Where will all the extra US Money Supply end up?

Today brings both the US economy and monetary policy centre stage. The OECD has already weighed in on the subject this morning.

The COVID-19 outbreak has brought the longest economic expansion on record to a juddering halt. GDP
contracted by 5% in the first quarter at an annualised rate, and the unemployment rate has risen
precipitously. If there is another virus outbreak later in the year, GDP is expected to fall by over 8% in 2020
(the double-hit scenario). If, on the other hand, the virus outbreak subsides by the summer and further
lockdowns are avoided (the single-hit scenario), the impact on annual growth is estimated to be a percentage
point less.

Actually that is less than its view of many other countries. But of course we need to remind ourselves that the OECD is not a particularly good forecaster. Also we find that the official data has its quirks.

Total nonfarm payroll employment rose by 2.5 million in May, and the unemployment rate
declined to 13.3 percent, the U.S. Bureau of Labor Statistics reported today……In May, employment rose sharply in leisure and hospitality, construction, education and health services, and retail trade. By contrast, employment
in government continued to decline sharply……….The unemployment rate declined by 1.4 percentage points to 13.3 percent in May, and the number of unemployed persons fell by 2.1 million to 21.0 million.

Those figures not only completely wrong footed the forecasters they nutmegged them as well in one of the most spectacular examples of this genre I have seen. I forget now if they were expecting a rise in unemployment of eight or nine million but either way you get the gist. We do not know where we are let alone where we are going although the Bureau of Labor Statistics did try to add some clarity.

If the workers who were recorded as employed but absent from work due to “other  reasons” (over and above the number absent for other reasons in a typical May) had
been classified as unemployed on temporary layoff, the overall unemployment rate  would have been about 3 percentage points higher than reported (on a not seasonally  adjusted basis).

We learn more about the state of play from the New York Federal Reserve.

The New York Fed Staff Nowcast stands at -25.5% for 2020:Q2 and -12.0% for 2020:Q3. News from this week’s data releases increased the nowcast for 2020:Q2 by 10 percentage points and increased the nowcast for 2020:Q3 by 24.5 percentage points. Positive surprises from labor, survey, and international trade data drove most of the increase.

As you can see the labo(u)r market data blew their forecasts like a gale and leave us essentially with the view that there has been a large contraction but also a wide possible and indeed probable error range.

The Inflation Problem

We get the latest inflation data later after I publish this piece. But there is a problem with the mantra we are being told which is that there is no inflation. Something similar to the April reading of 0.3% is expected. So if we switch to the measure used by the US Federal Reserve which is based on Personal Consumption Expenditures the annual rate if we use our rule of thumb would in fact be slightly negative right now. On this basis Chair Powell and much of the media can say that all the monetary easing is justified.

But there are more than a few catches which change the picture. Let me start with the issues I raised concerning the Euro area yesterday where the numbers will be pushed downwards by a combination of the weights being (very) wrong, many prices being unavailable and the switch to online prices. It would seem that the ordinary person has been figuring this out for themselves.

The May 2020 Survey of Consumer Expectations shows small signs of improvement in households’ expectations compared to April. Median inflation expectations increased by 0.4 percentage point at the one-year horizon to 3.0 percent, and were unchanged at the three-year horizon at 2.6 percent. ( NY Fed Research from Monday)

It is revealing that they describe an increase in inflation that is already above target as an “improvement” is it not? But we see a complete shift as we leave the Ivory Towers and media palaces as the ordinary person surveyed expects a very different picture. Still the Ivory Towers can take some solace from the fact that inflation is in what they consider to be non-core areas.

Expected year-ahead changes in both food and gasoline prices displayed sharp increases for the second consecutive month and recorded series’ highs in May at 8.7% and 7.8%, respectively, in May.

Just for the avoidance of doubt I have turned my Irony meter beyond even the “turn up to 11” of the film Spinal Tap.

Central bankers will derive some cheer from the apparent improvement in perceptions about the housing market.

Median home price change expectations recovered slightly from its series’ low of 0% reached in April to 0.6% in May. The slight increase was driven by respondents who live in the West and Northeast Census regions.


More food for thought is provided in this area. If we switch to US Federal Reserve policy Chair Jerome Powell will tell us later that the taps are open and credit is flowing. But those surveyed have different ideas it would seem.

Perceptions of credit access compared to a year ago deteriorated for the third consecutive month, with 49.6% of respondents reporting credit to be harder to get today than a year ago (versus 32.1% in March and 48.0% in April). Expectations for year-ahead credit availability also worsened, with fewer respondents expecting credit will become easier to obtain.


I now want to shift to a subject which is not getting the attention it deserves. This is the growth in the money supply where the three monthly average for the narrow measure M1 has increased in annualised terms by 67.2% in the three months to the 25th of May. Putting that another way it has gone from a bit over US $4 trillion to over US $5 trillion over the past 3 months. That gives the monetary system quite a short-term shove the size of which we can put into context with this.

In April 2008, M1 was approximately $1.4 trillion, more than half of which consisted of currency.  ( NY Fed)

Contrary to what we keep being told about the decline of cash it has grown quite a bit over this period as there is presently a bit over US $1.8 trillion in circulation.

Moving to the wider measure M2 we see a similar picture where the most recent three months measured grew by 40.6% compared to its predecessor in annualised terms. Or if you prefer it has risen from US $15.6 billion to US $18.1 billion. Again here is the historical perspective from April 2008.

 M2 was approximately $7.7 trillion and largely consisted of savings deposits.

So here is a question for readers, where do you think all this money will go? Whilst you do so you might like to note this from the 2008 report I have quoted.

While as much as two-thirds of U.S. currency in circulation may be held outside the United States….

The Investing Channel


The Chinese way of economic stimulus has started already in 2020

Firstly welcome to the new year and for some the new decade ( as you could argue it starts in 2021). The break has in some ways felt long and in other ways short but we have begun a new year with something familiar. After the 733 interest-rate cuts of the credit crunch era the People’s Bank of China ( PBOC ) has started 2020 with this.

In order to support the development of the real economy and reduce the actual cost of social financing, the People’s Bank of China decided to reduce the deposit reserve ratio of financial institutions by 0.5 percentage points on January 6, 2020 (excluding finance companies, financial leasing companies, and auto finance companies).

This is a different type of monetary easing as it operates on the quantity of money ( broad money) rather than the price or interest-rate of it. By increasing the supply ( with lower reserves banks can lend more) there may be cheaper loans but that is implicit rather than explicit. As to the size of the impact Reuters has crunched the numbers.

China’s central bank said on Wednesday it was cutting the amount of cash that all banks must hold as reserves, releasing around 800 billion yuan ($114.91 billion) in funds to shore up the slowing economy.

Care is needed here as we see some copy and pasting of the official release. This is because that is the maximum not the definite impact and also because the timing is uncertain. No doubt some lending will happen now but we do not know when the Chinese banks will use up the full amount. That is one of the reason’s we in the West stopped using this as a policy option ( the UK switched in the 1970s) as it is unreliable in its timing or more specifically more unreliable than interest-rate changes, or so we thought.

Speaking of timing there is of course this.

Freeing up more liquidity now would also reduce the risks of a credit crunch ahead of the long Lunar New Year holidays later this month, when demand for cash surges. Record debt defaults and problems at some smaller banks have already added to strains on China’s financial system.

The PBOC said it expects total liquidity in the banking system to remain stable ahead of the Lunar New Year. ( Reuters).

Although for context this is the latest in what has become a long-running campaign.

The PBOC has now cut RRR eight times since early 2018 to free up more funds for banks to lend as economic growth slows to the weakest pace in nearly 30 years.

You could argue the number of RRR cuts argues against its usefulness as a policy but these days interest-rate changes have faced the same issue.

The translation of the official view is below.

The People’s Bank of China will continue to implement a prudent monetary policy, remain flexible and appropriate, not flood flooding, take into account internal and external balance, maintain reasonable and adequate liquidity, and increase the scale of currency credit and social financing in line with economic development and stimulate the vitality of market players. High-quality development and supply-side structural reforms create a suitable monetary and financial environment.

I would draw your attention to “flood flooding” but let’s face it that makes a similar amount of sense to what other central banks say and write!

I note that it is supposed to help smaller companies but central banks have plugged that line for some time now. The Bank of Japan gave it a go and in my country the Bank of England introduced the Funding for Lending Scheme to increase bank lending to smaller and medium-sized businesses in 2012. The reality was that mortgage lending and consumer credit picked up instead.

Of the latest funds released, small and medium banks would receive roughly 120 billion yuan, the central bank said, stressing that it should be used to fund small, local businesses.

The banks

Having said that this was different to policy in the West there is something which is awfully familiar.

The PBOC said lower reserve requirements will reduce banks’ annual funding costs by 15 billion yuan, which could reduce pressure on their profit margins from recent interest rate reforms. Last week, it said existing floating-rate loans will be switched to the new benchmark rate starting from Jan. 1 as part of a broader effort to lower financing costs. ( Reuters ).

I guess central banks are Simon and Garfunkel fans.

And I’m one step ahead of the shoe shine
Two steps away from the county line
Just trying to keep my customers satisfied,

The Chinese Economy

There is something of an economic conundrum though if we note the latest economic news.

BEIJING, Dec. 31 (Xinhua) — The purchasing managers’ index (PMI) for China’s manufacturing sector stood at 50.2 in December, unchanged from November, the National Bureau of Statistics (NBS) said Tuesday.

A reading above 50 indicates expansion, while a reading below reflects contraction.

This marks the second straight month of expansion, partly buoyed by booming supply and demand as well as increasing export orders, said NBS senior statistician Zhao Qinghe.

“booming supply and demand”. Really? Well there is growth but hardly a boom/

On a month-on-month basis, the sub-index for production gained 0.6 points to 53.2 in December,

Even it is not backed up by demand.

while that for new orders fell slightly to 51.2, still in the expansion zone.

The wider economy is recorded as doing relatively well.

Tuesday’s data also showed China’s composite PMI slid slightly to 53.4, but was 0.3 points higher than this year’s average, indicating steady expansion in the production of China’s companies.

Stock Market

According to Yuan Talks it as ever liked the idea although it is only one day.

#Shanghai Composite index extends gains to 1.5% to approach 3100 mark. #Shenzhen Component Index and #Chinext index are surging near 2%.

Still President Trump would be a fan.

Yuan or Renminbi

Here we see that we have been on a bit of a road to nowhere over the past year. After weakening in late summer towards 7.2 versus the US Dollar the Yuan at 6.96 is up 1.2% on a year ago. So there have been a lot of column inches on the subject but in fact very little of them have been sustained.


It would appear that the PBOC does not have much faith in the reports of a pick up in the Chinese economy as it has already stepped up its easing programme. There are other issues in play such as the trade war and these next two so let us start with US Dollar demand.

China’s big bang opening of its $45 trillion financial industry begins in earnest next year — a step-by-step affair that’s unfolding just as economic strains threaten the promised windfall luring in global firms.

Starting with its insurance and futures markets, the Communist Party ruled nation will enact the most sweeping changes in decades to allow the likes of Goldman Sachs Group Inc., JPMorgan Chase & Co. and BlackRock Inc. to expand their footprint in China and compete for a slice of its growing wealth. ( Insurancejournal.com )

Will it need a dollar,dollar? We will have to see. Also this issue continues to build.

WARSAW (Reuters) – Bird flu has been detected in turkeys in eastern Poland, authorities said on Wednesday, and local media reported that the outbreak could require up to 40,000 birds to be slaughtered.

China has a big issue with this sort of thing and like in banking and economics the real danger was always possible contagion. So far it has had limited effect on UK pork prices for example as the annual rate of inflation is 0.7% but it is I think a case of watch this space.

Meanwhile according to Yuan Talks the credit may not flow everywhere.

Regulators in the city of Beijing warned financial institutions about risks in the lending to property developers with “extremely high leverage”, indicating the authority is not relaxing financing rules for the cash-starved sector as many anticipated.

Looking at it in terms of money supply growth an annual rate of 8.2% for broad money ( M2) may seem fast in the west but it has not changed much recently in spite of the easing and is slow for China.