Money Supply Madness in the Euro area

This morning has brought a consequence of the actions of the European Central Bank into focus. In response to the Covid-19 pandemic it found itself out of interest-rate ammunition having already cut interest-rates to -0.6%. Or rather interest-rate ammunition for businesses and consumers as of course it has set a record low of -1% for The Precious! The Precious! So it found itself only able to employ more unconventional measures such as Quantitative Easing ( QE) and credit easing ( TLTROs). Of course it was already indulging in some QE which is looking ever more permanent along the lines such about by Joe Walsh.

I go to parties sometimes until four
It’s hard to leave when you can’t find the door

Money Supply

We have been observing the consequences of the above in this area for some months now. Today is no different.

Annual growth rate of narrower monetary aggregate M1,, comprising currency in circulation and overnight deposits, stood at 12.6% in June, compared with 12.5% in May.

If we look back we see that it was 7.2% a year ago and then the extra monetary easing of the autumn of 2019 saw it rally to around 8%. So the new measures have pretty quickly had an impact. That has not always been true as regular readers will know. Also whilst we have seen an annual rate of 13.1% in the past ( late 2009 when the credit crunch hit) the money supply is much larger now. Mostly of course due to all the official effort pushing it up!

In terms of totals M1 pushed past the 9.7 trillion Euros barrier in June and also cash in circulation pushed past 1.3 trillion. Cash is not growing as fast as the rest but in other terms an annual growth rate of 9.7% would be considered fast especially as it has been out of favour as a medium of exchange for obvious possible infection reasons. More woe for the media reporting of it.

Broad Money

As you can see this is on the surge too.

The annual growth rate of the broad monetary aggregate M3 increased to 9.2% in June 2020 from 8.9% in May, averaging 8.8% in the three months up to June. The components of M3, showed the following developments. The annual growth rate of the narrower aggregate M1, which comprises currency in circulation and overnight deposits, stood at 12.6% in June, compared with 12.5% in May. The annual growth rate of short-term deposits other than overnight deposits (M2-M1) stood at 0.7% in June, unchanged from the previous month. The annual growth rate of marketable instruments (M3-M2) increased to 10.1% in June from 5.7% in May.

The relative move has been even stronger here as the annual rate of growth on a year before has doubled from 4.6%. In more recent terms it has risen from around 5.5% if we ignore the odd print at the end of 2019. As to the breakdown much of the growth (8.5%) is M1 and it is noticeable that M2 seems very out  of fashion these days. I guess with interest-rates so low why have your money deposited for longer terms? But M3 growth has picked up noticeably.  We should not be surprised as that is one of the main targets of ECB policy both implicitly via corporate bond purchases and explicitly such as the purchase of commercial paper.

So we have more overnight deposits backed up by more cash and more money market fund shares. There was also a noticeable slowing in June to 95 billion Euros as the growth rate ( Taking us to 13.89 trillion)

There is another way of looking at this and as usual let me remind you not to take these numbers too literally. That went horribly wrong in my home country back in the day.

the annual growth rate of M3 in June 2020 can be broken down as follows: credit to the private sector contributed 5.1 percentage points (down from 5.3 percentage points in May), credit to general government contributed 5.0 percentage points (up from 3.6 percentage points), net external assets contributed 1.0 percentage point (as in the previous month), longer-term financial liabilities contributed 0.3 percentage point (up from 0.0 percentage point), and the remaining counterparts of M3 contributed -2.0 percentage points (down from -0.9 percentage point).

It was only a few days ago I pointed out that the main role of the ECB these days seems to have become to make sure the Euro area government’s can fund themselves cheaply.


I consider this to usually be a lagging indicator but there are some points of note and the credit to governments leaps off the page I think.

 The annual growth rate of credit to general government increased to 13.6% in June from 9.8% in May, while the annual growth rate of credit to the private sector stood at 4.8% in June, compared with 4.9% in May.

Credit to government was -2% as recently as February so the pedal has been pushed to the metal.

The ECB will be troubled by the latter part of the numbers below.

The annual growth rate of adjusted loans to the private sector (i.e. adjusted for loan sales, securitisation and notional cash pooling) decreased to 4.8% in June from 5.3% in May. Among the borrowing sectors, the annual growth rate of adjusted loans to households stood at 3.0% in June, unchanged from the previous month, while the annual growth rate of adjusted loans to non-financial corporations decreased to 7.1% in June from 7.3% in May.

Private-sector credit declined noticeably in the circumstances when adjusted but that seems to go missing in the detail. So let me help out.

New bank loans to euro area corporates slowed to €9bn in June, following a massive increase of €245bn over the previous three months. ( @fwred)

Putting it another way credit growth fell to 178 billion Euros in June of which 153 billion went to governments.


The response of the ECB to the Covid-19 pandemic has been to sing along with MARRS.

Brothers and sisters!
Pump up the volume
Pump that beat
Brothers and sisters!
Pump up the volume
We gonna get ya!

But just like their other moves of applying large interest-rate cuts and then negative bond yields it does not seem to be working. Back in the day I was taught this as “pushing on a string”. As a concept it is clear but in the intervening decades the monetary system has changed enormously. Personally I think the concepts of money and credit have merged in certain areas such as people paying for things with their phone. Another is the use of credit cards.

Putting it another way the economic impact is money supply multiplied by velocity with the catch being we do not know what velocity is. We can have a stab at what it was but right now we neither know what it is nor what it will be. So we know it has fallen over time undermining the central bank efforts making it push on a string but we can only say that looks like it is happening all over again, we cannot measure it with any precision.

Thus a likely consequence from this is inflation. We can see this in two ways. The official denials combined with increasingly desperate efforts to miss measure inflation. Or as the news overnight has highlighted and my subject of a few days ago, another high for the price of Gold.

Let me offer an olive branch to economics 101. How is the Euro rallying ( 1.17 versus the US Dollar). Well the US Money Supply is growing even faster.


7 thoughts on “Money Supply Madness in the Euro area

  1. Shaun, you are usefully pointing out that velocity is key. For cash, that seems to be almost zero. I do worry that the money supply excesses could only rear their head once cash starts passing across people’s palms.

    Credit Card spend on Amazon Prime is what we need to be measuring, is that an index?

    • Hi Paul C

      This issue came up last week on the online RPI seminar held by the Royal Statistical Society. Whilst it was inflation related the issue of using actual transaction data holds true in your case. It also reminds me of the MIT million price project.

      With all the IT progress we should be able to do this but I think that our official statisticians are not progressing this as they might.

  2. Great blog and podcast as usual, Shaun.
    Regarding your podcast, you are absolutely right to be disappointed in the failure of the ONS to incorporate capital repayments in their experimental Household Cost Indices. It really does seem to reflect a reluctance to incorporate house prices into the UK inflation measures.
    The RPI and the HCIs are household-oriented consumer price measures, good for upratings and so forth. Housing prices should be both in household-oriented measures and in macroeconomic consumer price measures, but the approach used would not be the same. I just reread New Zealander Helen Stott’s 1998 paper “The CPI purpose and definition – the Australasian Debate”. The December 1997 Policy Targets Agreement in New Zealand made the Reserve Bank of New Zealand the first central bank in the world with an inflation target whose owner-occupied housing component was based on a limited net acquisitions approach (i.e. one that excluded mortgage interest). The Reserve Bank of Australia followed in October 1998. Stott makes clear that in doing so, the Australasians were greatly influenced by the papers the great English economist Peter Hill wrote on the HICP for Eurostat, which argued “very convincingly that a measure of inflation should be a measure of actual monetary transactions, and based on the acquisitions principle.” According to Stott, Peter believed: “The weight for housing would include the expenditure on all new houses during the base period as well as those sections purchased and built on in the year. The pricing measure would include the price of new houses (including the price of the section built on).” Section here just relates to the lot, which in New Zealand and Australia is often purchased and sold separately from the dwelling on it. So in Eurostat parlance, Peter argued for a gross weight-gross price approach, not the net weight-gross price approach adopted in the experimental OOH(NA) series calculated by EEA countries at the request of Eurostat. Unfortunately, neither the New Zealand nor Australian CPIs were calculated precisely as Peter wanted them to be. Instead a net weight-net price approach was adopted, which was not difficult to do in Australasia, since separate dwelling prices and lot prices didn’t have to be imputed. They were readily available, which is not the case in most countries in the developed world.
    So while the net acquisitions approach to OOH has made considerable progress since Peter wrote his papers, it has nowhere been implemented according to the gross weight-gross price approach he favoured. To him, creating a proxy new dwelling price index in a macroeconomic consumer price series was the same kind of a mistake as creating a proxy imputed rent series for OOH costs in general. And he wouldn’t be wrong. Now that the UK is out of the EU, there is surely no good reason for not adopting a gross weight-gross price approach to calculating OOH(NA) series. The UK CPI incorporating such a series would be the appropriate target inflation indicator for the Bank of England. One of the frequent complaints about the experimental OOH(NA) series that has been calculated by Tanya Flower is that the expenditure weight is too low. With a gross weight-gross price approach, it would be appreciably larger.

      • Hi, Forbin. I see that Shaun has already replied to you, but I will put my own two cents in. I actually continue to calculate an RPIX series and an RPI excluding mortgage interest and council tax, both adjusted for the formula effect, to amuse myself. The RPIX excluding the formula effect annual inflation rate was at 0.7% in June, unchanged from May. This assumes the formula effect is unchanged from 0.6% when it was last measured by the ONS for January 2020, which may be a bit of a stretch, but what can you do when you live in a shoe? In any case, to my mind, the alternative, that the inflation rate was 1.3% in June, unchanged from May, is absurdly high. The adjusted RPIX inflation rate is still higher than the corresponding CPI inflation rate (0.6% for June, up from 0.5% in May). The depreciation component actually rose from 2.5% in May to 2.8% in June, but this was due to a slight monthly decline in the depreciation index in June 2019 leaving the annual inflation.
        If I had to choose between RPIX adjusted for the formula effect and the CPI as a target inflation indicator of the Bank of England, I would still choose the former, but right now that would definitely be a poor policy prescription. The CPIH(NA) experimental series calculated by Tanya Flower of the ONS looked suspect before the stamp duty series was very substantially revised to show more inflation. Now all that is really needed is to be able to update it simultaneously with the current CPI and it is good to go as the BOE’s new target inflation indicator. It would be much better than the RPIX or the RPIX adjusted for the formula effect. If you look at my other comment, I am well aware that the CPIH(NA) series underweights new house acquisitions (or new dwelling acquisitions, as they are now) and that should be remedied. However, Rishi Sunak should change the remit of the Bank of England to the existing CPIH(NA) series, only modified to meet the exigencies of the shorter period for updating, ASAP. It would be easier to justify changes in the CPIH(NA) measure when it is the target inflation indicator than when it is just an experimental series. If Mr. Sunak wants to chat about it, he can always find me on Skype. John McDonnell is welcome to call too. I don’t get to vote in the UK and this issue should really not be a partisan one in the political sense.

  3. Hello Shaun,

    with so many unknowns it’s difficult to decide which way to go . But that’s never stopped the BoE before.

    So with everyone pulling in their collective horns ( what a blinder they did over Spain, must be an Ealing comedy show going on – or a carry on ! ) what better time to introduce BIRP.

    Mind you they’d have to get to -2% on the high street – just exactly are they expecting the average Joe & Jane to do ?

    Better close off those pesky ATM and compesate with UBI/Grain dole

    What could go wrong ?


    PS: CPI consumer price index , perhaps it should be scrapped as there’s virtually no “consumer” now , all at home scare ****less incase they get the plague ……..

    • Hi Forbin

      I attended another online seminar on the RPI earlier. In it the Office for National Statistics said it plans to scrap RPIX because CPIH has no measure of mortgage costs. They seemed to ignore my point that the new HCIs have to have one.

      Anyway in essence the new RPI* will be CPIH. So I said that they were setting up “one inflation rate to rule them all” whilst claiming to want a range. The Deputy National Statistician even tried to claim the CPIH was “trusted” so I asked him by who? I also pointed out that the RPI is trusted by many people and markets.

      I guess there will be no Christmas card from them this year (again).

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