Money Supply growth has both ramped Bitcoin and made it even more unstable

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by Shaun Richards

Let me welcome you to 2021 as the main financial trading year catches up with the calendar one. It is a time of year to mull whether the Who will be right or not?

Meet the new boss
Same as the old boss

The good news comes from the vaccine rollout with the Oxford vaccine programme beginning today and the bad from the case numbers in the UK which seem set to add to the restrictions on our lives.What can central banks  do about it well they can visit the outer limits of monetary policy as below.

The Central Bank of Egypt (CBE) has launched a new EGP 15bn initiative to finance the dual-fuel vehicle conversion plan, with a lump-sum return of 3%.
In a Sunday letter to banks, the CBE said that the initiative aims to support the government’s ambitious, recently announced multi-year plan to replace car engines powered by traditional fossil fuels with dual-fuel engines that run on both petrol and natural gas.

Accordingly, the central bank will provide the needed financing through this initiative at low-interest rates.

Its Board of Directors approved the decision, with the financing to be made available through banks at a flat return rate of 3% used in granting loans. ( alnaasher.com)

That sort of mission creep will no doubt be copied by others and is one of the factors behind this development which has really gathered pace in the new year.

Bitcoin climbed above $34,000 for the first time on Sunday, extending a record-breaking rally in the volatile cryptocurrency that delivered a more than 300 per cent gain last year. With trading in key financial markets yet to commence in 2021, bitcoin has resumed its dizzying ascent, rising more than 10 per cent in the first few days of January. By late afternoon in London on Sunday, it had given up some of its early gains to dip just below $33,000. ( Financial Times)

As so often they are rather tardy whereas back on November 17th when the price was half of what it is now I pointed out this.

Another way of looking at the change in perception of Bitcoin is the way that central banks are now looking at Digital Coins in a type of spoiler move as it poses a potential challenge to their monopoly over money.

The price is volatile and there are dangers in using a marginal price for an average concept but a “value” of over US $600 billion will be giving central bankers itchy shirt collars. Also frankly it is another sign of inflation.

UK Money Supply

Let me pivot now to a factor behind this announced by the Bank of England this morning.

Overall, private sector companies and households significantly increased their holdings of money in November. Sterling money (known as M4ex) increased by £31.9 billion in November; broadly in line with October which saw holdings increase by £33.5 billion. This is similar to strong deposit flows seen between March and July, which saw money holdings increase by £41.1 billion on average each month.

That takes the annual rate of growth of the Bank of England’s preferred money supply measure to 13.9%. This is significant not only for the rate itself which in theory feed straight into nominal economic growth but because it comes on the back of an inflated money supply which now totals some £2.53 trillion. Or as MARRS observed.

Pump up the volume
Pump up the volume
Pump up the volume
Pump up the volume

If we switch back to Bitcoin we see another factor in its rise. UK money supply is only a bit part player but we see similar ramping of the money supply pretty much everywhere we look. I get regularly asked where it goes? Also where the inflation is? Well…..

House Prices

Whilst we were off on holiday ( a stay at home one) the Nationwide released this.

“Annual house price growth accelerated further in
December, reaching a six year high of 7.3%, up from 6.5% in the previous month. Prices rose by 0.8% month-on-month, after taking account of seasonal effects, following a 0.9% rise in November. House prices ended the year 5.3% above the level prevailing in March, when the pandemic struck the UK.”

The Bank of England was cheerleading for this sort of thing in its release earlier.

The mortgage market strengthened in November. Households borrowed an additional £5.7 billion secured on their homes, following net borrowing of £4.5 billion in October. November borrowing was the highest since March 2016, and significantly higher than the average of £3.9 billion seen in the six months to February 2020.

But for it the party really got started here.

The continued strength in mortgage borrowing follows a large number of approvals for house purchase over recent months. In November, the number of these approvals – an indicator for future lending – continued increasing, to 105,000 from 98,300 in October (Chart 1). This was the highest number of approvals since August 2007 and recent strength in approvals has almost fully offset the significant weakness earlier in the year. There were 715,300 house purchase approvals up to November 2020, close to the number during the same period in 2019 (722,000).

So we now know something we had long expected which is that even an economic depression is not allowed to get in the way of house price pumping and rises. Or as the Nationwide put it.

“But, since then, housing demand has been buoyed by a raft
of policy measures and changing preferences in the wake of
the pandemic.”

Consumer Credit

By contrast there will have been wailing and gnashing of teeth at the Bank of England earlier over this.

Household’s consumer credit weakened further in November with net repayments of £1.5 billion; that followed a net repayment of £0.7 billion in October. The weakening on the month reflected a fall in new borrowing. Since the beginning of March, households have repaid £17.3 billion of consumer credit. That has caused the annual growth rate to fall to -6.7% in November, a new series low since it began in 1994.

The word repayment is like kryptonite to them. These are broad brush numbers with the only breakdown we receive below.

Within consumer credit, the weakness was broad based with net repayments on both credit cards (£0.9 billion) and other forms of consumer credit (£0.7 billion). As a result, the annual growth rates of both components fell further, to -14.5% and -3.0%, respectively. For credit cards, this represents a new series low.

I make the point because there was a brief spell we were updated on car loans but that soon ended. So I wonder what is happening now in that area? According to the UK Finance and Leasing Association or FLA then personal credit for new cars was down 17% in the year to October and down 10% for second-hand cars.

But the overall picture is of a collapse in credit card borrowing which maybe has led to this.

The cost of credit card borrowing fell by 47 basis points to 17.49% in November; a new series low.

I have followed it since the credit crunch began and all the various interest-rate cuts have until now bypassed it.

Mortgage Rates are rising

Apart from it we see that other interest-rates are rising.

The ‘effective’ interest rates – the actual interest rates paid – on newly drawn mortgages rose 5 basis points to 1.83% in November. That is close to the rate at the start of the year (1.85% in January)

Where did the Bank Rate cuts and bank subsidies ( Term Funding Scheme) go? It looks as though banks have simply boosted their margins. Especially as they pay ever less.

The effective interest rate paid on individuals’ new time deposits with banks fell by 3 basis points in November, to 0.50%, and remains much lower than in February (1.04%)………The rate on the stock of sight deposits remains the lowest since the series began, and 34 basis points lower than in February.

 

Comment

We see that in spite of the increasingly desperate effort to claim there is no inflation we do not have to look far to see it. Indeed this morning someone I consider to be something of a High Priest in the systemic denial has changed tack.

Ultra low interest rates raise asset prices hurting the young and those without wealth. ( Paul Johnson of the Institute for Fiscal Studies)

Why do I say denial? Well his 2015 Inflation Review told us this.

CPIH is conceptually the best overall measure of inflation in the UK.

Because it excluded the asset prices (house prices) he is now worried about. Indeed he thought making the numbers up was much better.

A home provides a flow of accommodation services that are
consumed by households. The rental equivalence approach estimates the price of consuming these services as being equivalent to what the owner would have to pay if renting the property.

Suddenly the house price rises are recorded as growth. The poor first-time buyer gets shafted twice. Firstly by higher prices and then by being told they are better off using the inflation measure recommended by Paul.

Next comes the instability created by a system built in sand and misrepresentations. Bitcoin is showing that by its drop to around US $30k as I have been typing this.

Lastly let me give you another example of reality being adjusted to suit a narrative. Remember the way that the present Bank of England Governor Andrew Bailey so botched an enquiry into overdraft interest-rates that they then doubled?

 Following discussions with reporters on how to account for the ending of fees and COVID support measures, these overdraft rates are now estimated to have been lower between April and September than previously thought, and similar since October.

So far though they seem to be failing.

The effective rate on interest-charging overdrafts was 20.62% in November, above the rate of 10.32% in March 2020 before new rules ending overdraft fees came into effect.

 

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