles in emerging markets mature and start to deflate just as developed markets struggle with their own deleveraging process. We think 2012 will be a tough year for risk assets,” he said.
Monetary data for China is remarkable. Real M1 contracted in January, weaker than post-Lehman. The rate rebounded in February but only to zero.
It is too early to judge whether China really can deflate its property bubble with carefully-calibrated credit curbs, achieving a feat that has eluded very clever officials across the world over the last century.
But bear in mind that China has racked up loan growth of 87pc of GDP over the last five years – according to Fitch study that should be compulsory reading – compared to less than 50pc in Japan leading up to the Nikkei bubble, or in Korea before the 1998 crisis, or in the US before the subprime debacle.
For what it’s worth, if there is an issue here, it’s a global money-supply growth issue. The money supply in the U.S. is still growing at a rapid clip, as the charts below show:
U.S. M1 Growth (year over year):
Photo: St. Louis Fed
U.S. M2 Growth (year over year):
Photo: St. Louis Fed
And, of course, banks are still flush with lending capacity. Check out the “excess reserves” on deposit at the Fed: