"On 29 September, Martin Wolf wrote in the Financial Times that: "UK broad money (M4) shrank by 1.1 per cent in the year to July 2011." We seem to be so focused on government deficits and Quantitative Easing that we may be missing what is happening to global Money Supply. Do we have figures for money supply growth in the USA, Euro zone, Japan and the BRICs? What is the impact of money supply global growth on stock markets?"

Eoin Treacy's view Thank you for these questions which may be of interest to other subscribers. Money Supply is only half of the equation. In order to get an idea of whether there is too much or too little money being created we need to also have an idea of how quickly money is circulating through the financial system.

By multiplying broad Money Supply by the Velocity of Money we should get a relatively steady trend from lower left to upper right. This would suggest that the central bank is managing the supply of money to cater to the health of the economy and allowing enough leeway for economic growth. Slow velocity would require more money, high velocity requires less money creation.

Unfortunately, while most countries make some measure of money supply public, velocity of money data is harder to source. The USA stopped reporting M3 data in 2005 but still posts data for both M2 and the Velocity of M2. As of June 30th the Velocity of M2 was still deteriorating. However, the product of the two measures is hitting new highs reflecting the surge in M2 creation over the same period. The Fed appears to be doing everything in its power to avert deflation even to the extreme of courting inflation.

I contacted the Bank of England's press office this afternoon. They confirmed that they do not make velocity of M3 or M4 public so I cannot produce a similar multiple for the UK. However, we can assume that if the Bank has decided on another round of quantitative easing then the velocity of money has probably not turned upwards yet.

The OECD distributes Velocity of Money indices for a number of countries but their data includes estimates as well as solid data. Using the OECD's measures this multiple of Japan's broad Money Supply and Velocity of Money suggests not near enough money is being created to stimulate the economy.

We do not have access to velocity of money data for any of the BRICs and in my opinion it does not make a great deal of sense to look at money supply data in isolation. However, we do have the respective spreads between the 10yr and the 2yr for India and China. Both countries have been focused on tightening monetary policy in an effort to rein in inflationary pressures. Spreads have pulled back to zero in India and appear to be stabilizing whereas China has yet to exhibit signs that a low is forming.

Stock, commodity and credit markets have priced in at least an approximation of a worst case scenario. If the global economy is in fact about to slow down meaningfully, central banks will respond by printing more money either conventionally or through quantitative easing. The impressive rallies in stock, commodity and credit markets since late 2008 are evidence that while money creation is local, its effect is global.