Monthly Monetary Updates 2017
An archive of Professor Tim Congdon's Monthly Monetary Updates from the year 2017. 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 2017: The world economy: What are the prospects for 2018 and 2019?
This presentation looks back as well as forward. At the time it was produced, there was much concern that the global economy was stagnating. Actually, during the preceding few years, the world global growth rate stood at the average rate for the overall period 1980-2017 – roughly 3.5%. It has also been very stable. Neither has the trend growth rate slowed down – in fact, it has increased in recent years in spite of the Great Recession.
Considering the UK, nominal GDP has been growing steadily since 1992, apart for the Great Recession of 2008-9. This stands in contrast to the more turbulent 20 years before 1992. Considering the money growth rates from 1964 to 2016, the correlation between the rate of growth of broad money and nominal GDP during this period is very apparent. The stability of recent years can be explained by the stable growth of broad money.
Looking ahead, the prospects for 2018 and 2019 depend on broad money growth. With the Fed running off some of its assets and the ECB winding down its QE programme, the rate of growth of GDP in these two areas may be lower but a recession looks unlikely.
November 2017: Has the bank recapitalization programme affected British banking?
This video looks back over the last decade, which has been characterised by demands from officialdom for banks to hold ever higher ratios of capital to their assets. The officials were concerned about the possibility of banks going bust after the events of 2007-2008. The focus is on the UK with the first question to be considered is whether British banks had too little capital relative to their losses during the crisis period. The equity (risk-bearing) capital of British banks in early 2007 was in the order of £200 – £250 billion. In late 2008, large increases in this amount were mandated. The losses in the years 2008-2014 amounted to £34.3 billion. The figures for just 2007 and 2008 were £31 billion, mainly concentrated in RBS and HBoS, which was indeed “bust”. Would it not have been better for the central bank to have extended credit to these banks as the ECB did under Mario Draghi rather than increase the capital/asset ratios?
The banks did what they were told. Banks doubled their capital in the eight years to 2014. The composition of their assets also changed. There were only relatively negligible bank claims on the public sector before 2009. Thanks to QE, this has changed. The demand for higher capital forced banks to shed their riskier assets, which were loans to the private sector. QE was able to offset this. Consequently, commercial banks’ claims on the state rose from £15.2b. in Q2 2008 to £651.2b. in Q1 2017 and remain close to this peak.
Which part of private sector was most affected by this change? After all, the fall in loans to the private sector between 2008 and 2015 was quite substantial – 20% in real term and 30% in nominal. Lending to households has only fallen slightly but lending to financial institutions fell by half in money terms. Lending to companies fell by a smaller amount, but the fall was greater for SMEs. Indeed, these loans have been falling steadily since 2011 and have fallen by a half since 2008. Politicians have stressed that they want banks to lend more to small companies during this period but they seem unaware that the policy they have been endorsing has led to a collapse in such loans. In summary, the bank recapitalisation exercise has done a lot of damage to the UK economy – and to others who are following the Basel rules too.
October 2017: Will the end of QE mean lower money growth in 2018?
This video focuses on the USA and the Eurozone. Starting with the USA, there are concerns that the economy might slow down because the Fed is unwinding its QE programme. For much of the 2010s, growth in US bank credit had been positive and stable, but there was a dip in 2016 due to the tightening of bank regulation With further regulatory tightening in prospect, it looks as if 2018 would see lower broad money growth compared with the preceding few years – about 3% - 4% - as the “run-off” of assets purchased by the Fed would also be continuing. Based on the Quantity theory of Money, Professor Congdon’s analysis points to a slowdown than a recession.
Turning to the Eurozone, weak broad money growth carried on for several years after the Great Recession, resulting in a second recession in 2012-3, which was fairly mild overall although a lot worse in a few countries, notably Greece, Portugal and Ireland. Regulatory issues, preventing banks from growing their assets, was the prime reason for weak broad money growth. Furthermore, the Bundesbank was opposed to the use of QE and not until 2015 was an asset purchase scheme introduced. Since then, broad money growth has been stable at around 5% - twice the pre-QE figure. Banks’ holdings of government securities have increased since 2015. Without QE, the increase in broad money growth would have been more modest. There are claims that the QE programme will cease in early 2018, due to a lack of suitable securities to buy and ongoing opposition form the Bundesbank. If QE does stop, broad money growth is likely to be weak because bank lending to the private sector has never recovered to pre-pandemic levels. The Bundesbank’s worries about other countries’ banking systems are likely to intensify.
In summary, a recession looks unlikely either in the USA or the Eurozone but growth in the global economy is likely to be slower in 2018 compared with 2017.
September 2017:
*** No money note or video were produced in September 2017 ***
August 2017: Were big banks to blame for the Great Recession?
The monetary interpretation of the Great Recession, as explained by Professor Congdon in this video, states that it was caused mostly by a collapse in the rate of growth of the quantity of money in the leading nations, with this collapse attributable in large part to official demands for an increase in banks’ capital/asset ratios from October 2008 in order to make them “safer”. Although the raising of banks’ capital/asset ratios from October 2008 was misguided and its timing was a grotesque blunder, over the last decade the focus on banks’ capital positions has been the dominant strand in both academic discussions and real-world policy-making.
An article by Stanley Fischer, vice-chairman of the Federal Reserve at this time, was recently printed in the Financial Times. In that interview Fischer said that while he was unconcerned about pressure for a relaxation of regulation for small US banks, an easing of the rules (capital/asset ratios, capital weights for different asset types and so on) for large banks would be “very, very dangerous”. He made three assumptions – firstly that loan losses in 2007-2009 were greater among small banks, secondly that the Great Financial Crisis was caused by bank failure, e.g., insufficient capital; thirdly that the risk of bank failure poses a threat to macroeconomic stability.
The banking data from the Fed casts doubt on this. Large banks did not suffer the worst losses. Medium sized banks fared worse. Coming on to his claim that bank failures are a threat to stability, in the 1980s, losses were concentrated in the large banks. In those days banks’ equity to capital ratios were lower than the current figures and problems with third world debt caused the big banks to go bust. Interest rates were also high, which caused parts of the US housing finance industry also to go bust. What was going on then in US banks was worse than 2007-2009 but in actual fact, the US experienced a boom. Fischer’s third assumption is also flawed. If banks are forced to shrink their capital, it can be recessionary but it can be stopped by asset purchases by the central banks (“QE”). This prevents a collapse on broad money growth which is the real reason why recessions happen, not the failure of a few banks.
July 2017: A round-up of monetary trends in the main nations
Reviewing money growth trends around the world, there is little reason to worry about a recession, In the USA, broad money growth remains reasonable stable although it has fallen back recently and the Fed is considering unwinding its asset purchases (so-called “Quantitative Tightening”) which will slow broad money growth further but not drastically.
The Eurozone has seen stable broad money growth since a QE programme was introduced in 2014. The ECB is now tapering its QE programme, but a collapse in broad money growth looks unlikely. China has a money growth target of 11% which is being slightly undershot but a crash in money growth is unlikely. Japan has seen very modest levels of broad money growth for some time. There has been a slight slowing recently, but nothing major. Monetary policy remains loose. India is recovering from its de-monetization exercise and is not a major influence on the world economy. Finally, in the UK broad money growth has been too high recently but is coming down and there seems little cause to worry.
Any talk of a global downturn in 2018 is therefore a mistake. There is no reason for the “Great Moderation” to continue. Nonetheless, concerns have been raised by Moody’s downgrading China’s sovereign debt because of allegedly excessive debt in the private sector and state-owned enterprises. “Debtism” has been very much in vogue recently – i.e., too much debt will result in a recession. A study of data from the USA going back to 1962 shows that the “Credit gap” theory doesn’t work. Therefore, for all the faults of the Chinese banking system, its current high levels of debt is not a major cause for concern.
June 2017: The debate on UK monetary policy
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This video begins with a plug for Professor Congdon’s latest book, Money in the Great Recession, which was about to be published at that time. Its principal argument was that the downturn in 2007-9 was caused by regulatory demands for a sudden increase in banks’ capital/asset ratios, causing their balance sheets - and thus the quantity of money – to contract.
In the UK, there has been a disagreement between Mark Carney, the Bank of England’s governor, and chief economist Andy Haldane. Carney thinks that post-Brexit vote uncertainties mean that monetary policy should remain loose whereas Haldane thinks that interest rates need to rise quite soon. This debate is conspicuous by the absence of any mention of the quantity of money. Professor Congdon then quotes Milton Friedman’s comment on the stability of broad money growth in the USA from 1984 until his death in 2006 being the root cause of the “Great Moderation”. Turning to the UK, the period since 2010 has been very stable in terms of growth of nominal GDP, unlike the 1970s and 1980s – a period of boom/bust and higher inflation. The key to macroeconomic stability is steady growth in the rate of bank deposits.
Returning to the Carney/Haldane debate, money growth, which was rather high in late 2016, has dropped back down towards 5%. With inflation above target, Haldane has a valid point. The Bank of England should pay more attention to the behaviour of the quantity of money. Its current research is misdirected.
May 2017: Can President Macron revive the Franco-German engine of European integration?
Newly elected French President Emmanuel Macron is a strong advocate of European integration. He is proposing a European Finance minister, banking union and debt mutualisation. These are not new ideas. Furthermore, the Germans are not enthusiastic about these ideas because they would be liable for the debts of other nations. In Italy, for example, the ratio of public debt to GDP is twice that of Germany. The French debt/GDP ratio tracked Germany’s until 2010 but is now much higher. Greece’s public finances are in an even worse state. Another problem is highlighted by the Target 2 credit system, which is used for clearing cross-border payment between banks. The debit and credit balances between different member states’ banking systems have widened dramatically. Germany has the largest credit whereas Italy is the biggest debtor. With figures like this, Macron’s hopes of further fiscal and banking integration are illusory.
The video concludes with a brief look at US money figures, which have recovered somewhat after slowing in late 2016 and early 2017.
April 2017: Another credit & money slowdown: A new concern in the USA
This video begins with a re-statement of the links between the growth of money and nominal national income. (In the USA in early 2017, broad money growth was slowing,) A consideration of the relative growth rates of broad money and nominal GDP in the inter-war period in the USA shows a strong correlation between the two. For all the efforts of Milton Friedman and Anna Schwartz to highlight these links, particular with regards the Great Depression of 1929-33, a collapse in broad money growth occurred not just in the USA but also (among other places) the UK and the Eurozone in 2007-10. Many people have rejected the Friedman/Schwartz analysis, blaming the Great Depression on “a crisis in capitalism” regarding banks as inherently unstable. As the March presentation pointed out, while a significant number of American banks went bust in the Great Depression, in 2008-9, most US banks were in good health.
So the fall in the quantity of money did not occur because of bank failures or higher interest rates. It was caused by a drastic tightening of bank regulation. Banks could only comply with these regulations by shedding their liabilities. In the USA, at this time there was a slowdown in the growth of US bank credit, albeit (unlike 2008-10) focussed on the large banks. This is due to further regulation demanding that large banks hold even more capital in relation to their assets. The money numbers indicate that talk of a “Trump boom” is misguided. Policymakers do not understand how changes in the quantity of money affect the economy.
Looking at the global scene, there is no indication of a recession. Money growth is adequate in the leading economies, even though the UK also is seeing a credit growth slowdown. Concerns nonetheless remain about the debit balance of Italian banks to the European payment system which has reached record levels.
March 2017: Should US banks double their capital?
This video starts by mentioning a recent article in the Wall Street Journal, co-authored by Professor Tim Congdon and Steve Hanke of Johns Hopkins University. It was written in response to a proposal from Neel Kashkari, president of the Minneapolis Fed, that US banks should operate with double the current capital/asset ratios, in order to make them “safer”. This would kill the economy. Similar actions were ordained in 2008 in the wake of the Global Financial Crisis. The resultant asset sales (as they are paid for out of bank deposits) and new bank capital raising, along with calling in loans all destroy money. This is deflationary. Kashkari, like most central bank officials, do not take any notice of the quantity of money. He also believes, as did the authorities in 2008-9, that many banks almost went bust at that time and does not want to see this happen again. In reality, the US banking system was nowhere near going bust. The IMF’s estimates that the total value of bad debts in the US banking system was higher than their equity capital were questioned by the banks themselves and they have been vindicated. After all, profitable loans will cover loan losses. Figures from the Federal Deposit Insurance Corporation confirm that banks were nowhere near going bust. Even in the worst year, 2009, US bank losses were only $12b., much lower than the $1,600b. estimate. The big increase in capital/asset ratios resulted in the Great Recession. Thankfully, the Trump administration is unlikely to take much notice of Kashkari’s proposals.
The video concludes with a summary of global money trends. Broad money growth has slowed in the USA, so there will be no “Trump boom” in early 2017. India is suffering from the misguided demonetisation exercise of late 2016. Elsewhere, things are fine – steady, moderate broad money growth, pointing to moderate inflation pressures.
February 2017: Is another Eurozone crisis imminent?
The Eurozone is not going to break up but concerns about its health are not unfounded. Tim Congdon was sceptical in the 1990s about the concept of a single currency being shared by several sovereign countries and doubted whether monetary union would actually go ahead. Although he was wrong about this, his concerns about the structure of EMU were not unfounded.
When Mario Draghi became President of the ECB in 2011, he faced two problems: banks in the Eurozone periphery could not fund their assets from market sources but were due to repay loans. Secondly, economic activity was weak, with a further recession looming after the crisis of 2009 and possible deflation. Draghi dealt with the former problem by offering long-term low-cost loans to distressed banks, funded by the national central banks. This may have saved the banks in the periphery but has led to massive imbalances in the different member states’ banking systems, which has actually got worse since 2014. The situation is further complicated by the fact that although Germany is the biggest creditor, it receives no interest on these loans, poorer to the tune of between €35b. and €40b. per year than it would have been at more typical rates of interest. Big debtor countries like Italy and Spain are therefore the real winners but for how long will Germany be willing to support its southern neighbours? At the moment, it is a prosperous country and will not want to rock the Euro boat.
Draghi wanted to solve the deflation problem by easing monetary policy, but faced opposition from the Bundesbank. Eventually in 2015, a programme of QE was finally agreed. This has proved successful and the Eurozone economy has picked up, including the periphery. It is therefore hard to imagine any country wanting to disrupt the working of the Eurozone.
Apart from slowing money growth in the USA, money numbers are fine, suggesting that 2017 will be a good year for the world economy although not a boom.
January 2017: Comments on monetary trends in the leading economies
This video was recorded as the beginning of the Trump presidency, which promised higher fiscal spending, leading to forecasters increasing their growth predictions for the USA. In reality, the Trump campaign’s spending promises, if implemented in full, would only amount to 0.6% of GDP. Furthermore, increasing the budget deficit (which Trump’s spending plans would require) does not necessarily increase demand, output or employment. There have been a number of instances where reductions to budget deficits have been accompanied by economies picking up. There is no clear correlation between fiscal policy and demand. In the USA between 1990 and 2014, there also were occasions - including the “Fiscal Cliff” episode of 2012 – when the budget deficit was reduced and the economy grew (“expansionary fiscal contractions”) and the UK saw something similar in the 1981 budget: taxes were raised in the midst of a recession, but the economy recovered within a matter of weeks. If Keynesians were right, increases in the budget deficit should correspond with above trend growth. A chart for the USA from 1990 onwards proves this to be a fallacy. There is a much stronger correlation between changes in the budget balance and the output gap. Figures from the UK give the same message. Keynesians need to check the facts.
Going back to the USA, Donald Trump’s spending plans do not suggest an improved outlook for the US economy in 2017. Indeed, broad money growth has slowed since August 2016 due to the Fed unwinding its asset purchases although not on a scale to cause any serious worries.