posted by Tapestry
Pre-pandemic, growth in broad money supply averaged 3.8pc per year.
Tim Congdon of the Institute of International Monetary Research calls the decline over the last year “the largest one-year drop in the modern statistical record”.
“It was exceeded in 1922, but that is the one and only precedent,” he says.
That is a worrying comparison: “1921 and 1922 experienced a vicious slump after a boom following the First World War.”
Followers of the money supply are known as monetarists. This school of economics had its heyday in the early 1980s but fell out of favour as central banks shifted focus towards interest rates, rather than money supply, as a method of controlling inflation.
However, adherents of monetarism argue that money supply is a critical leading indicator for growth and inflation, showing the direction in which the economy is heading.
Simon Ward, economist at Janus Henderson, says: “When people or firms are planning to increase their spending, they move their assets into liquid form first. So that move into money signals increased confidence and, a bit later on, spending.
“It is an early warning indicator of animal spirits.”
The current data shows animal spirits are firmly tamed.
One factor hitting the money supply is that households are taking cash out of instant access bank accounts, which pay little interest, and locking it away in fixed-term bonds. This generates more interest but means the funds are no longer available to spend immediately.
Ward notes that the latest drop is “exaggerated” by the pension squeeze after the mini-Budget last year, which pushed LDI funds to liquidate assets to boost their cash holdings. A reverse of that trend since then has triggered a sharp decline in liquid assets.
However, even excluding this factor, the money supply is still shrinking.
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