Life Blood

Nearly all policy makers share two key interests: lay the foundations for a sustainable economic recovery and unwind the emergency facilities and spending. There appeared to have been a consensus, giving more weight to the former than the latter this year. The bond vigilantes have instigated a disruption of that consensus much to the chagrin of the popular will. Indeed, those countries that capitulate the most to the vigilantes are likely to experience the most social push back. Stay tuned.

Ironically, the effect of the bond vigilantes and the social resistance may be similar insofar as the economic impact is negative. Ultimately what is at stake is how the costs (broadly understood) of the bailouts and stimulus are going to be distributed, not just in terms of classes, but also sectors, industries and countries.

This is taking place along another potent but yet somewhat less personal of a force. Like a victim in a trendy vampire show, the life blood of the two largest economic regions, the US and Europe, is being sucked out.

Money supply, measured by the ECB's M3 has collapsed. In January 2009 it was growing at a 6% year-over-year pace. By the end of the year it was contracting at a 0.2% pace. It was contracting in both November and December. The next report is due January 25th and even if one is not a monetarist, the situation is worrisome.

It has been lost in the light of the preliminary 5.7% Q1 US GDP, but in the Fed's statement there appeared what seems like the first official recognition of the ongoing contraction in bank credit. The FOMC implies that this is being offset by improved financial market conditions. We thought so too.

But the capital markets are fickle and given the surge in volatility and the general deterioration of market conditions (should it persist), the risk is that it no longer is sufficient to offset the contraction in bank credit. Even if this is just a normal market correction, it could stall the economies at a crucial time.

The real tragedy is not what is happening in Athens, as painful as the adjustment promises to be. Rather the real Greek tragedy is that we are running quickly, even if not irrevocably yet, into precisely that which we wanted to avoid the most.

David Fuller's view This is a worryingly pessimistic, hopefully too pessimistic conclusion, but let's have a look at various money supply figures.

We are not always comparing like with like here. For instance, M3 data is not available for some countries, including the USA, and in the UK we have had to use M4. Additionally, I would also like to see the velocity of money but we have only been able to obtain this for the USA. Also, I have only posted data available from Bloomberg in cumulative totals, not YoY as from Australia, which I have excluded. Lastly, the money supply data is only available quarterly, in arrears. Despite these deficiencies, we still get an overall impression.

USA M2 (monthly & weekly) has clearly slowed, and while velocity (monthly & weekly) has picked up recently, it has done so from a low level. Euroland M3 (monthly & weekly) has declined, as Marc Chandler mentioned above. Expansion in UK M4 has slowed. Switzerland's M3 is still climbing; Canada's M3 has resumed its climb following a 12-month pause; the trends for M3 in Brazil, Singapore and China (M2) continue to rise. M3 in Hong Kong turned down at the last update. There is more in the Library under Monetary Measures but you get the point, such as it is.

In all candour, I am not sure how much we can conclude from all this, if anything. However, both US M2 and Euroland M3 tipped downwards recently. Last year's advance in most stock markets was overstretched relative to a sustainable trend mean, represented by the rising 200-day moving averages. While we have yet to see any technical evidence that the present correction has ended, it has brought most indices much closer to potential support from both underlying trading and the MAs.