Monthly Monetary Updates 2022
An archive of Professor Tim Congdon's Monthly Monetary Updates from the year 2022. In this archive you can find a link to his Monthly Note videos, the Money Notes (PDF) and also the slides used in the Monthly Notes (PDF).
December:
No Money Note was produced in December 2022 but a short special email was distributed.
(No video was produced in December)
November: Sharpest fall in US money balances since the 1980s
In this video, Professor Tim Congdon expresses his concern about the sharp contraction of US broad money in the latter part of 2022. There was a huge increase in the quantity of money in early 2020 but most economists incorrectly predicted years of disinflation or even deflation. By contrast, Professor Congdon warned as long ago as March 2020 that inflation would rise, possibly to double digits. Using the same analytical framework – namely the monetary theory of national income determination - the recent contraction in real US bank deposits, which fell in the 3 months to October at an annualised rate of 9.9%, points to a recession in 2023. This is the biggest squeeze on monetary balances since the 1980s. In spite of events in the last three years vindicating the quantity theory of money, most US economists focus almost exclusively on interest rates, regarding money as irrelevant in spite of strong evidence to the contrary. The big concern is therefore that the Fed will continue with its current contractionary monetary policy for too long.
October: Supply side Trussonomics vs Thatcherite monetarism
This video looks at the dynamics of public debt in the wake of the disastrous mini-budget of Kwasi Kwarteng. Public spending has two elements – interest on that debt and all other kinds of spending. We all have to pay taxes to service debt interest. Being unproductive, surely the economy should be organised in such a way to minimalise it. It can, in theory, be inflated away, but bondholders do not like this as it reduces the real value of their assets. The “supply siders” such as Professor Patrick Minford, suggest that cutting taxes will increase the trend growth rate and therefore increase government revenue, enabling the debt to be paid. There is no evidence that this actually works. The Reagan government adopted this policy in the 1980s and the US debt to GDP ratio rose from 30% to 50%. By contrast, the Thatcher government focussed on keeping debt under control, raising taxes in the midst of a recession in 1981. Sound fiscal policy is a key element of Thatcherite monetarism. The short-lived Truss government went in the opposite direction and the markets’ response- a sharp rise in bond yields – indicated a serious concern about the plausibility of the “Trussonomics”.
September: Putin's gas gamble: masterstroke or blunder?
Professor Tim Congdon considers the move by President Putin to cut off supplies of Russian gas, which has pushed up the price of gas, leading to predictions that inflation could rise as high as 22%. Was this a masterstroke by the Russian president or a blunder? As a starting point, Professor Congdon considers the Russian share of global output, which stood at 3% in the early 2010s but has now fallen to about 1½% - tiny compared with the advanced nations of the west. Russian gas imports amount to only ¼% of Western GDP. Furthermore, although in the short term, inelasticity in the supply of gas has been a problem, in the medium term, the revolution in the international market in gas thanks to the increase in trade in Liquefied Natural Gas, should ensure that there will be plenty of gas available, even without any supplies from Russia. Furthermore, over the medium and long term, inflation is determined by rises in the quantity of money, not changes in the price of a commodity such as gas.
August: US monetary overhang and macroeconomic scene in Summer 2022
This video considers the macroeconomic scene in the USA. In 2020, there was a huge surge in broad money growth. As Professor Congdon predicted at the time, this led to a sharp increase in asset prices followed by rising inflation. The USA has not really suffered a recession in the first half of 2022 even though GDP technically fell for two consecutive quarters. Essentially, the US economy suffered from supply constraints and couldn’t produce enough – hence the rise in inflation. In 2022, broad money growth has collapsed. One factor behind this has been the stagnation in growth of US bank deposits, caused by the monetary overhang which ensued as a result of the exceptional broad money growth of 2020. However, only between ¼ and ⅓ of the overhang has been eliminated, which suggests that inflation will stay above 5%, growth of output will slow and the tight monetary policy pursued by the Fed will keep broad money growth low. This is a typical cycle and the blame for it lies with central banks and theories of macroeconomics that pay no attention to the quantity of money. Of particular concern at the moment is the decline in the US housing market. This is one further indicator which is pointing to a recession in 2023. Monetary equilibrium is, however, likely to be restored by the end of 2024.
July: Do interest rates or the quantity of money determine growth?
In this video, Tim Congdon gives a rather technical talk on whether interest rates or the quantity of money determine demand growth. The context for this was a recent speech my Huw Pill, the Bank of England’s Chief Economist, entitled “What did the monetarists ever do for us?” in which monetarists were “damned with faint praise”. Pill emphasises the centrality of interest rates in determining monetary policy, which he regards as “canonical”. However, continuing the analyses of the US economy by Anna Schwartz some 50 years ago up to the year 2019, Professor Congdon reaches the same conclusion as she did – namely that there is a relationship, albeit imperfect, between money and income, but there is no relationship between interest rates and income at all. Turning to the UK, here too there is a good relationship between real private demand growth and broad money but none whatsoever between real private demand and interest rates. Note that in the 1970s demand was weak but interest rates were low. Conversely in the 1980s, demand was strong during a period when interest rates were high. The Bank of England has not performed well in recent years and its neglect of money is the main reason why. Interest rates are important only inasmuch they affect the quantity of money. At this moment in time, higher borrowing costs have brought down broad money growth to a level.
June: Is the Bank of England to blame for the above-target inflation?
This video features a discussion by Professor Tim Congdon on the recent remarks made by the Governor of the Bank of England, Andrew Bailey, where he mainly blames external factors out of the control of the Bank for inflation rising to almost 10%. Speaking to the Treasury Select Committee of the House of Commons, Bailey denied that the Bank was to blame for high inflation. Instead he cited the increase in energy prices, higher food prices thanks to the Ukraine war and supply chain issues following on from the Coronavirus pandemic. The Shadow Monetary Policy Committee (of which Professor Congdon is a member) wrote a letter to the Financial Times on 26th April 2021 predicting high inflation in 2022 and into 2023 and blaming the Bank of England for its unnecessary asset purchases in 2020 which resulted in an extraordinary increase in the amount of money. This is what has led to rising inflation in 2021-22; broad money growth at this level is far too high to be commensurate with 2% inflation. Bailey’s comments contained three serious errors. Firstly, confusing the absolute price level and relative price movements. Secondly, inflation rates are much lower in Japan and Switzerland, even though they suffered from the same global shocks. Thirdly, increases in house prices and the buoyant stock market of 2020 cannot be explained by energy prices or the Ukraine war, but they can be explained by the increase in the quantity of money. In conclusion, given that it was the Bank of England, along with other central banks, who initiated these huge asset purchases in 2020, they are to blame for the current high inflation.
May: Is a global recession to be expected in 2023?
In this video, Tim Congdon looks at global monetary trends and considers whether the point to a recession in 2023. He begins with a mention of surging house prices over the period 2019-22 in the USA. There has been a corresponding increase in broad money over the same period but only very modest growth in bank credit. Inflation is also rising and central bankers are putting the blame on a series of one-off “transitory” shocks including the surge in energy prices, the Ukraine war and a shortage of semiconductors. However, these factors cannot explain the surge in house prices. If instead one looks at the huge increase in the quantity of money in 2020 as central banks responded to the Covid 19 pandemic by buying assets to stimulate the economy, here is an explanation for all the recent macroeconomic developments. The situation in 2022 is very different. Growth of bank deposits in the USA has stopped. At the same time, the Fed looks as if it may sell off some of these assets (“Quantitative Tightening”) which will destroy money balances. A recession in 2023 is therefore likely. Output has to drop to trend levels eventually and it is currently way above trend. Recessions bring output down. For similar reasons, a recession can be expected in the Eurozone in 2023, although not as severe as in the USA. It is a bleak outlook in the developed “west”. The picture for Asia is more positive and growth can be expected here. Neither China nor Japan has an inflation problem, although Japanese inflation may rise above the 2% target.
April: How are house prices determined?
House prices are rising rapidly in the USA. In January 2022, the annual rate of increase was 18%. Why is this? The “official” answer is that the cause is credit shifts. A short date series from 2006 onwards comparing mortgage credit with the value of household real estate does not show any significant relationship between the two. However, strong money growth correlates much better with increases in house prices. What happened in 2020? There was a surge in broad money growth. Too much money was chasing too few assets and at the time, real estate was a popular choice of asset for people with a monetary surplus, so prices went up. However, previous housing booms have been followed by falls in prices and we must worry that something similar will happen this time .
March: Double-digit US inflation ahead in a troubled world
This video was produced only three weeks after the Russian invasion of Ukraine. At the time, discussions were taking place about imposing an embargo on sales or Russian oil and gas, two of the country’s major exports. In the USA, the housing market is booming and retailers’ inventory stocks are at their lowest level in over 30 years, with unemployment at very low levels. Inflation is likely to rise to 10% or more, but this cannot be blamed on events in Ukraine but rather on the very high level of broad money growth in 2020. Professor Congdon predicted this inflationary surge at the time and he has been proved correct. Turning to the Eurozone there has been a significant change inasmuch as the “'Bundesbank model” has been abandoned by the ECB. Inflation is not as high as in the USA, but it is the highest ever reading since the introduction of the single currency. The “Bundesbank model” insisted that the ECB should not lend to the government and should avoid lending to commercial banks as far as possible. Until 2007, this model was followed. It began to break down when the ECB started providing loans to commercial banks in the wake of the Global Financial Crisis. The resignation in 2011 of Chief Economist Jürgen Stark, who opposed the expansion of the Central Bank balance sheet, and the appointment of Mario Draghi as ECB President saw a complete change in policy. His decision to implement a QE programme in 2015 essentially completely re-wrote the rule book for central banking in Europe. The ECB’s response to the Covid 19 crisis involved a further asset purchase programme and also further loans to Eurozone banks. The ECB’s holding of government securities in March 2022 amounted to over $5 trillion.and its lending to Euroizone banks $2.2 trillion. With Isabel Schnabel, the German representative calling in effect for more inflation in a speech in 2021, the “Bundesbank model” is dead and the Eurozone is entering uncharted waters.
February: Has policy been responsible for the current upturn in inflation?
US inflation is at its highest level in 40 years. In this video,. Professor Tim Congdon asks what has caused this and who is to blame. The economist Paul Krugman, whose New York Times column is very widely read, is very keen to deflect any blame from President Biden and the Democrats. He claimed in an article on 12th November 2021 that the surge in inflation around the world proved that what was happening in the USA wasn’t about “policy”. However, in reality, not only is inflation running at very different levels in different countries but so, crucially, is broad money growth. There is a big difference between “the west” (UK, USA and Eurozone) and “Asia” (China, Japan and India). In the former, 2020 saw an explosion in broad money growth in 2020. By contrast, although there was a bit of an upward blip in Japan in 2020, broad money growth by and large did not pick up to anything like the same degree. It is therefore highly likely that inflation, especially in the USA, could rise well above 5%, maybe even to double digits. In Asia, especially given the higher trend growth rate in China and India, much more modest rises in inflation are to be expected. In summary, it is down to “policy”, whatever Paul Krugman might say.
January: A monetary analysis of inflation risks in 2022/23
This first presentation or 2022 sees Professor Tim Congdon making some forecasts for inflation in leading economies in the next two to three years. As early as June 2020, the Institute of Economic Affairs published a booklet co-authored by Professor Congdon and Dr Juan Castañeda warning that the excess in money balances created by leading central banks in the spring of that year would lead to a sharp acceleration in US GDP towards double digits and given a trend growth rate no higher than 3%, a substantial rise in inflation would follow, possibly reaching double digits. Similar predictions were made for the Eurozone and the UK,. These warnings turned out to be very prescient Why were they correct? Simply because they were based on the Quantity Theory of Money This states that households and other institutions wish to have a stable ratio of money to wealth. When broad money growth surges, as it did in 2020, this implies that a sharp increase in national income and asset prices would follow. The velocity of money in the medium to long term remains fairly stable, although it collapsed in 2020 and will thus likely recover quite sharply.
What does this mean for inflation in the next 2-3 years? Given that the ratio of Broad money to GDP has shot upwards since 2020 after a long period of stability. It depends how long it takes to get back to the stability of the 2010s, but come what may, inflation is likely to rise to between 5½% and 7% - certainly well above the official target. The Eurozone and the UK are in a similar situation and inflation will rise well above target in both jurisdictions, A number of factors will push up inflation in the next few years. These include real negative interest rates, the damage to supply-side capacity as a result of Covid – the so-called “Great Resignation”, the crypto boom and the green agenda, (which means higher costs and lower productivity growth). Central banks must bring monetary growth down to 4% - 5% per year, in order to return to their definition of price stability, around 2% year on year.