13/6/2020: What Do Money Supply Numbers Tell Us About Social Economics?

What do money supply changes tell us about social economics? A lot. Take two key measures of U.S. money supply:

• M1, which includes funds that are readily accessible for spending, primarily by households and non-financial companies, such as currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; traveler's checks; demand deposits; and other checkable deposits. 

• MZM, which is M2 less small-denomination time deposits plus institutional money funds, or in more simple terms, institutional money and funds available for investment and financial trading.

Here we go, folks:

Does this help explain why Trumpism is not an idiosyncratic phenomena? It does. But it also helps explain why the waves of social unrest and protests are also not idiosyncratic phenomena. More interesting is that this helps to explain why both of these phenomena are tightly linked to each other: one and the other are both co-caused by the same drivers. If you spend a good part of 20 years pumping money into the Wall Street while largely ignoring the Main Street, pitchforks will come out. 

The *will* bit in the sentence above is now here.

12/6/20: Summary of the Eurosystem Response Measures to COVID19

Great and tight summary of the Eurosystem monetary policies deployed in response to COVID19 pandemic: https://blocnotesdeleco.banque-france.fr/en/blog-entry/monetary-policy-measures-taken-eurosystem-response-covid-19.  Cumulative total through the end of May, EUR 1.27 trillion.

27/5/20: Falling Velocity of Money

Despite massive money printing by the Fed in the years post-GFC and again since the start of the COVID19 pandemic, velocity of money in the U.S. is actually shrinking.

The latest bout of falling velocity of money started with what appears to be a new wave of precautionary savings by the households:

However, as the chart above also indicates, propensity to trade financial and real assets has been declining in recent years, from the start of the Global Financial Crisis on.

You can see a massive spike in precautionary savings in March 2020 in the following graph:

These charts indicate that the Fed's ability to support demand side of the economy is declining, as consumers have been drastically reducing their willingness to spend. They also suggest that investment markets liquidity has declined over time. All together, the above charts show the declining effectiveness of monetary policy in the age of ultra low interest rates.

$5.9 trillion and counting: the scale of Monetary Easing

Updating my previous post: https://trueeconomics.blogspot.com/2020/03/20320-46-trillion-and-counting-scale-of.html listing all measures monetary authorities around the world have unleashed in response to the Covid19 crisis:

• 23/3/2020 Federal Reserve Bank of the U.S.: 

1. Commitment to continue asset purchasing program “in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions and the economy”. Basically, an open-ended pledge, with no USD amount. This does not move the needle on its prior commitment if USD 700 billion in purchasing, for 2020. But it does expand the program, should the crisis continue unabated, and probably allows for bringing the committed purchases forward
2. The Fed also will be buying corporate bonds, crucially the investment-grade securities in primary and secondary markets and through exchange-traded funds. Again, this has been pre-committed to, but 'primary' markets operations are something that is truly unprecedented.
3. An unspecified lending program for Main Street businesses and the Term Asset-Backed Loan Facility implemented during the financial crisis
4. There will be a program worth $300 billion “supporting the flow of credit” to employers, consumers and businesses 
5. Two facilities set up to provide credit to large employers
6. Issuance of asset-backed securities backed by student loans, auto loans, credit card loans, loans guaranteed by the Small Business Administration and certain other assets
7. Expanding Commercial Paper Funding Facility. The program now will include “high-quality, tax-exempt commercial paper” and the pricing will be reduced.
8. Lower the interest rate on its repo operations to 0% from 0.1%.
9. My estimate of the 1H 2020 net impact of new measures is in the region of USD200-400 billion.

• 22/3/2020 Chancellor Angela Merkel’s government plans to increase borrowing up to EUR 150 billion in 2020 and pass a EUR 156 billion supplementary budget. Germany is also planning to set up a bailout fund for critical industries of about EUR 500 billion. While the measures are fiscal in nature, they require monetary policy supports to sustain low borrowing costs and demand for these securities.

These measures moves the needle for global measures from USD4.6 trillion to USD 5.9 trillion.

20/3/20: $4.6 trillion and counting: the scale of Monetary Easing

The monetary largesses to-date: Central Banks across the world have slashed interest rates in the past few weeks, provided additional emergency liquidity supports for the markets, ranging from equity markets to bond markets to municipal debt markets and money markets. They also announced trillions worth of direct asset purchasing and debt monetization programs. Ex-international / multinational lines and direct swaps lines, total amounts of monetary and financial channels supports deployed so far is around USD 4.582 trillion. This number also excludes open-ended (unbounded) measures, such as programs to purchase securities to guarantee specific price/yield ranges.

Here is the summary of these (and direct Government lending) programs to-date:

• 20/03/2020  Banco de México: rate cut bps = -50, base rate = 6.50, overnight interbank rate.
• 20/03/2020  National Bank of Romania: rate cut bps = -50, base rate = 2.00
• 20/03/2020  Bank of Thailand rate cut bps = -25, base rate = 0.75
• 20/03/2020  Norges Bank (Norway) rate cut bps = -75, base rate = 0.25
• 19/03/2020  Central Reserve Bank of Peru rate cut bps = -100, base rate = 1.25
• 19/03/2020  Bank of England rate cut bps = -15, base rate = 0.1, added GBP 200 billion to bond buying programme raising it to GBP 645 billion. On 17/03/2020: the U.K. Government unveiled another, larger stimulus package. It includes, among other things USD 379 billion in business loan guarantees, USD 23 billion in business tax cuts and grant funding to businesses hit worst by the virus, such as retail and hotel businesses
• 19/03/2020  South African Reserve Bank rate cut bps = -100, base rate = 5.25
• 19/03/2020  Taiwan Central Bank rate cut bps = -25, base rate = 1.125
• 19/03/2020  Bank Indonesia rate cut bps = -25, base rate = 4.5
• 19/03/2020  Philippine Central Bank cut bps = -50, base rate = 3.25
• 19/03/2020  Reserve Bank of Australia cut bps = -25, base rate = 0.25, set a target for the yield on 3-year government bonds at ~0.25%, plans to purchases bonds in the secondary market do sustain yield around 25 bps; provided a 3-year funding facility to the banks at a fixed rate of 0.25%
• 18/03/2020  Central Bank of Brazil cut bps = -50, base rate = 3.75
• 18/03/2020  Bank of Ghana cut bps = -150, base rate = 14.50
• 18/03/2020  Central Bank of Iceland cut bps = -50, base rate = 1.75
• 18/03/2020 Federal Reserve Bank of the U.S. announced the Money Market Mutual Fund Liquidity Facility (MMLF), to lend money to banks so they can purchase assets from money market funds. The U.S. Treasury will cover up to USD 10 billion of loan losses from this program, and lending under the program will not effect bank capital requirements. The program is scheduled to run until the end of September. This is similar to the AMLF program launched in 2008 after the collapse of Lehman Brothers.
• 17/03/2020 French Government announced a guarantee on bank loans to businesses up to USD 327 billion
• 17/03/2020  National Bank of Poland cut bps = -50, base rate = 1.00
• 17/03/2020  Central Bank of Armenia cut bps = -25, base rate = 5.25
• 17/03/2020  Bank Al-Maghrib, Marocco cut bps = -25, base rate = 2.00
• 17/03/2020  State Bank of Pakistan cut bps = -75, base rate = 12.50
• 17/03/2020  Central Bank of the Rep. of Turkey cut bps = -100, base repo rate = 9.75
• 17/03/2020  State Bank of Vietnam cut bps = -100, base refinancing rate = 5.00, cut bps = 50, base discount rate 3.50
• 17/03/2020 Federal Reserve Bank of the U.S.: U.S. Treasury Secretary Mnuchin approved the Federal Reserve's "Commercial Paper Funding Facility" (CPFF) which allows the Fed to create a corporation which can purchase commercial paper, short-term, unsecured loans made by businesses for everyday expenses. Mnuchin authorized up to USD 10 billion from the U.S. Treasury to help cover loan losses incurred under this program. The program will end on March 17, 2021 unless it is extended. The program is similar to the one launched after the Global Financial Crisis. On the same day, the Federal Reserve received approval to re-launch another Great Recession-era tool, the Primary Dealer Credit Facility (PDCF). PDCF will offer short-term loans to banks secured by collateral such as municipal bonds or investment-grade corporate debt. The program will run at least six months and can be extended.
• 16/03/2020 Federal Reserve Bank of the U.S. increased reverse repo operations by another $500 billion to USD 2 trillion
• 16/03/2020  Central Bank of Jordan cut bps = -100, base rate = 2.50
• 16/03/2020  Central Bank of Chile cut bps -75, base rate = 1.00
• 16/03/2020  Central Bank of Egypt cut bps -300, base overnight rate = 10.25; cut bps = -300, base overnight deposit rate = 9.25
• 16/03/2020  Czech Central Bank, cut bps = -50, base rate = 1.75
• 16/03/2020  Central Bank of Bahrain, one week deposit rate, cut bps = -75, rate =1.00
• 16/03/2020  Qatar Central Bank, cut bps = 50, base repo rate = 1.00
• 16/03/2020  Saudi Arabian Monetary Authority, cut base repo rate = -75 bps, to rate = 1.00
• 16/03/2020  Central Bank of Sri Lanka, cut base deposit rate to 6.25 and standing lending rate to 7.25
• 16/03/2020  Bank of Korea cut 50 bps to the base rate of 0.75
• 16/03/2020  Bank of Japan: short term rate -0.1%, long term 10-year JGB yield target at 0%; raised purchases of exchange-traded funds (ETFs) x2 from USD 56 billion a year to USD 112 billion for ETFs and for other risky assets, including commercial paper, created new loan program for 1 year at zero rate for financial institution.  
• 16/03/2020  Reserve Bank of New Zealand, cut bps = -75, base rate = 0.25
• 16/03/2020 Bank of Canada: the Office of the Superintendent of Financial Institutions (OSFI), Canada's financial regulatory body, lowered bank reserve requirements, allowing banks to lend an additional USD 214 billion
• 15/03/2020  Federal Reserve of the U.S., cut bps = -100, base rates 0-0.25 range, will purchase at least USD 700 billion of securities, including at least $500 billion of U.S. Treasuries and at least $200 billion of mortgage-backed securities
• 13/03/2020 Germany authorizes state-owned KfW bank, to lend out as much as USD 610 billion to companies to cushion the effects of the coronavirus
• 13/03/2020  Bank of Canada, cut bps = -50, base rate = 0.75
• 13/03/2020  Norges Bank, Norway, cut bps = -50, base rate = 1.00
• 13/03/2020 People's Bank of China: lowered the banks' reserve requirement ratio by 0.5-1 percentage points to free USD79 billion worth of new lending
• 12/03/2020 Federal Reserve Bank of the U.S. massively expanded reverse repo operations, adding USD1.5 trillion of liquidity. Effectively, the Fed extended the amount of short term loans to banks in an attempt to stabilize money markets and increase banks' access to cash.
• 12/03/2020  European Central Bank, deposit rate remains = -0.50%, cut TLTROIII rate by 25 bps to -0.75% (TLTROs are Targeted Long-Term Refinancing Operations providing negative cost loans to banks); later added to its 2019-announced asset purchase programme of EUR 20 billion a month: a one-off EUR 120 billion purchases in 2020 on top of EUR240 billion already planned, plus another EUR 750 billion in a Pandemic Emergency Purchase Programme. Purchases total planned for 2020 is at EUR 1.1 trillion.
• 11/03/2020  Bank of England, cut bps = -50, base rate = 0.25, also introduced a new programme for cheap lending and reduced a capital buffer requirements for the banks. Lowered capital requirements for U.K. banks, allowing them to use a "counter-cyclical capital buffer". Facilitating nearly USD 390 billion in new loans.
• 11/03/2020  National Bank of Serbia, cut bps = -50, base rate = 1.75
• 11/03/2020  Central Bank of Iceland, cut bps = -50, base rate = 2.25
• 05/03/2020  Central Bank of Jordan, cut bps = -50, base rate = 3.50
• 04/03/2020  Bank of Canada, cut bps = -50, base rate = 1.25
• 04/03/2020  Hong Kong Monetary Authority, cut bps = -50, base rate = 1.50
• 04/03/2020 and 03/03/2020: People's Bank of China expanded its reverse repo operations by USD 71 billion and USD 174 billion, respectively.
• 03/03/2020  Federal of the U.S., cut bps = -50, base rates range = 1.00-1.25. Largest cut since 2008
• 03/03/2020  Central Bank of Malaysia, cut bps = -25, base rate = 2.50
• 03/03/2020  Reserve Bank of Australia, cut bps = -25, base rate = 0.50
• 20/02/2020  Bank of Indonesia, cut bps = -25, base rate = 4.75
• 20/02/2020  People's Bank of China, cut bps = -10, base rate = 4.05 for 1 year loan prime rate and 5-year rate from 4.80% to 4.75%.
• 06/02/2020  Philippine Central Bank, cut bps = -25, base rate = 3.75
• 05/02/2020  Bank of Thailand, cut bps = -25, base rate = 1.00

Multinational efforts:
 

• The Fed, along with the ECB, Bank of Canada, Bank of England, Bank of Japan and the Swiss National Bank also agreed to offer three-month credit in U.S. dollars on a regular basis and at a rate cheaper than usual.
• 04/03/2020 the International Monetary Fund made USD 50 billion in loans available to deal with the coronavirus, including USD10 billion of zero-interest loans to the poorest IMF member countries. 16/03/2020 the IMF said it, "stands ready to mobilize its USD 1 trillion lending capacity to help our membership." In the same statement, the IMF said it has $200 billion in current lines of credit, some of which could be used for the COVID crisis, and that they have "received interest from about 20 countries and will be following up with them in the coming days." The IMF also is aiming to boost its debt relief fund to $1 billion from its current level of $400 million.
• 03/03/2020 the World Bank announced an initial package of up to USD 12 billion in loans for countries to help cope with the effects of the COVID19. USD 8 billion of the funding is new loans and the remaining USD 4 billion is redirected from current lines of credit.

 

1/9/19: Priming the Bubble Pump: Extreme Credit Accommodation in the U.S.

Using Chicago Fed National Financial Conditions Credit Subindex (weekly, not seasonally adjusted data), I have plotted credit conditions measurements for expansionary cycles from 1971 through late August 2019. Positive values of the index indicate tightening of credit conditions in the economy, while negative values denote loosening of credit conditions.

Since the start of the 1982 expansionary cycle, every consecutive cycle was associated with sustained, long term loosening of credit conditions, which means the Fed and the regulatory authorities have effectively pumped up credit in the economy during economic expansions - a mark of a pro-cyclical approach to financial policies. This trend became extreme in the last three expansionary cycles, including the current one. In simple terms, credit conditions from the end of the 1990s recession, through today, have been exceptionally accommodating. Not surprisingly, all three expansionary cycles in question have been associated with massive increases in leverage and financialization of the economy, as well as resulting asset bubbles (dot.com bubble in the 1990s, property bubble in the 2000s, and financial assets bubbles in the 2010s).

The current cycle, however, takes this broader trend toward pro-cyclical financial policies to a new level in terms of the duration of accommodation and the fact that it lacks any significant indication of moderation.

3/5/19: The Rich Get Richer when Central Banks Print Money

The Netherlands Central Bank has just published a fascinating new paper, titled "Monetary policy and the top one percent: Evidence from a century of modern economic history". Authored by Mehdi El Herradi and Aurélien Leroy, (Working Paper No. 632, De Nederlandsche Bank NV: https://www.dnb.nl/en/binaries/Working%20paper%20No.%20632_tcm47-383633.pdf), the paper "examines the distributional implications of monetary policy from a long-run perspective with data spanning a century of modern economic history in 12 advanced economies between 1920 and 2015, ...estimating the dynamic responses of the top 1% income share to a monetary policy shock." The authors "exploit the implications of the macroeconomic policy trilemma to identify exogenous variations in monetary conditions." Note: the macroeconomic policy trilemma "states that a country cannot simultaneously achieve free capital mobility, a fixed exchange rate and independent monetary policy".

Per authors, "The central idea that guided this paper’s argument is that the existing literature considers the distributional effects of monetary policy using data on inequality over a short period of time. However, inequalities tend to vary more in the medium-to-long run. We address this shortcoming by studying how changes in monetary policy stance over a century impacted the income distribution while controlling for the determinants of inequality."

They find that "loose monetary conditions strongly increase the top one percent’s income and vice versa. In fact, following an expansionary monetary policy shock, the share of national income held by the richest 1 percent increases by approximately 1 to 6 percentage points, according to estimates from the Panel VAR and Local Projections (LP). This effect is statistically significant in the medium run and economically considerable. We also demonstrate that the increase in top 1 percent’s share is arguably the result of higher asset prices. The baseline results hold under a battery of robustness checks, which (i) consider an alternative inequality measure, (ii) exclude the U.S. economy from the sample, (iii) specifically focus on the post-WWII period, (iv) remove control variables and (v) test different lag numbers. Furthermore, the regime-switching version of our model indicates that our conclusions are robust, regardless of the state of the economy."

In other words, accommodative monetary policies accommodate primarily those with significant starting wealth, and they do so via asset price inflation. Behold the summary of the last 10 years.

12/5/18: Monetary Activism at ECB: A Chart of Failure

A simple chart, a great observation by Holger Zschaepitz @Schuldensuehner: "Chart of failure: #Eurozone core inflation has plunged to 0.7% despite #ECB balance sheet at record high. If ECB permanently fails to hit its #inflation target, it's time to rethink target. By the way, there is inflation in stocks, bonds, real estate not measured in official CPI."

The story of ECB racing away from the Fed and even BoJ in pursuit of the inflation Nirvana:

Which brings us to a bigger question: with ECB at play, what is there to brag about when it comes to Europe's latest growth "renaissance"? Read my article in the Business Post tomorrow... 

23/3/18: Still Printing Their Ways Into Prosperity: The Big Three

Just a gentle reminder... the QE is still going on, folks...

As of mid-March, total assets on BOJ, ECB, PBOC and Fed balancesheets have amounted to USD 20.6 trillion, excluding PBOC - USD 14.9 trillion. In Q4 2017 terms (the latest comparable data for GDP), US Fed's assets holdings amounted to 22.4% of GDP of the country, ECB's to 38.9% and BOJ's to 94.5%.  In three largest advanced economies in the world, the Central Banks' created liquidity (printing money for Governments) remains the only game in town, when it comes to sustaining both, asset prices and fiscal profligacy.

10/11/15: Keiser Report from Kilkenomics 2016

My interview with Max Keiser and Stacy Herbert in Kilkenny :

http://www.disclose.tv/action/viewvideo/216140/kilkenomics_where_comedy_meets_economics_constantin_gurdgiev__keiser_report/

Enjoy. (from 3:26 on).