Duncan’s early take on the money supply numbers is “ouch”.  If the point of QE is money growth, it’s not working.   Whereas Simon Ward says

UK monetary statistics for September are much better than they look on first inspection . . .  he Bank of England’s preferred broad money measure – M4 excluding “intermediate other financial corporations” – fell sharply on the month, resulting in a third-quarter contraction of 1.7% at an annualised rate  . . . On closer analysis, however, the quarterly decline was entirely due to “non-intermediate” financial corporations running down their money balances. Insurance companies, pension funds, trusts and other fund managers reduced their M4 holdings by £10 billion last quarter, presumably reflecting increased confidence in financial market prospects . . . M4 excluding all financial corporations, i.e. money holdings of households and non-financial companies, rose by 0.3% in September and 3.8% annualised in the third quarter – the fastest since the second quarter of 2008

I won’t say “I’m lost”.   Just that the effect of QE on money seems so unpredictable, and its effect on GDP even worse, that its risks are surely larger than currently stated.

And to make things even more confusing, Ronald McKinnon says we need higher rates to get the money markets moving again.

In 2009, however, the zero interest rate policy became an important supply-side constraint on the resumption of normal interbank trading. Positive rates of interest at all terms to maturity are necessary for restoring normal borrowing and lending in the wholesale interbank market. Only then will banks that are liquid, i.e., have excess reserves but no good future lending opportunities at retail, lend to those that are illiquid-i.e., those with good retail lending opportunities in domestic or foreign trade but no excess reserves. But if the risk-free federal funds rate is close to zero, banks with excess reserves will not bother parting with them for a derisory yield.

We heard a similar argument from Building Societies: that they are struggling to find the depositors they need to expand lending, because rates are too low to attract them.   Their blended cost of capital is still high. See this press release.

I would love to know what Scott Sumner, who wants negative rates, would think of Ron McKinnon.

The pressure is building on Osborne (hat tip moments of Clarity) Then again, having both Heffer and Campbell as your enemies can’t hurt that much in the Tory party, surely?

I am glad that someone is beginning to kick back against the Rogoff Reinhart “All financial crises the same” work.  Here is Cechetti et al.

In recent writings, Carmen M. Reinhart and Kenneth S. Rogoff have drawn lessons from previous financial crises to predict the fallout from the current crisis (see Reinhart 2009 and Reinhart and Rogoff 2008a,b, 2009). We do have sympathy for their conclusion, but would like to sound a note of caution. As we argue in our contribution to last August’s Jackson Hole Symposium (Cecchetti et al. 2009), while they may be similar in their sources, financial crises appear quite different with respect to their ultimate impact. Any attempt to learn from the past must, in our view, take these differences into account.



One thought on “Money supply confusion again?

  1. Certainly confusing.

    We have M4 and M4L for each of the following: total, households, non-financials & financials.

    Plus for ‘excluding intermediate other financial companies’ (the new series (or new in public for the first time)). Simon Ward has just added a new catergory ‘excluding all financial companies’. If I’m honest that sounds a little like data mining to get an answer you want to me.

    I helped construct the ‘excluding intermediate other financial companies’ back in 2006, trying to understand why M4 growth had gone from about 8% to about 12% with no obvious effect on the economy. (Deeply tedious).

    The BOE decided only to exclude some types of financials, Simon seems to want to cut them all out. The Bank’s reasoning is here – and seems pretty fair:


    Personally I stick to non-financials and households M4L.

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