Why a declining money supply is now an ‘ominous sign’ for the global economy, in one chart

  • The global money supply – adjusted for US inflation – just contracted for only the sixth time since 1980.
  • Research from BAML shows the previous five times it went negative, a global economic slowdown followed.

After years of easy monetary policy, the liquidity it provided in global markets — allowing assets to be easily bought and sold — is starting to reduce.

The US Federal Reserve is already raising rates and easing back on its bond purchases, and the European Central Bank (ECB) has signaled it plans to follow suit.

As a result, the global monetary base — adjusted for US inflation — is now contracting for just the sixth time since 1980.

Investopedia.com defines the monetary base as the aggregate total of all liquid currencies in circulation and commercial bank deposits held at central banks.

Unfortunately, Bank of America Merrill Lynch (BAML) points out that the previous five contractions all preceded a global economic slowdown.

This chart from BAML tells the story:

Sixth time (un)lucky

The most recent contraction was in 2006, two years prior to the height of the global financial crisis in September 2008.

So while the exact time frame for the subsequent down-turn may be hard to predict, an extended contraction in the real monetary base is still an “ominous sign”, BAML said.

And looking ahead to 2019, it’s “highly likely for the global inflation-adjusted monetary base to contract further”.

They cited the ongoing tightening measures by the US Fed, which is still on track to raise rates again in December, along with expectations of a “sharp stop to ECB quantative easing”.

And despite some recent turmoil in global stock markets, JP Morgan expects the Fed to hike rates another four times next year as inflationary pressures begin to rise.