Globally contracting money stocks

In a chart on the Rates Blog today they point out that the money stock (note not really the money supply, depending on how you define it) in the Euro Zone is declining.  The indication then is that “Europe looks bad”.

However, the money stock is also dropping in Australia and New Zealand.  If there were figures for the US, I suspect we would see some contraction there as well.

Does this mean economic activity is taking a sharp turn downwards?  Not necessarily – we may be seeing a sharp uptick in the velocity of money or a movement in reserves as global interest rates tick up.  Furthermore, remember that growth in the money stock in many countries ACCELERATED in the middle of the great financial crisis – so to be honest, it is hard to tell exactly what is going on with these figures.

Overall, falling money stock (in conjunction with an easing in borrowing statistics) suggests we should be cautious – it looks like deleveraging is happening.  However, it is not a clear indicator of where the economy is directly going – if relative prices in the economy are adjusting then activity could still be rolling along nicely.

  • Thank you very much for sharing…

  • roelof

    Yeah…. I think Corporates and consumers are downpaying debt.. ( deleveraging).
    I think that the growth in the Global money stock during the crisis was Central Banks providing liquidity… they opened the flood gates. ( Makes sense )…. BUT that was only to stabalize the “system”….

    Will we see an increase in the velocity of money, anytime soon…???? ( I don’t think so… the impact of the Govts stimulus packages must be wearing off..?? )

    How will falling Money stock impact on GDP..???

    Steve keen has an interesting article on how credit growth/contraction impacts on aggregate demand.

    http://www.debtdeflation.com/blogs/2010/01/24/debtwatch-no-42-the-economic-case-against-bernanke/

    If we have a few more months of falling money stock…. ?????
    What would that imply, Matt..???

    Cheers RK