Bank of England QE is coming under increasing fire as inflation rises

This has been a bad week for central bankers as we have seen inflation soar above their predictions. The 5.4% for US CPI is not what the Federal Reserve explicitly targets but suggests a trend well above its thinking and that is before we get to the issue of the “transitory” or it you prefer “temporary” claims they have made. If you look at the statement to Congress of Chair Powell this week he shifted to expectations on inflation in response to this.

To avoid sustained periods of unusually low or high inflation, the Federal Open MarketCommittee’s (FOMC) monetary policy framework seeks longer-term inflation expectations thatare well anchored at 2 percent, the Committee’s longer-run inflation objective.

After all he can claim pretty much what he wants via them as opposed to workers and consumers paying higher prices who have no such choice. Also we had the UK with the targeted inflation measure going to 2.5% so 0.5% over and RPI at 3.9%. That is really rather awkward in a week where you have bought some £3.45 billion of UK bonds as part of a policy ( QE) to raise inflation.

House of Lords

They have published a report today which questions QE on a strategic level. One issue is how much of it is planned.

Since March 2020, the Bank of England has doubled the size of the quantitative easing programme. Between March and November 2020, the Bank of England announced it would buy £450 billion of Government bonds and £10 billion in non-financial investment-grade corporate bonds. In total, by the end of 2021, the Bank will own £875 billion of Government bonds and £20 billion in corporate bonds. This is equivalent to around 40% of UK GDP.

Those who have followed my “More! More! More!” theme which has been running for a decade will have a wry smile at this.

Therefore, the scale and persistence of the quantitative easing programme are substantially larger than the Bank envisaged in 2009.

It has also become the policy of first resort.

Once considered unconventional, more than a decade after its introduction, quantitative easing is now the Bank of England’s main tool for responding to a range of economic

Yet have things got better?

These problems are quite different from those of 2009.

The House of Lords does not explicitly say it at this point but let me point out that it has created problems along the way as the Cranberries told us.

In your head, in your head
Zombie, zombie, zombie-ie-ie


Their Lordships have spotted the 2021 issue.

Despite a growing economy and expansionary monetary and fiscal policy, central banks in advanced economies appear to see the risks of inflation in terms of a transitory, rather than a more long-lasting, problem.

A fair point as after all whilst the flow may stop ( presently planned to be towards the end of 2021) the stock of £895 billion including corporate bonds will remain on the books. After all, so far, the Bank of England has not redeemed a single penny. So in monetary terms there will remain an extra £895 billion in the money supply although care is needed because what follows from it is not as simple as what was thought. especially by the Bank of England itself.

Quantitative easing’s precise effect on inflation is unclear.

It has been made less clear in my view by the establishment effort to remove ways measuring this by downgrading the RPI which is a pretty transparent effort to move the focus away from the house prices it includes. Can anybody think why?

Since they finalised their thinking the statement below has been reinforced by inflation going over its target as well.

The official inflation rate is already higher than
the Bank of England’s previous forecasts.

These factors add to the challenges here.

The Bank of England forecasts that any rise in inflation will be “transitory”; others disagree.

They then pose a challenge whilst also issuing a critique. After all it should have made its thinking clear.

We call upon the Bank of England to set out in more detail why it believes higher inflation will be a short-term phenomenon, and why continuing with asset purchases is the right course of action.

This leads to the crux of the matter because as I have frequently pointed out monetary policy takes around 18 months to 2 years to have its full impact. That may even have lengthened in the modern era due to the increased numbers of fixed-rate mortgages which is considered a major transmission mechanism. Yet we have central bankers who ignore that and at times claim that they can act during or even after the event which to mt mind requires the ability to time-travel.

The Bank should clarify what it means by “transitory” inflation, share its analyses, and demonstrate that it has a plan to keep inflation in check.


Their Lordships seem to have stumbled on my point that we will not see many if any interest-rate increases because of the cost of them.

Quantitative easing hastens the increase in the cost of Government debt because interest on Government bonds purchased under quantitative easing is paid at Bank Rate, which could be much higher than it is now (0.1%) if the Bank of England had to increase Bank Rate to control inflation. As a result, we are concerned that if inflation continues to rise, the Bank may come under political
pressure not to take the necessary action to maintain price stability.

That is of course assuming they do not follow the path trod by the ECB and simply change the rules of the game.

These included an option to not pay interest on commercial bank reserves.

This bit made me laugh and I hope it is humour.

While the UK can be proud of the economic credibility of the Bank of England, this credibility rests on the strength of the Bank’s reputation for operational independence from political decision-making in the pursuit of price stability.
This reputation is fragile, and it will be difficult to regain if lost.

Like so many central banks they lost it years ago.

Michael Saunders

We can now switch to the tactical rather than the strategic and yesterday one of the policy-makers said this.

In my view, if activity and inflation indicators remain in line with recent trends and downside risks to growth and inflation do not rise significantly (and these conditions are important), then it may become appropriate fairly soon to withdraw some of the current monetary stimulus in order to return inflation to the 2% target on a sustained basis. In this case, options might include curtailing the current asset purchase program – ending it in the next month or two and before the full £150bn has been purchased – and/or further monetary policy action next year.

So there may be several votes for ending the QE programme early. Not enough to win a vote but increasing.

Oh and his confession that they had for their forecasts wrong (most of you are no doubt thinking again) is rather devastating for their “transitory” claims.


If we switch to the benefits we seem to get ever more of something that has unclear results.

We found that the available evidence shows that quantitative easing has had a limited impact on
growth and aggregate demand over the last decade.

They do not point out the moral hazard of the evidence often coming from those operating the policy. There are also losses and problems.

Furthermore, the policy has also had the effect of inflating asset prices artificially, and this has benefited those who own them disproportionately, exacerbating
wealth inequalities.

I am glad they are making this point as I believe they did note my points about house price rises when I gave evidence to the RPI enquiry. Actually even the Financial Times may be forced into a rethink as it is its economics editor Chris Giles who led the charge to remove house prices from the RPI.

Finally it is hard not to have a wry smile at Lord King of Lothbury criticising a policy he started.

“I wonder if I’ve been changed in the night. Let me think. Was I the same when I got up this morning? I almost think I can remember feeling a little different. But if I’m not the same, the next question is ‘Who in the world am I?’ Ah, that’s the great puzzle!” ( Alice In Wonderland )

Producer Price Inflation surges in Spain

Some days the economic news just rolls neatly into the current economic debate and this morning is an example of that. If we look at Spain we are told this.

The annual rate of the general Industrial Price Index (IPRI) in the month of May is 15.3%, more than two points above that registered in April and the highest since January

So their version of producer prices is on a bit of a charge and this is repeated in the monthly figures.

In May, the monthly variation rate of the general IPRI is 1.6%.

If we look into the detail we see that this was a major factor.

Energy, whose variation of 2.6% is due to the rise in Oil refining, Production
Of gas; pipeline distribution of gaseous fuels and Production, transportation and
electrical power distribution. The impact of this sector on the general index is 0.824.

So half of the May move is a rise in energy prices and we know that this theme has continued this month as we note that Brent Crude futures are just below US $76 per barrel.

The other factors were.

Intermediate goods, which presents a monthly rate of 2.1% and an effect of 0.601….Non-durable consumer goods, with a rate of 0.6% and an effect of 0.149, caused by the increase in the prices of the Manufacture of vegetable oils and fats and animals.

So we see that energy and intermediate prices are on a bit of a charge but that so far this has not really fed into consumer goods. In terms of a pattern we see that something seems to have changed in November ( up 0.9%) last year and since then we have seen quite an increase overall.

As we will be moving on to consider the implications for the ECB let us note the number it will ask for.

The annual variation rate of the general index without Energy increases more than one and a half points, up to 7.1%, standing more than eight points below that of the general IPRI. This rate is the most since July 1995.

So they lower the number but cannot avoid the general principle of an inflationary push.

Euro area money supply

If we now switch to the money supply we have the ECB trying to pump it up to generate inflation and here are it latest efforts.

Annual growth rate of broad monetary aggregate M3 decreased to 8.4% in May 2021 from 9.2% in April……Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, decreased to 11.6% in May from 12.3% in April.

This leads to several impressions. Firstly these are high rates of annual growth and next they are slowing. But care if needed with the latter view because the monthly rise in broad money was higher as 65 billion Euros in March and 43 billion in April has been followed by 76 billion in May. It was not narrow money which was virtually the same in May as it was in March after a small dip in April.

The banks are still seeing cash pour in which of course has been a feature of these pandemic times although again the annual numbers show some slowing.

From the perspective of the holding sectors of deposits in M3, the annual growth rate of deposits placed by households decreased to 7.9% in May from 8.3% in April, while the annual growth rate of deposits placed by non-financial corporations decreased to 8.9% in May from 12.8% in April. Finally, the annual growth rate of deposits placed by non-monetary financial corporations (excluding insurance corporations and pension funds) increased to 11.4% in May from 8.7% in April.

The actual numbers for deposit increases coincide with this more than the previous ones as we note the increase in overnight deposits has gone 69 billion Euros in March then 45 billion in April, followed by 59 billion in May.


These numbers are hard to interpret right now. This is because they are a lagging indicator of economic activity but got a sharp shove higher in the spring of last year via central bank and government action. However there is one area we can look at from several angles.

The annual growth rate of credit to general government decreased to 15.4% in May from 18.0% in April,

There clearly has been a lot going on here and you will not be surprised to read that there was a clear shift last March. The annual growth rate had been negative for a while signalling a type of austerity but then went positive rising to a peak growth rate of 24% in February. The monthly rate has been falling overall ( 67 billion then 27 then 37 in May) but it is now some 6.1 trillion Euros.

@fwred has been crunching some numbers for the French public debt.

French public debt rose to a new high in Q1, at 118% of GDP

But someone has been buying.

the Eurosystem ( @banquedefrance @ecb ) holds more than 20% of general government debt, returning interest payments to the state eventually. Excluding Eurosystem holdings, French public debt has risen slightly since 2015 and stands at 94% of GDP.

So QE excluded there has not been much change and of course as we observe so often an SPV fixes everything!

 On the upside, the first payout from the European Recovery and Resilience Facility (RRF) should help to ease the deficit. ( Bank of France)

Well until Eurostat makes them include it anyway.

The European Commission has today adopted a positive assessment of France’s recovery and resilience plan. This is an important step towards the EU disbursing €39.4 billion in grants under the Recovery and Resilience Facility (RRF). ( European Commission)


As we have seen today the current central banking challenge is the fact that we are seeing inflation warning signals whilst they are still pumping up the money supply. This provides quite a challenge and reverses past central banking rules. There are various features of this as the ECB like so many central banks funneled cash to the banking sector just before the furlough schemes did exactly the same thing. I note that Isabel Schnabel estimated yesterday that there were 400 billion of excess savings at the end of 2020 so there will be more now. Eventually these will be spent giving the economy another shove at a time of supply issues such as the lack of semiconductors for the motor industry.

There are growing problems with the claims that inflation is low if we return to Spain.

The  Government is  going to approve this Thursday in an   extraordinary Council of Ministers a  lowering of the VAT on electricity from 21 to 10% , as confirmed by sources from  United Podemos  to RTVE in the first instance and sources from Moncloa later.

Also there is the area which escapes the official inflation numbers.


Actually they do not account for it at all but let us give her some credit for at least mentioning the issue.

What is the future of money and cash?

The issue of money and what it is considered to be has been something that has undergone quite a few changes in the credit crunch era. For example back then many would have described Quantitative Easing (QE) bond purchases as printing money and therefore being directly inflationary. Whereas we have learnt over time that the main effects escape consumer inflation measures and instead can be found in asset prices such as houses and bonds. Oh and don’t be too worried about if you got that wrong as the central banks did too as I recall the Bank of England assuring us QE would directly create inflation. If course that message got relegated if not redacted but we are left with the uncomfortable view that whilst one Pound is the same as another it has different impacts due to the way it is created. Money creation by banks is different to money creation by central banks. Putting that another way the “high powered money” of economics text books referring to central bank creation actually fitted better with bank creation.


Next comes the issue of the crypto era or the various digital coins that have appeared. If we look back then Bitcoin was created back in 2009, but if you indicated that it would have the role it has now you would only confuse people  back then. Who would believe you? Telling them that the crypto world would have a market value of US $2.5 trillion as it did last week might have got you a padded cell. There are of course issues with using a marginal price for a collective concept like market value but as Todd Terry put iy.

Something’s goin’ on

Whilst the coin introduced this week ( Internet Computer) is already worth over US $40 billion it is hard to call it money for now when who even knows about it? Also it would appear that many of the advocates who are pleased at the way they have avoided central bank involvement seem to have replaced them with Elon Musk, at least for the time being. We started the week noting his impact on Dogecoin and then there was this.

We are concerned about rapidly increasing use of fossil fuels for Bitcoin mining and transactions, especially coal, which has the worst emissions of any fuel……….Cryptocurrency is a good idea… but this cannot come at great cost to the environment

So Elon seems to have his finger on the price trigger as we mull what is behind all of this.

To be clear, I strongly believe in crypto, but it can’t drive a massive increase in fossil fuel use, especially coal

There are all sorts of issues here as we wonder what his view of the Lithium mining for his batteries is? But we see that this new form of money has its challenges too.

Bank of England

John Cunliffe of the Bank of England has been looking at this and he is concerned about the split between what is “public” and “private money”

Public money for general use in the UK is only available in the form of physical cash. It is highly visible, trusted and, indeed, is probably the image that many people in this country have in their mind when they picture money.


However, the majority of the money held and used by people in the UK today is not physical ‘public money’, issued by the state, but digital private money’ issued by commercial banks. Around 95% of the funds people hold that can be used to make payments are now held as bank deposits rather than cash. In everyday use, only 23% of payments pre pandemic were made using public money in the form of cash, down from close to 60% a decade earlier.

I am not sure where he thinks he is going with this because for most people private money is fungible with public money due to this.

And a deposit guarantee scheme gives holders of commercial bank money the protection of a backstop should the bank fail.

But the concept of money at banks was challenged not so long ago and we did see bank runs.

the government was forced to bailout the banking system at enormous cost to avoid the millions of citizens losing the money they held in the form of claims on commercial banks.

The response of ever more state backing such as the expanded deposit protection scheme as well as the “Too Big To Fail” culture means I would argue that public money is these days effectively more like 70-80% ( not all deposits are insured) than the 5% he claims.

This bit is more interesting though because it brings the crypto world into the equation.

 Money is in the end a social convention that can be very fragile under stress.

Perhaps Elon will demonstrate how fragile as as far as I can see he is operating without reference to regulation or the law. More disturbingly the law does not seem to be catching up with him whereas it is trying to with others.

Cryptocurrency exchange Binance is under investigation by the Justice Department and the IRS, with officials who probe money laundering and tax offenses seeking information ( Bloomberg)

Being a central banker John Cunliffe wants to downplay the role of cash.

As a result the use of public money in the form of physical cash has been declining……….A recent Bank of England survey, for example, found that 70% of respondents were using less cash than prior to the pandemic.

Whereas the actual amount of cash has been rising and at quite a rapid rate recently as you can see below.

What about a Digital Pound?

There will be absolute panic at the Bank of England at the prospect of this.

As I set out earlier, there is now the very real prospect of non-banks, including the large technology platforms or ‘Big Techs’, issuing new forms of digital money, such as ‘stablecoins for general payment purposes. These are likely to have greater functionality and lower transaction costs than the current commercial bank digital money offering and could quickly attract a large number of users.

The panic will be at the impact on The Precious! The Precious! which would be singing along with Queen and David Bowie.

It’s the terror of knowing
What this world is about
Watching some good friends
Screaming let me out

Putting it another way this bit is curious.

Competition acts a spur to innovation.

The banking system has been exactly the opposite of that being at best mostly an oligopoly. Also the track record of the public-sector in keeping people’s data safe inspires little confidence here.

A second area in this values category is privacy.


Money has changed quite a bit in recent times although to be fair much of that as been in our perception of it. In some ways Pink Floyd had a decent stab at it.

It’s a crime
Share it fairly
But don’t take a slice of my pie
So they say
Is the root of all evil today
But if you ask for a raise
It’s no surprise that they’re giving none away
One aspect of the future is clearly the advent of central bank digital coins which will have two features. The first is negative interest-rates in the next recession and the second is an attempt to protect the role of the banks. That creates a problem because the first undermines the second.
Actual physical cash will come under more official pressure. They will claim that this is to deal with financial crime but the reality is that the future is likely to find even a 0% interest-rate attractive. Who a decade ago would have thought I would be both thinking and typing that? I think that is why we are seeing the cash in circulation rising as people are putting some aside for such eventualities. Thus the high tech world of digital money may be creating a subset of money under mattresses and floorboards.
Also we are seeing a lot of official talk about privacy. Are you thinking what I am thinking?
Oh and as a final point there are regular flurries about the end of US Dollar dominance. But all of these new ventures seem to define themselves in relation to it, so it seems to be doing okay…..


Is Dogecoin really money or just an illusion?

Saturday night brought something really rather extraordinary as the worlds of finance and entertainment came together at least for a while. Here is The Hill on Saturday Night Live which was on NBC in the US.

Musk appeared on the show’s “Weekend Update” segment as fictitious financial expert Lloyd Ostertag. When asked about Dogecoin by co-host Colin Jost, Musk explained it is “the future of currency.”

“It’s an unstoppable financial vehicle that’s going to take over the world,” he said.

“I get that, but what is it, man?” co-host Michael Che asked.

“It’s a cryptocurrency you can trade for conventional money,” Musk responded.

“Oh, so it’s a hustle?” Che asked.

“Yeah, it’s a hustle,” Musk replied, letting out a laugh.

This begs quite a few questions of which the first is should NBC be showing this sort of thing which leads into the behaviour of Elon Musk to whom financial regulation foes not seem to apply. If we start with the claim that it is going to take over the world that is not a little bizarre but does feed into this sort of hype.

Speaking of hype there was also this.

CALGARY, ABMay 9, 2021 /PRNewswire/ – Geometric Energy Corporation (GEC) announced today the DOGE-1 Mission to the Moon—the first-ever commercial lunar payload in history paid entirely with DOGE—will launch aboard a SpaceX Falcon 9 rocket.

Geometric Energy Corporation’s DOGE-1 Mission to the Moon will involve Geometric Space Corporation (GSC) mission management collaborating with SpaceX to launch a 40kg cubesat as a rideshare on a Falcon 9 lunar payload mission in Q1 2022. The payload will obtain lunar-spatial intelligence from sensors and cameras on-board with integrated communications and computational systems.

Of course this involves Elon Musk again and we are running on the future of currency vibe again although maybe the view of space needs refining as last time I checked the Moon is not a planet.

“This mission will demonstrate the application of cryptocurrency beyond Earth orbit and set the foundation for interplanetary commerce,” said SpaceX Vice President of Commercial Sales Tom Ochinero. “We’re excited to launch DOGE-1 to the Moon!”

What is Money?

There is then a switch to implying this means that Doge is money.

Indeed, through this very transaction, DOGE has proven to be a fast, reliable, and cryptographically secure digital currency that operates when traditional banks cannot and is sophisticated enough to finance a commercial Moon mission in full.

We have seen a lot of claims for security for the various coins that have then hit issues. The statement about traditional banks seems to be in fact them saying no as they could finance this.Also “sophisticated enough” merely means you have enough money to do so and with the rise in the Doge price which tells me has been 21,666% over the past year you could buy quite a few things. There is no sophistication here.

But the bit that stands out is “reliable” because over the weekend we also saw this.

Dogecoin DOGEUSD, -6.22% slumped Sunday after Musk’s “SNL” appearance failed to rally prices toward $1. Instead, the price of dogecoin, which was around 70 cents before the show started Saturday night, plunged as low as 47 cents. By Sunday evening, it had rebounded to about 57 cents, according to Coinbase. ( MarketWatch)

As you can see hopes that Doge would cruise to US $1 were replaced by quite a drop. On this there are two perspectives because if you have held Doge for only a month or so you were only losing some of your profits. But those who bought the SNL hype were making pretty quick losses and at the time of typing the price is 53.6 cents.

Next we get a mention of another of the functions of money which is as a type of measuring stick.

 It has been chosen as the unit of account for all lunar business between SpaceX and Geometric Energy Corporation and sets precedent for future missions to the Moon and Mars.

That’s going to be fun! Quite how you account with such swings I am not entirely sure. Ordinary or fiat currencies do have swings at times. Some consistently fall but that tends to be over quite long periods and moves like Doge has seen this weekend are vary rare. Even something like the Turkish Lira has only fallen by 16% over the past year versus the US Dollar. So in general they work as a unit of account although not always which is why the US Dollar is so popular in places like Argentina and Venezuela.


According to Dogecoin it is this.

1 Dogecoin = 1 Dogecoin

Also this

Dogecoin is an open source peer-to-peer digital currency, favored by Shiba Inus worldwide.

Shiba Inus is the dog in the pictures.

In case you think that there is more to it than this here is an interview with Max Keller who is a Core Developer for Dogecoin.

I was not involved in its creation specifically, but I think Billy and Jackson, the original creators, explained that quite well. DOGE was meant to be a joke and was built that way…….. it has become much more serious. Now, we are dealing with a lot of funds. Every time I look at the market cap, I get goosebumps. Thus, Dogecoin has developed into something more serious while managing to keep its fun side.

The market capitalisation referred to rose as high as 92 billion US Dollars on Friday and is 67 billion now.

Interestingly we move onto another of the functions of money but not the one mentioned.

As for the Dogecoin being a store of value, I believe it is more of an actual currency. I mean, there are lots of things in my apartment that have been paid for in DOGE…….. By the way, I used a service selling gift cards for DOGE, so I paid half the bill for my sofa with it. And just yesterday, I bought a keyboard for DOGE directly from someone.

Thus it is beginning to fulfil some of the medium of exchange function of money. In a sense the moonshot example we looked at earlier did that too although these seem to be quite specific examples because he only bought half off his sofa with it.


We can look at this from the context of the very last part of the Bank of England press conference on Thursday when Bank of England Governor Andrew Bailey said this.

You mentioned cryptocurrency. I don’t like using that phrase and I’m afraid currency and crypto are two words that don’t go together for me so I’m trying to use the more neutral crypto-assets. I would only emphasise what I’ve said quite a few times in recent years. I’m afraid they have no intrinsic value. That doesn’t mean to say people don’t put value on them because they can have extrinsic value but they have no intrinsic value so I’m sorry, I’m going to say this very bluntly again, you know, buy them only if you’re prepared to lose all your money.

The first undercut is that the Bank of England can hardly be seen as a beacon of technology when the press conference is virtual but with no video. It was at least better than the previous “lack of bandwidth” issue but combining both makes you look archaic. Next is the issue of the Pound notes issued by the Bank of England which promise to pay the bearer the sum on the note but that is not really an intrinsic value either. The use of the word “fiat” in fiat currencies means that in another way. There are a couple of nuances to this as the Bank of England has some gold reserves but they would not go far especially if we note the expansion of the money supply over the past year. Also with commodity prices high some coins will have a far bit of intrinsic value, but that is not what he meant.

So as you can see Doge may have begun as a joke but in the famous words of Bob Monkhouse.

nobody’s laughing now….

It may be used more as a medium of exchange but for that to last it needs a more stable price. That is a problem because many or only in it to make money which leads to instability. But the central bankers are mostly upset because it disturbs their game of controlling both the amount and price of money. Indeed the expansion of the various coins looks to me to be a direct response to the expansion of the fiat money supplies.

So if it works The Waterboys were on the case.

You saw the whole of the moon
I was grounded
While you filled the skies
I was dumbfounded by truth
You cut through lies

If it doesn’t it seems they were also ready.

You stretched for the stars and you know how it feels to reach too high
Too far
Too soon
You saw the whole of the moon


China moves to tighten monetary policy

This morning has brought something which raised a bit of a wry smile. It came from the People’s Bank of China and the emphasis is mine.

At the end of March, the balance of broad money (M2) was 227.65 trillion yuan, a year-on-year increase of 9.4%, and the growth rate was 0.7 percentage points lower than the end of the previous month and the same period last year; the balance of narrow money (M1) was 61.61 trillion yuan, a year-on-year increase of 7.1%. The growth rate was 0.3 percentage points lower than the end of the previous month and 2.1 percentage points higher than the same period last year;

It was the case for many years that China had faster money supply growth than the West. But as you can see it is a fair bit lower now as for example the latest broad money growth in the Euro area is shown below.

Annual growth rate of broad monetary aggregate M3 decreased to 12.3% in February 2021 from 12.5% in January.

There are various contexts here and the first is the 3% difference in broad money growth rate. This matters in terms of monetarist theory because it leads into growth in nominal economic output or GDP with a lag of 18-24 months. So either the Euro area is going to grow faster than China or we will see an inflationary push. These days the inflationary push tends to turn up in asset prices such as house prices rather than consumer inflation especially in the Euro area where its measure ignores owner-occupied housing.

Also narrow money is growing more slowly than broad money which would put most Western central bankers into quite a spin. The gap between China and the Euro area is even more pronounced here.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, stood at 16.4% in February, compared with 16.5% in January.

So a difference in annual growth rate of a bit over 9%.

What are economic prospects?

The South China Morning Post pointed out this last week.

China’s economic growth rate for this year has been raised by the International Monetary Fund (IMF), which believes a way out of the unprecedented coronavirus crisis is becoming “increasingly visible” around the world.

The Washington-based organisation on Tuesday raised China’s economic growth estimate for 2021 to 8.4 per cent, 0.3 percentage points higher than in its January prediction,  with the 2020 estimate left unchanged at 5.6 per cent.

Should that turn out to be true and I am thinking in broad brush terms as the IMF is maybe having a laugh using decimal points. We see that China is expecting faster economic growth with slower money supply growth.

Time to Tighten?

Firstly let me apologise to any Western central bankers reading this next bit as it must be discombobulating. Please make sure you are sitting comfortably as we join the China Economic Review..

China’s central bank has asked lenders to rein in credit supply, as the surge of lending that sustained the country’s debt-fueled coronavirus recovery renewed concerns about asset bubbles and financial stability, reported the Financial Times.

New loan growth hit 16% in the first two months of the year. The People’s Bank of China responded in February by instructing domestic and foreign lenders operating in the country to keep new loans in the first quarter of the year at roughly the same level as last year, if not lower, according to FT sources with knowledge of the situation.

The directive could translate into a considerable drop in bank lending, the largest source of financing for the world’s second-largest economy, said the FT.

The policy mechanism of using a quantity measure is one that also differentiates China from the West or at least it did. The reason here is that Western experience was that trying to control lending in one area led to two problems. Firstly that it is a blunt instrument that tends to impact on all lending including that to the real economy and thus affects economic growth. Next that lending for property is hidden via all sorts of machinations so that we get what is called disintermediation where the official measures do not count what the officials think they do.

Thus after various failures we abandoned such policies although the new enthusiasm for macroprudential policies may mean we are back on the case soon or as The Who put it.

Meet the new boss
Same as the old boss

Those calculating the numbers are likely to need to mull this part of the lyrics as well.

Then I’ll get on my knees and pray
We don’t get fooled again
Don’t get fooled again, no, no

Another issue is that as the impacts collide and the economy slows the measures tend to get abandoned before their time.

What is the state of play?

From the PBOC.

At the end of March, the balance of domestic and foreign currency loans was 186.44 trillion yuan, a year-on-year increase of 12.3%. The balance of RMB loans at the end of the month was 180.41 trillion yuan, a year-on-year increase of 12.6%, and the growth rate was 0.3 and 0.1 percentage points lower than the end of the previous month and the same period of the previous year, respectively.

Is Inflation on the rise?

Late last week brought news of changes as we look up the inflation chain. From the National Bureau of Statistics.

2021 March, the country’s industrial producer prices rose 4.4% , up 1.6% ; industrial producer prices rose 5.2% , up 1.8%

The area pushing this change is below.

Among them, the price of mining and quarrying industry increased by 12.3% , the price of raw material industry increased by 10.1% , and the price of processing industry increased by 3.4% .

This has led to a response this morning.

China will strengthen controls on the raw materials market to help limit costs for companies that have been pressured by a surge in commodity prices, China National Radio reported, citing Premier Li ( @FirstSquawk)


We see that China is switching to tightening monetary policy as we mull how much ahead of us in the West it is? As we cannot raise interest-rates by much I believe that we will convert to the Chinese way when the time comes here although it still feels a long way away. Returning to the domestic issue there are consequences as we note house price growth.

On a year-on-year basis, new home prices in first-tier cities rose 4.8 percent in February, up 0.6 percentage points from January, while those in second-tier cities edged up 4.5 percent, compared with the 4.1 percent increase in January.

Resale home prices in first-tier cities grew 10.8 percent from a year earlier, expanding 1.2 percentage points from the growth in January. ( Shine)

How much will they be willing to cut growth and will they accept falling house prices to improve affordability?

According to Bloomberg the crunch is already impacting students.

Last month authorities effectively shuttered student access to the once ubiquitous online loan industry, a sprawling collection of apps, fintechs and other unregulated lenders. Internet platforms were told to stop offering online loans to students and unwind existing credit. Banks will need to seek regulatory approval before promoting such loans on campus.

The loans look not a little usurious to me.

Historically there were next to no affordability checks on short-term loans to students, where annualized rates are typically between 15% and 24%.

What could go wrong?

Well for a start this.

Zhang Chunzi, a 25-year-old who works at a foreign trade company in Hangzhou, still has 150,000 yuan of loans outstanding from a dozen platforms including Ant Group Co.’s Jiebei service.

Zhang, who lost her job in February last year due to the pandemic and only just found a new job in June, makes a monthly 6,000 yuan after-tax.

“I get calls and text messages from debt collectors almost every day,” Zhang said. Nearly all of her attempts to negotiate lower interest payments have been rejected and collection staff have even called her new employer. “It’s very scary.”


Euro area money supply growth has fed government spending and house prices

A feature of these times is that thing’s are often not what they seem. After all the Bank for International Settlements is holding a conference on innovation today but the speakers are bureaucrats like Christine Lagarde of the ECB and Mark Carney formerly of the Bank of England. Still we can stay in the international scene because before we even get to Euro area money supply let us take a moment to note that it is not the only source of what Abba sang about.

Money, money, money
Must be funny
In the rich man’s world
Money, money, money
Always sunny
In the rich man’s world

If they are right then it is about to be very sunny at the offices of the International Monetary Fund.

Great news: IMF Executive Directors conveyed broad support for considering an SDR allocation of ~$650 billion! Key step to ensure all members, particularly those hardest hit in the crisis, have higher reserve buffers and more capacity to help their people and support recovery. ( IMF Head Kristalina Georgieva )

That would be quite an increase on the present level of US $293 billion. One can easily see how this would be attractive to politicians as it is money created out of nothing they can then spend. Thus I can see how Kristalina is excited and even more so as I note it inflates her status. However I note the reception on Twitter was much less warm especially from Argentinians noting the IMF role in their problems. Of course that returns us to Christine Lagarde again as I recall her assuring us that the IMF programme in Argentina was going well.

Switching back to the Euro I note that it is 31% of the SDR so in equivalent terms its share of the increase would be around 170 billion Euros.


Just over a year ago this new variant of QE was announced by the European Central Bank. This was because it was in danger of breaking issuer limits in places like Germany and the Netherlands. Let me explain this via the ECB Blog just written on the subject and may I remind you that each announcement was accompanied by an “up to”

We launched the PEPP on 18 March 2020, with an initial envelope of €750 billion, as a targeted, temporary and proportionate measure in response to a public health emergency that was unprecedented in recent history.

That seemed a lot of the time but well that did not last long…..

In June 2020 we expanded the PEPP envelope by €600 billion, to a total of €1,350 billion, and announced that we expected purchases to run for at least another year.

Actually that did not either.

To underpin our commitment, in December 2020 the Governing Council decided to expand the PEPP envelope by an additional €500 billion, to a new total of €1,850 billion – more than 15% of pre-pandemic euro area GDP.

This is a lesson in how up to 750 billion has ended up at just over 900 billion so far and looks on course to double that. I say that with the confidence of someone noting that no central bank has ever done less and indeed none have ever reversed course. The US Federal Reserve did have a slight trim but then added far more. From the point of view of the money supply we see that over 900 billion Euros have been added over the past year and that this is in addition to the existing QE programme or PSPP.

Also let me call out its second sentence.

It stabilised financial markets by preventing the market turbulence in the spring of last year from morphing into a full-blown financial meltdown with devastating consequences for the people of Europe.

The reality is that it was the FX Swaps programme of the US Federal Reserve which did that. The PEPP allowed governments and with other efforts large corporates to borrow even more cheaply and in fact frequently be paid to do so.

As to my “More!More! More! ” point it is kind of Christine Lagared to reinforce it albeit unwittingly.

Based on this joint assessment, the Governing Council expects purchases under the PEPP over the next quarter to be conducted at a significantly higher pace than during the first months of this year.

Money Supply

Such measures leave us on this road.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, stood at 16.4% in February, compared with 16.5% in January.

The slight hint of slowing may well simply be that February is a relatively short month. These are record levels and a further point is that with M1 at just under 10.5 trillion it is on a grand scale. Also let me slay a dragon which frequently appears. Last month there was an extra 10 billion of cash money making the growth rate 12.5% and the total 1.39 trillion Euros. So it is far from dead.

The narrow money push feeds straight into broad money.

Looking at the components’ contributions to the annual growth rate of M3, the narrower aggregate M1 contributed 11.3 percentage points (as in the previous month), short-term deposits other than overnight deposits (M2-M1) contributed 0.3 percentage point (as in the previous month) and marketable instruments (M3-M2) contributed 0.7 percentage point (down from 0.9 percentage point).

The net effect was a slight slowing from 12.5% to 12.3% and whilst it in itself means little change there is something significant in the breakdown. The theory is that narroe money growth is supposed to stimulate a response from bank lending but as you can see M3-M2 is not much and in fact has slowed. This is significant as it breaks one of the monetary transmission chains or rather if you prefer the “high powered money” of the textbooks has been replaced by a limp lettuce. Unlike Fleetwood Mac they have broken the chain.

And if you don’t love me now
You will never love me again
I can still hear you saying
You would never break the chain (Never break the chain)


Let me know spin this around and look at it from a different perspective which is both good and bad. From an article by Patricia Kowsman in the Wall Street Journal.

LISBON—Paula Cristina Santos has a dream mortgage: The bank pays her.

Her interest rate fluctuates, but right now it is around minus 0.25%. So every month, Ms. Santos’s lender, Banco BPI SA, deposits in her account interest on the 320,000-euro mortgage, equivalent to roughly $380,000, she took out in 2008. In March, she received around $45. She is still paying principal on the loan.

The good bit is an ordinary person benefiting as it is usually government’s and big business. I hope there are plenty of others.

The catch is that in theory broad money should be expanding due to much more lending as we see a narrow money push and negative interest-rates. But whilst credit in the Euro area is now over 20 trillion Euros ( 20.4) I see that of the February increase 66 billion is for governments and only 36 billion is for the private-sector. Or if you prefer annual growth rates of 22.9% and 5.1%.

So if we take the 5.1% number that may be why inflation is disappointing the hyper- inflationistas. Although there is one area where we see rampant inflation if we stay with the example of Portugal.

In 2020, the House Price Index (HPI) increased 8.4% when compared with the previous year. This rate of change was 1.2 percentage points (pp) lower than in 2019. From 2019 to 2020, the prices of existing dwellings (8.7%) increased at a higher rate than new dwellings (7.4%).
In the 4th quarter of 2020, the HPI year-on-year rate of change was 8.6%, 1.5 pp more when compared to the previous quarter. ( INE)

The Great Inflation Lie of 2021

The events of 2020 and so far in 2021 have provided quite a shock to the economic system. Let us call it what it has been which is a depression. It may for some be a speeded up one but others such as Italy and especially Greece had never really recovered from the credit crunch one so it is another feature in their lost decade. The policy response and the hoped for bounce back pose a lot of questions? Today I intend to look at the inflation issue.

Where Does It Come From?

Both versions of economic policy have been applied with full force. If we start with monetary policy we see a world of ZIRP ( Zero Interest-Rate Policy) and in some places NITP ( N = Negative) plus a whole swathe of bond and asset buying under the QE banner. This has meant that the money supply has surged. For example on the UK the measure of broad money M4 is growing at an annual rate of 15%. Monetarist theory suggests that goes into nominal GDP and as growth will not be 15% there will be an inflationary push. With the swings in the economy it is hard to have any precision as where do you start from?

Another way of expressing the problem is shown by the US. Right in the middle of the crisis ( last May) they  changed the definition of the M1 measure of the money supply and roughly trebled it. So analysis is broken for it and we see a classic bureaucratic move. So they are worried and the first response is to try to hide the evidence.

If we switch to fiscal policy we see that the taps have been open there too. For example the Chancellor claimed this in his Budget Speech yesterday.

Once you include the measures announced at Spring Budget last year, including the step change in capital investment, total fiscal support from this Government over this year and next amounts to £407 billion.

Let me give you the US position from a different perspective.

US National Debt moves above $28 trillion for the first time, increasing $4.6 trillion over the last year. ( Charlie Biello on Tuesday)

I note that the discussion seems to be bypassing $29 trillion and going straight to $30 trillion as people mull the stimulus plan of President Biden.


These are another reflection of the situation and bring in elements of both factors above. Let me explain via the US which updated us at the end of last month.

Disposable personal income (DPI) increased $1,963.2 billion (11.4 percent) and personal consumption expenditures (PCE) increased $340.9 billion (2.4 percent). ( BEA)

As you can see there is quite a gap and a heavy hint at quite a surge in savings. This was backed up later.

Personal saving was $3.93 trillion in January and the personal saving rate—personal saving as a percentage of disposable personal income—was 20.5 percent

So there has been an over US $3 trillion rise in savings and the January rise came from fiscal policy.

The increase in personal income in January was more than accounted for by an increase in government social benefits to persons as payments were made to individuals from federal COVID-19 pandemic response programs.

Switching to the money supply this will be part of the increase in it ( strictly speaking the amount which is now sitting in bank accounts).

If we look at monetarist theory this is quite close to how the textbooks explain it. The phrase “excess money balances” covers savings which are mostly being built up because they cannot be spent. In the theory the next step is that when they are spent we get growth but also inflation.

Inflation Expectations

These are in my opinion widely misunderstood. Just because there is a price for something does not mean it is the right price and these days so many prices have been manipulated by central banks. The first situation is like forward prices for exchange-rates which are far from a guide to future exchange-rates and are a reflection of now rather than the (unknown) future. Here is Kailey Leinz of Bloomberg.

Hello inflation expectations. 5-year breakevens just hit 2.5% for the first time since 2008.

As Dawn Penn put it “No! No! No!”. There is an implication of more inflation but as a measure it is very inaccurate. That is before we get to the next issue which is that the US index or inflation linked bond market has been rigged by a familiar player. It has bought some US $321 billion of them or if you include the inflation compensation US $365 billion of them.

The concept was given a push by the ECB back in the day but it all backfired and went wrong, But as so often these days this sort of thing survives.

Output Gap

Whilst we are discussing things which are useless let me point out one more time that the Output Gap concept has had a dreadful credit crunch era. If economics was a science then its continual failure would lead to its rejection. Even worse it is dreadfully measured yet some cling to it like a life raft. My advice is to avoid it.

Inflation Measurement

This is an issue and let me be clear even a genuine attempt at inflation measurement will not be perfect. It will be a generic but it can be genuine unlike the official measures I see. The first issue comes from owner-occupied housing and the worst case is the Euro area which completely ignores it.

House prices up by 4.9% in the euro area (EA-19) and by 5.2% in the EU-27 in the third quarter of 2020, compared with the same quarter of 2019. ( Eurostat)

Other countries ( US and UK ) use rents as a way of reducing inflation and the UK is so desperate it uses last years rents. As an aside that is backfiring right now. But the crucial point is that in the US house price inflation of 9%-10% becomes the much more friendly 2.7% of imputed fantasy rents.

Next comes the impact of the pandemic itself and the shift in our spending patterns. I asked the UK Office for National Statistics about spending on masks and cleaning products. I was told it was not significant. I did not believe that then and even less so now as mask use has increased. For a cost of living measure the whole change is an increase. Another area has been the increase in the number of people get dogs leading to a doubling and trebling of the price. Apparently it is too hard to get a price which us news to the two people I know who have got one in the last fortnight.


There has been a fair bit of debate on this issue on social media. Some of it has been from those who previously assured us there would be no inflation so there has been an element of covering their tracks to some extent. But let me get to the heart of the issue which is can you have deflation and inflation at once? The answer is yes mostly because deflation ( a fall in aggregate demand) is misunderstood. Looked at like that it not only has been here for a year or so it will be for at best some months yet. We already have inflation if you look at the US January numbers.

Real PCE increased 2.0 percent; goods increased 5.1 percent and services increased 0.5 percent

As depending where you are some or many services are not available if you start adjusting for reality you move nearer to the 5.1% of goods inflation. Add in house price inflation and you can see where this is going.

Also it does not need much inflation these days to cause trouble because wage growth is weak. So even the 3-4% that central bankers currently dream of can cause quite a downturn for the ordinary person. In the UK if we look back to 2010/11 we see that real wages have never recovered from the 5% inflation peak back then. Oh and back then I made similar points to today against a background of claims that we would either have no inflation or hyper inflation.

For the avoidance of doubt I have reported the latest UK average earnings figures as not fit for purpose to the UK Statistics Authority.



The money supply numbers show the ECB is pushing on a string


Sometimes we find something revealing in an unexpected area. It is especially unexpected because Isabel Schnabel is the heavy hitter in European Central Bank public relations terms. She can be relied upon to approve of everything and wrap it in something which sounds scientific and technical and also to deny anything unfavourable. Yet she let something slip in an interview with LETA of Latvia

The world economy is recovering more quickly than we had anticipated. And the sizeable fiscal package envisaged by the Biden administration will likely have positive spillover effects in the euro area. So we are seeing light at the end of the tunnel.

The fiscal package she mentions first is the US one which is quite a thing to say when ECB policy has as its main priority these days the intention of supporting fiscal policy in the Euro area. In fact we get told that immediately.

Looking ahead, fiscal and monetary policy support will remain crucial and must not be withdrawn prematurely.

Now let me switch to her first mention of Euro area fiscal policy.

That is why the efficient use of public funds, especially those of the “Next Generation EU” instrument, is so important. These funds should be used to foster the transition to a greener and more digital economy.

You may note that we are back to what regular readers will regard as the familiar reform agenda. This was a paragraph or so added onto every policy press conference demanding Euro area reform. It became one of the certainties of life as in spite of the occasional rhetoric about improvement it was always back. Also note that the funds are for some unspecified future date rather than the apparent immediacy of the Biden plan.

We do get another reference but for someone like Isabel this is very mealy mouthed.

But in light of the positive developments to which I have alluded, the historically favourable financing conditions and an expansionary fiscal policy, annual growth is likely to be in the same ballpark as projected in December.

Based on our current projections, the euro area economy should be back at its pre-crisis level by mid-2022.

This matters also because the window may be closing for fiscal policy to some extent. This is because as I have been pointing out for most of this year bond yields have been rising and the US ten-year yield is now 1.43%. This may not bother Germany much because it only means it is being paid less to issue bonds ( its benchmark yield is -0.27%). But a squeeze may arrive in places like Italy ( 0.72%) where the SuperMario effect has now gone.

Indeed the topic of using negative interest-rates is coming under fire if this question is any guide.

In Latvia there is a feeling that low interest rates are not enough to lift the bank credit market, for example.

The answer is an exercise in evasion.

As to the ECB we know the issue is on its mind from this from President Lagarde earlier this week.


So she is now hinting at doing more after hinting at doing less ( not fully using the 1.85 billion Euros of the PEPP version). Not a big deal for us as we expected it to be fully used ( they always are…) but in terms of Forward Guidance it is a case of putting one’s Hermes shod foot in the Open Mouth Operations.

Money Supply

We get a broad hint as to how hard the ECB has been trying from this.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, increased to 16.4% in January from 15.6% in December.

This is a much higher rate than we saw post credit crunch and the same is true about the “whatever it takes” period from 2015 when we saw negative interest-rates and a large QE programme. Now we see the ECB pumping 121 billion, 130 billion and 113 billion into the aggregate in the 3 months to January as a sort of oiling the wheels for fiscal policy.

This is in effect the quantity side of supporting fiscal policy as we observe the money flowing into the system as the ECB buys bonds, mostly government ones. It used to be the case that this was considered to be high-powered money which would help drive an economic recovery via expenditure of the new money balances. That has gone from being very vocal to mirroring Paul Simon.

People writing songs that voices never share
And no one dared
Disturb the sound of silence

Now the emphasis is on government’s spending the money created ( for them being able to finance spending via bond issuance). So far with its various programmes the ECB has bought around 3.3 trillion Euros worth but as you have seen above it does not seem too keen on the results.

But those who think monetary data has an influence will be worried about this.

Broad Money

Another way of looking at the situation is to use the broad money numbers as a guide to push provided to nominal GDP.

Annual growth rate of broad monetary aggregate M3 stood at 12.5% in January 2021, after 12.4% in December 2020 (revised from 12.3%)

So there has been a large push and it has been pretty much the ECB which has done this.

The annual growth rate of the narrower aggregate M1, which comprises currency in circulation and overnight deposits, increased to 16.4% in January from 15.6% in December. The annual growth rate of short-term deposits other than overnight deposits (M2-M1) decreased to 1.1% in January from 1.7% in December. The annual growth rate of marketable instruments (M3-M2) decreased to 18.2% in January from 25.0% in December.

In fact in January it more than did it if I may put it like that as the M2 and solely M3 components shrank.

If this flows into nominal GDP then there is a question as we know that over the period no economic growth is expected therefore in theory the rest is inflation. Some of that the ECB is able to turn a blind eye too via the deliberate exclusion of owner-occupied housing from its official inflation measure. As you can see below that will account for quite a bit of the pressure.

House prices up by 4.9% in the euro area (EA-19) and by 5.2% in the EU-27 in the third quarter of 2020, compared with the same quarter of 2019. ( Eurostat)

But there is a fair bit left. So what does Isabel think about it?

The pandemic has put downward pressure on inflation, which we have countered through the introduction of various crisis measures,

Make of that what you will


In a nutshell the ECB finds itself observing the part of economic theory that was called a liquidity trap. A fair bit of the detail is different as times have moved on but if we look at the period since 2015 and the results the phrase “pushing on a string” fits neatly. It is also a sign of the times that it has been able to avoid opprobrium for one of the consequences by simply omitting it from its inflation measures.

In 2020 it pushed even harder and now it faces various challenges. One of that it is in something described by Elvis Presley.

We’re caught in a trap
I can’t walk out
Because I love you too much, baby

Some countries are now so dependent on negative interest-rates and QE that we can switch to Queen for any likelihood of change.

I’m floating around in ecstasy
So, (don’t stop me now)
(Don’t stop me)
‘Cause I’m having a good time, having a good time

You do not have to take my word for it because Isabel Schnabel admitted it in her interview.

The low interest rate environment is driven by long-term structural trends such as demographics, which play an important role in the Baltic states, globalisation and a decline in productivity growth. There is a relatively strong desire to save and a subdued willingness to invest, which is putting downward pressure on interest rates not just in Europe, but across all advanced economies.

If negative interest-rates were a success she and her colleagues would be looking to bask in the credit, whereas apparently it is nothing to do with them at all! That is a poor potent for the future and means if true we may as well dispense with them and let AI do the job much more cheaply.

UK mortgage supply surges as consumer credit collapses

Today the economic focus switches to the UK as we consider its share in the pumping up of the world money supply. Although as I type this the central bankers may be rather jealous of the Reddit and Wall Street Bets crew.

Spot silver leapt as much as 7.4% in Asia to $28.99 an ounce, taking gains to about 15% since last Wednesday and the price to its highest since mid August.

Silver mining stocks soared in Australia and China and Money Metals, an online exchange for precious coins and bullion, posted an “EXTREME DEMAND ALERT” banner across its homepage, and announced it restricted orders to between $1,000 and $10,000. ( Reuters)

A more prosaic view on a direct impact of the loose monetary policy in the UK is provided by house prices. Last week Hometrack offered their perspective on this.

The annual rate of UK house price growth is 4.3%, the highest since April 2017. The impetus for growth is coming from Wales, northern England and Scotland where strong demand and attractive affordability allow headroom for above average growth rates.

The rate of annual price inflation is highest in Wales and the North West at +5.4%.

At a city level, Liverpool has jumped to the top of the growth rankings with house prices rising by 6.3% over the last 12 months – this is the highest annual growth rate for 15 years.

Manchester is close behind with a growth rate of +6.0%, back to levels of inflation last seen 2 years ago.

So Liverpool is leading the way as the house price market follows the performance its football team, or at least the red version. Next comes Manchester which may be seeing the benefit of all the plugging of its house prices by the Salford based BBC. Care is needed though because at £127,200 prices in Liverpool are a long way short of the average for this index which is £233,700 and less than half of the twenty city index at £260.500.

This time around things are being led by the North it would seem.

House price growth is at a decade high across three regions – North East, North West, Yorkshire and the Humber – in fact growth is running at the highest since before the global financial crisis.

Although looking ahead they expect all areas to continue this trend.

Despite the new lockdown, demand for homes has posted the usual seasonal rebound which has been stronger than last year. Demand for homes is up 13% on this time last year, with new sales agreed also up 8%.

This rebound is broadly uniform across all regions and countries. It is a continuation of above average demand and market activity from 2020 H2.

You may not be surprised to read that they seem to be keen on an extension to the Stamp Duty holiday. They say it will be short but we know what that invariably means!

Meanwhile something slightly different is happening in London.

The one area where supply is growing is London with flats accounting for much of this increase.

We believe this is a combination of 1) more owners looking to trade up from flats to houses motivated by a desire for space and more flexible working patterns; 2) investors looking to sell homes in the face of falling rents and expectations of an increase in capital gains tax rates in 2021.

Those of you who follow the debate might think that for once the official obsession with using Imputed Rents might show something useful here.They might if they did not use last year’s.So next year they will be useful for telling us what is happening now!

Mortgage Supply

It was on a bit of a tear in December.

Net mortgage borrowing remained strong at £5.6 billion in December.

2020 was a year of not far off the football image of two halves with a strong ending.

Net borrowing continued to be significantly higher than the average of £3.9 billion seen in the six months to February 2020. Strength since September in net mortgage borrowing has, however, only partially offset weakness earlier in the year: total borrowing in 2020 (£43.3 billion) was below 2019 (£48.1 billion).

If we look further up the chain we can expect more of the same.

The strength in mortgage borrowing follows a large number of approvals for house purchase over the second half of 2020. In December, the number of these approvals – an indicator for future lending – was 103,400 (Chart 1). This was slightly lower than in November (105,300) but well above the February level (73,400). Recent strength in approvals has more than offset the significant weakness earlier in the year

The next statement is not for the nervous as what happened after 2007?

House purchase approvals – having troughed at a record low of 9,400 in May – totaled 818,500 in 2020, the largest number in one year since 2007.

These are extraordinary numbers in a pandemic which has ravaged more than a few bits of the UK economy. For example there was more woe being reported for the retail sector earlier via Arcadia. This is a clear function of the way the Bank of England stepped in.

However there is an area where it is now beginning to struggle.

The ‘effective’ interest rates – the actual interest rates paid – on newly drawn mortgages rose 7 basis points to 1.90% in December. That is slightly above the rate at the start of the year (1.85% in January) and the highest since October 2019. The rate on the outstanding stock of mortgages was little changed at 2.12% in December.

The fact that mortgage rates are not higher than pre pandemic confirms my theme that Bank Rate is essentially now irrelevant for them. After all it was cut from 0.75% to 0.1% and now mortgage rates are in general higher. Indeed it has had little lasting effect even on the shrinking number of variable rate mortgages as their interest is 0.11% lower than a tear ago or around one sixth of the Bank Rate cut.

Consumer Credit

This had a simply wretched 2020 and I do envy the individual who had to announce these numbers at the Bank of England morning meeting.

Households’ consumer credit remained weak in December with net repayments of £1.0 billion. This follows a net repayment of £1.5 billion in November (Chart 2). Total net repayments were £16.6 billion in 2020, the weakest in one year on record. As a result, the annual growth rate fell further to -7.5% in December, a new series low since it began in 1994.

It has essentially been driven by credit cards.

Within consumer credit, the weakness in December reflected net repayments on both credit cards (£0.8 billion) and other forms of consumer credit (£0.1 billion). As a result, the annual growth rates of both components fell further, to -16.2% and -3.4%, respectively. For credit cards, this represents a new series low.

I would say this was due to the cost of borrowing on a credit card but in fact that has pretty much ignored all the Bank Rate cuts of the credit crunch era.

The cost of credit card borrowing bounced back to 17.76% in December, following the series low at 17.49% in November.


There are some extraordinary numbers here as we see the impact of the £128 billion or so of the various Term Funding Schemes on mortgage supply. Next comes the impact of the extra QE bond buying in driving mortgage interest-rates lower although even a current weekly purchasing rate of just over £4.4 billion has not stopped a bounce back.

Switching to the wider money supply we see changes as mortgage finance fires up again but consumer credit shrinks. On the other side of the coin we have seen an extraordinary rise in savings.

Households’ flows in to deposit-like accounts rose in December. The net flow of deposits was £20.9 billion in December, up from £18.4 billion in November (Chart 3).

There is an irony here as the TFS was to avoid the banks having to compete for deposits which have poured in anyone. I am also sure some bright spark PhD is writing a piece saying that lower savings rates create a higher demand for savings.

The effective interest rate paid on individuals’ new time deposits with banks fell by 8 basis points in December, to 0.42%, a new series low since it began in 2016. The effective rates on the outstanding stock of both sight and time deposits were broadly flat, at 0.12% and 0.51%, respectively. The rate on the stock of sight deposits remains the lowest since the series began, and 34 basis points lower than in January.

With mortgage rates rising and savings rates falling The Precious! The Precious! Will be making some money and is no doubt a factor in why bank share prices have been doing better.

Adding it all up gives us money supply growth of 14.1%.





GameStop and Robinhood are linked to all the money supply surges

It has been quite an extraordinary week and that has just been added to by Elon Musk.The simple addition to Bitcoin to his twitter bio has seen it rise by US $4000 in around 15 minutes. This makes even the move by GameStop which rallied after hours from a close at US $193.60 after hours to US $312 seem quite normal. It seems some limited buying is allowed again and look at the impact.We can add to that this because I am not sure I recall a broker responding to events quite like this before.

Robinhood, the online brokerage at the centre of wild trading in equities this week, has raised more than $1bn from its existing investors and tapped credit lines from banks to shore up its financial position after a turbulent four days. The company has drawn down at least several hundred million dollars via a credit facility with banks led by JPMorgan and including Goldman Sachs, Morgan Stanley, Barclays and Wells Fargo, according to people familiar with the move. ( Financial Times)

They have obviously been taking lessons from central bankers as this is described thus.

A spokesperson for Robinhood early on Friday described the $1bn infusion from its investors as a “strong sign of confidence” that will help it “further serve our customers”.

Perhaps they are regretting this.

A Robinhood user who was gifted a single share of GameStop stock when downloading the app in March just sold it for $353, a gain of more than 9,000% ( Wall Street Journal)

There is a group in Nottingham who are not regretting all this but they are somewhat bemused.

Lovely to have all these new followers .. can we just check that you know that you’re following The World Wide Robin Hood Society in Nottingham and not the Robin Hood App .. if so .. a big welcome from Sherwood.

Apparently they are run off their feet with new orders!

Oh and in the time I have been typing this Bitcoin has rallied another US $2000 so net up US $6000.

Money Money Money

Now let me switch to a news release from the European Central Bank which highlights something which is feeding all of this.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, increased to 15.6% in December from 14.5% in November.

This is as high an annual growth rate as it has seen in its twenty years or so ( I am only counting the period for which the Euro has existed although numbers are calculated for beforehand and it still seems true). A couple of months ago it was nudging the 10 trillion Euro barrier and since then another 121 billion ( November ) and 125 billion ( December) have been added. That gives us an idea of the scale of what is taking place as Elvis Costello blares out from the loudspeakers.

Pump it up, until you can feel it
Pump it up, when you don’t really need it
Pump it up, until you can feel it
Pump it up, when you don’t really need it

These week some ECB sources ( sauces in modern language) have been hinting at yet another rate cut potentially fulfilling some more lines of the song lyrics.

She’s been a bad girl, she’s like a chemical
Though you try to stop it, she’s like a narcotic

Before I move on let me point out that the amount of cash in circulation rose by another 8 billion Euros in December. That means the annual rate of growth is 11.3% which is not bad for something we keep being told is in decline! We get plenty of denials about money printing but if we take the subject literally the answer is yes and on quite a scale. Curiously really because the next step after claiming that money is in decline is to claim that only money launderers, drug traffickers and other criminals use it.

Broad Money

This gives us a link as to where the money is going in the economy or at least it used to.

  • Annual growth rate of broad monetary aggregate M3 increased to 12.3% in December 2020 from 11.0% in November

In theory this flows straight into nominal Gross Domestic Product with the only debate being whether it becomes inflation or real growth. Except these days with the way inflation numbers are so manipulated it is hard to tell.For example the Euro area measure HICP simply omits the fastest growing area which is below.

House prices up by 4.9% in the euro area (EA-19) and by 5.2% in the EU-27 in the third quarter of 2020, compared with the same quarter of 2019.

Even the ECB admits it can be up to a third of consumer/household spending. I will leave that there because there are plenty of apologists for this who will construct all sorts of reasons why this should be so.

So we have a wash of cash and some of it is hard to pin down.For example this month saw a 41 billion increase in money market fund shares out of not much.

So there has been an enormous shove. Care is needed because this is a Euro game and we have been looking at US Dollar investments above.But there are all sorts of links these days and the same is happening with the US money supply.

Oh and did I mention a possible interest-rate cut?


For newer readers one of the themes of my work is never to believe anything until it is officially denied. Also I would point out that if the benefits being limited was the criteria here, they would not have made all the other interest-rate cuts either.


So today’s thesis is that some of the funds created has ended up in GameStop via the creation of the Robinhood traders.Not a direct link but via the way the stimulus cheques have been oiled and implicitly funded by the central banks. Then things get even more awkward because if we briefly put on our central banker hats do we calculate the Wealth Effects at a GameStop share price of US $397 ( it has been rising as I wrote this) or US $193.60? Maybe they will be distracted by personal wealth effects.

Janet Yellen accepted $810,000 in speaking fees from Citadel, owner of Robinhood.

Reporter: Are there any plans to recuse herself from advising the President on GameStop and Robinhood situation?

Psaki: ‘No and she’s an expert and deserves that money.’ ( @IsicaLynn)

There are some really awkward elements to this whole episode.Whilst in isolation it is amusing to see some  hedge funds on the run others will have been on the other side.Also we should be careful about cheer leading for geared investments as they have consequences. Some of the trading halts have been due to the slow settlement process and margin calls on the brokers.

Industrywide collateral requirements for U.S. brokerages yesterday jumped to $33.5 billion, up from $26 billion, in the face of higher stock-specific volatility: DTCC  ( @lisaabramowicz )

Next comes the fact that shares are being pushed to many times their value which means that whilst some will gain most of the Wall Street Bets crowd will lose.