Monthly Monetary Updates 2024
An archive of Professor Tim Congdon's Monthly Monetary Updates from the year 2024. 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 2024 ***
November: The FED is to blame for the election of Trump
Although it was Joe Biden and the Democrats which were blamed by voters in America for the sharp rise in consumer prices they suffered in 2022/3, the main event which caused US inflation to spike took place during the first Trump Presidency. In 2020, the Federal Reserve’s response to the coronavirus pandemic caused broad money growth to increase sharply – indeed, its massive monetary stimulus resulted in US M3 rising to post-war record levels. In this video, Professor Congdon is strongly critical of the Fed’s President Jay Powell who, in a press conference in September 2020 expressed concern that inflation would be beneath the Fed’s 2% target for much of the following two years. He could not have been more wrong – and the reason why his forecast was so inaccurate was purely and simply because of his failure – along with his fellow members of the Federal Open Market Committee - to take any notice of the money numbers.
The return of Donald Trump could see the return of prices & incomes controls – tools that fell out of favour many years ago. It could also see Jay Powell (or his successor as Fed President) put under pressure from the White House – in other words, the principle of central bank independence could face severe pressures in the next four years. The US Federal deficit is also likely further to increase.
This video was produced shortly after the annual Institute of International Monetary Research lecture, which Professor Congdon delivered at the RAC Club, Pall Mall, London, on 18th November. That lecture (which gets a mention in this video) also dealt with the subject of how the failure to follow money numbers resulted in many influential economists being caught out when inflation started to rise in late 2021 and 2022.
October: Money and inflation in the early 2020s
This video begins with a recap of the events of 2020 - in particular, the effects of the fiscal and monetary response to the Coronavirus pandemic which caused the quantity of money, broadly defined, to increase rapidly in most developed countries, including the UK, US and Eurozone. To anyone believing in the Quantity Theory of Money, this implied that a sharp rise in inflation would follow - and so it has proved. However, leading economists including Olivier Blanchard (formerly of the IMF), the Fed Vice President Richard Clarida and Isabel Schnabel of the ECB were all warning at the time of prolonged disinflation or even deflation. Why did they get it so wrong and Professor Congdon get it right? Because of a long-established theory which states that households and businesses will want to hold a stable ratio of money to income. This is the dominant driver of spending and portfolio decisions; there will always be a response to sharp shocks in money growth. The Quantity Theory of Money is an ”always and everywhere” theory. Professor Congdon also said that the veolcity of circulation would return to its mean within four years and that US inflation would be back down to its target level by the time of the 2024 US Presidental election. Both predictions proved accurate. The video concludes by asking the question once again: why then did these so-called experts get it so wrong?
September: Monetarism and the public sector problem
The current Labour government has not yet been in office for three months, but it has already done enough to raise widespread anxiety about the impact of its policies on the economy. An appropriately organized and calibrated monetary policy is key to keeping inflation under control. Monetary policy is discriminatory, working by acting on the money balances and balance sheets of private sector agents and thus having no effect on the public sector. However, the public sector can affect inflation. Although public sector employment is much lower than in 1979, when 30% of all workers were public sector employees, public sector unions have influence over a number of members of Parliament.If the government continues to award unduly large pay rises in the public sector, that will affect the wider effort to constrain inflation. While the Bank of England will be only a bystander to public sector pay negotiations, the effects of big public sector pay rises will make it harder for the Bank to keep the annual rate of money growth under 5%, which is necessary if the official target of 2% inflation is to be met.
August: Debt deflation downward spiral and developments in China
In this video, Professor Tim Congdon discusses Irving Fisher's 1933 article The Debt-Deflation Theory of Great Depressions which looked at how the repayment of loans in the aftermath of the Wall Street Crash provoked a debt-deflation spiral. Fisher was affected personally. (In 1929 he had a large personal fortune; four years later he had lost the lot.) He explained that the repayment of bank loans reduces the quantity of money (or “deposit currency”, as he called it). A reduction in the quantity of money lowers prices, of both goods and services, and assets. In the extreme, if the fall in prices is large enough, the value of remaining bank loans could rise in real terms. In his words, “While liquidation [i.e., debt repayment] diminishes the number of dollars owed, it may not do so as fast as it increases the value of each dollar owed.” Professor Congdon argues that in 1929-33, the state should have borrowed from the banks to offset the lack of lending by the private sector. This, in effect, is what Quantitative Easing is.
The video considers the relevance of Fisher's article to contemporary China, where banks are incurring losses on loans, particularly to local governments, many of which are bust. At the same time, the authorities are telling banks not to grow their balance sheets. China’s boom is clearly over. Asset price deflation is possible and given that China is the world’s largest exporter of goods, could deflation be exported? Furthermore, could a debt-deflation spiral happen in China? On balance, probably not, but such a scenario cannot be totally ruled out.
July: Understanding the velocity of money and mean reversion
Tim Congdon, Chair of IIMR, continues his explanation of his successful call on inflation in 2020. Focussing again on the USA, after showing the close link between broad money and nominal GDP,he highlights the importance of changes in the velocity of money to the behaviour of the economy. The collapse in the velocity of money that year, coupled with the exceptional broad money growth, was bound to be inflationary. Changes in the velocity of money tend to be mean-reverting so the velocity of money was inevitably going to increase after declining in 2020, although it has not yet returned to its pre-covid level. Central Bank and University macro forecasting does not take the velocity of money into account.
Tim Congdon admitted that in 2022 he had expected a recession following the collapse of broad money, but it hadn’t happened. Asset prices have been more resilient than forecast. Looking back, he admits that he had underestimated the size of the monetary overhang from 2020. We are now back to the ratios of money to GDP seen during the 2010s in the developed economies of the West. In China, money growth is very weak and it looks as if the next two years will be characterised by low inflation and maybe even some deflation.
June: Quantity theory of money vs interest-rate-only macroeconomics
Tim Congdon explains why he made the correct call in 2020 when many other economists were predicting that the Covid pandemic would be followed by several years of disinflation or even deflation. Essentially, this was because he highlighted the huge surge in the quantity of money following the monetary and fiscal stimuli launched at that time. By contrast, New Keynesianism, which has dominated central bank thinking for some two decades, claims that changes in the quantity of money are irrelevant and that interest rates are far more important, including bond yields. This video highlights the flaws of such thinking, pointing out that bonds are a very small part of households’ and companies’ wealth portfolios. Houses and shares are far more significant and the creation of so much extra money in 2020 saw agents seeking to re-balance their money holdings, leading firstly to an increase in value of both of these assets followed by a sharp rise in inflation.
May: Chicago monetarism is dead but broad monetarism is still alive and well
All monetarists believe that inflation is always and everywhere a monetary phenomenon and deplore interest-rate-only macroeconomics but this video highlights the fundamental differences between broad money monetarism and that of the Chicago School – in particular regarding the importance of the monetary base.
April: The UK’s inflation performance; the Bernanke review of the Bank of England
Tim Congdon predicts that inflation (which was 3.2% at the time the video was produced) will fall to the Bank of England's 2% target in the following two months. He does not think that either the Bank of England or the UK government deserve any credit for this. NB His prediction was proven correct when May’s inflation numbers were published on June 19th. While acknowledging that the recent review of the Bank of England by former Fed Chairman Ben Bernanke included some valid points, he laments the lack of any criticism for the Bank’s lack of interest in monetary aggregates, especially in 2020 when broad money growth shot up.
March: Has the UK economy stopped growing?
- UK economic growth has slowed in recent years but the country still boasts some rapidly growing industries, best described as international business services such as consultancy, accountancy, IT and legal work, which are growing faster than financial services and the growth rate is accelerating. This sector of the economy is largely located in London and the South East. By contrast, certain other parts of the country which are not involved in international business activities have actually seen a fall in real income since 2010.
- Download March 2024 Money Note PDF
- Download March 2024 Powerpoint Presentation PDF
February: US Federal deficit being monetized
US money growth has picked up since December. This is not due to any increase in the demand for new bank credit but rather because of the monetary financing of the huge federal federal deficit. If the US government cannot borrow from the capital markets and overseas, it has to seek finance from the banks. A pattern for the second half of 2023 was of rapid increases in the balance sheets of money market mutual funds, which were the main purchasers of government debt. The sheer size of this deficit (8%-10% of GDP) is a worry. The video concludes with some comments on Ukraine’s effective use of drones in its conflict with Russia, including its destruction of Russian naval vessels.
January: Will 2024 be a make or break year for American public debt and politics?
Italy has been a byword for mismanaging its public finances in the last 30 years but the USA may exceed Italy with a higher public debt/GDP ratio within the next four years. In Obama’s second term the US structural budget deficit was only 2% - 3% of GDP. Both the Trump and Biden presidencies oversaw a worsening of this deficit and the deficit is now almost 9% of GDP. In 1992, Bill Clinton expressed concern about the level of debt at a time when it was much lower than it is now. It is therefore a great concern that Trump and Biden, neither of whom care about fiscal solvency, are the two main candidates in the 2024 presidential election. It is a particular concern that Keynesianism, with its dislike of fiscal contraction, is so prevalent. If the deficit, the debt and indeed the interest on that debt keeps on rising, there could be problems ahead not just for the USA but for the whole world.