If the central bank has been at the heart of the economy since the 2008 crisis, the money supply is the blood that circulates through its veins, and since last July it has increasingly flowed in smaller quantities. Analysts have been warning for months about the negative impact that it will have on growth, the increase in rates at an accelerated pace by central banks, and the dismantling of the balance of assets that they have built in recent years. This process has led to the money supply (M3) to contract at the fastest pace in the history of the euro zone, already falling for the first time in 74 years in the United States, a leading indicator that seems to anticipate a recession in the coming months.
The impact of the changes that occur in the money supply is felt in the economy with a certain delay, overheating activity in a market when monetary aggregates increase greatly, which ends up generating inflation, and causing a slowdown in growth. or even recession, when these are contracted by the policies of central banks. With the M3 money supply (among those collected by the ECB, it is the one that takes into account the most components) contracting at a rate of 1.2% at this time, there are analysts who warn that The economy will not last long without falling into a recession.
One of the most prestigious monetarist economists, Tim Congdon, advisor to the British government during 1993 and 1997, has pointed out this year that “the Fed, the ECB and the Bank of England are to blame for the high inflation they are suffering.” the economies”, and warns that “they will also be responsible for the recessions that will arrive from mid-2023”. In his opinion, “the amount of money in circulation It should be in the control panel of the central banks. If not, central bankers They will be as dangerous as a citizen who drives without a speedometer“warns Congdon.
“Central banks will be responsible for the recessions that will arrive from mid-2023,” warns Tim Congdon
Felipe Villaroel, portfolio manager at TwentyFour AM, agrees: “The creation (or destruction) of money is an important, although not simple, concept that, in our opinion, has had a lot to do with the inflation part of the problem. the world is facing today, driven by demand,” he points out.
The chief economist of the manager Janus Henderson, Simon Ward, is also among the group of monetarists who warn of the economic slowdown that these leading indicators are anticipating. For him, the money supply ends up infecting the real economy over time, first through the PMI activity indicators, and later reaching the real economy and the GDP data. And for him, “central banks must recover positive monetary growth. Monetarists have won in the inflation forecasting competition, but central bankers claim that it was by chance. Now, let’s get revenge: “If the central banks lose again and we fall into a recession or deflation, will they finally recognize their mistake?”Ward wonders.
In his opinion, this is what is at stake in the economy at this moment: a recession, stagnation and the danger of falling into a situation of deflation, the fears that existed before the central banks flooded the economy with unprecedented stimuli after the arrival of the Covid-19 pandemic. “The growth of the money supply in the United Kingdom and the euro zone is well below the averages of the 2010s,” something that “It is extremely worrying and suggests a recession, disinflation and deflation”warns.
In fact, since the middle of this year the leading PMI indicators are already pointing to a contraction in economic activity, which, however, has not yet been felt with all the virulence with which it can arrive. The Composite PMI (combines the manufacturing sector with the services sector) is now moving at 46.5 points (below 50 points indicates contraction), the lowest level seen since the end of 2020, in the midst of the Covid crisis.
Thomas Hempell, head of macroeconomic and market studies at Generali Investments, agrees, pointing out how “the lack of confidence and monetary data, with the M3 indicator down 1.1% year-on-year, make a recession led by Germany more likely.”
The debt wall and its fall in 2024
For many economists, it has been a surprise to see how the United States survived the year 2023 without falling into a recession. Macroeconomic data suggested a contraction in growth this year, but so far the US economy is holding up better than expected at the beginning of the year. The Fed’s support for the banking sector when The crisis broke out in Marchand the wall of debt maturities, which has not yet been dismantled, are the two keys.
Daniel Lacalle, chief economist at Tressis, explains how the Federal Reserve has kept an ace up its sleeve, and how it is managing to sustain the growth of the world’s leading economy in recent months. “If you now look at the monetary aggregates, it is unquestionable that we would already be entering a certain recession. And furthermore, “a very strong one,” he highlights, but highlights a factor that is not being taken into account: “The money supply does not include loans to the interbank system, the liquidity injections that the Fed has given to the banks in the discount. This has skyrocketed massively,” he explains.
The data is very significant: although the money supply has been reduced in the United States by 10.4% from September 2022 to the same month of this year in its most liquid components (M1), and 3.58% in the same period for the M2 money supply, this fall has been partially offset by the increase in loans to banks by the Fed. The increase in this sense has been dizzying: in February 2023, just before the SVB banking crisis, loans to Fed banks reached $15,605 million; In just one month they jumped to exceed 215,000 million. The figure reached $307.19 billion in May, and last September it fell to $222 billion.
In addition to the support that the economy has had from the Fed, which managed to prevent the March banking crisis from having systemic consequences, the debt maturity structure would have been the other great ally that has managed to avoid the crisis up to this point. “GDP is being sustained by excess debt, and that is why, while the credit supply indicators give figures that would indicate a very strong recession, it is possible that this will remain stagnant,” explains Lacalle.
“In 2023 it has not happened yet because there is a huge wall of debt protecting the economy, due to the years of cheap money. But this wall of debt expires in 2024 and 2025: the combination of a falling money supply and these maturities, With the US refinancing $7 trillion in debt next year, it makes everything much more complicated,” he acknowledges. “We will have to see what will happen next year, when we face the fall of that wall of maturities,” warns Lacalle.