The ECB has found itself pushing on a string

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by Shaun Richards

Our focus today shifts to the Euro area where to quote Todd Terry there is indeed “something going on”. We find that the European Central Bank can influence one area of the economy and here it is.

Annual growth rate of narrower monetary aggregate M1,, comprising currency in circulation and overnight deposits, increased to 13.8% in September from 13.2% in August.

For newer readers wondering if this is high then the answer is yes. The ECB did not reach such annual rates of growth in either of its two main pushes. So the slashing of interest-rates in response to the credit crunch and later the imposition of negative interest-rates and mainstream QE bond purchases did not reach this level of percentage expansion. The next context is that the narrow money supply is much larger now so in terms of Euros around ( on this measure) the push is a real shove.

If we look back we see that there has been a two-stage move with the initial one beginning on the 18th of September last year with the interest-rate cut to -0.5% and the restarting of QE bond purchases. It is hard not to have a wry smile at the thought that back then Mario Draghi was setting policy for his successor Christine Lagarde in a revealing summary of the competence of someone he knows well. Life has sure moved on in the meantime as she is now in a full blown crisis! This move raised M1 growth from 7% to 8% in broad terms. The turbocharger was applied in March and we have gone to three months in a row of growth over 13%. Let me give you an example of the turbocharger in action and remember these are just for last week.

ECB PSPP (EUR): +6.733B To 2.309T (Prev -1.883B To 2.303T) –

CSPP: +2.208B To 241.524B (Prev +2.137B To 239.316B) – CBPP: +722M To 287.426B (Prev -81M To 286.704B) – ABSPP: -206M To 29.173B (Prev +222M To 29.379B) – PEPP: +16.264B To 616.856B (Prev +15.858B To 600.592B)

Firstly apologies for the alphabetti spaghetti, I am sure the names sound grand when they make them up. The original QE programme is at the top and added nearly 7 billion Euros and the emergency one at the bottom added a bit over 16 billion. They also bought over 2 billion Euros of Corporate Bonds. But in total as the ECB supplied Euros in return for the bonds roughly 26 billion was added to the money supply in one week.


I often get asked about this and the concept here is to attempt to measure what happens to the money supply. We cannot measure it directly so the proxy is usually our measure of economic output called Gross Domestic Product. The credit crunch era has seen plenty on monetary expansion but only weak GDP growth so velocity has been singing along with Alicia Keys.

I, I, I, I’m fallin’
I, I, I, I’m fallin’

This has in the past been described as being like pushing on a string.

If we now bring this up to date we see that Velocity has had a shocker with narrow money growth of a bit over 12% combined with GDP growth of nearly minus 12%. There will be quite a swing in the third quarter as we see quite a bounce back but looking ahead to this quarter things are getting worse again. I have previously suggested the Euro area may contract again this quarter and with the implementation of ever more restrictions in response to the Corona Virus pandemic the economic clouds are gathering. Yesterday brought more news on this front from a country which has had relative success in dealing with the pandemic.

German Chancellor Angela Merkel is planning a nationwide “lockdown light” which could force the closure of bars, restaurants and public events, according to Bild newspaper.

Merkel is expected to push for the measure in a meeting with regional leaders on Wednesday where additional curbs are likely to be decided on. ( Euronews).

Belgium seems to be in a pretty awful mess and playing a new version of Catch-22.

Now 10 hospitals have requested that staff who have tested positive but do not have symptoms keep working.

The head of the Belgian Association of Medical Unions told the BBC they had no choice if they were to prevent the hospital system collapsing within days.

I never thought I would be analysing money velocity in this way but it will be another plunge if as looks likely now the economy shrinks again with M1 growth of the order of 13%.

Broad Money

The heat is on here too.

The annual growth rate of the broad monetary aggregate M3 increased to 10.4% in September 2020 from 9.5% in August, averaging 10.0% in the three months up to September.

As you are probably expecting much of the shove here came from the narrow money we have just looked at.

the narrower aggregate M1 contributed 9.4 percentage points (up from 9.0 percentage points in August), short-term deposits other than overnight deposits (M2-M1) contributed 0.4 percentage point (up from 0.1 percentage point) and marketable instruments (M3-M2) contributed 0.6 percentage point (up from 0.4 percentage point).

The ECB will be pleased to see a pick-up in the rate of growth of “marketable instruments” although in these times this could also be for reasons which are not good.We can apply a similar line of thinking to this perhaps.

From the perspective of the holding sectors of deposits in M3, the annual growth rate of deposits placed by households increased to 7.8% in September from 7.5% in August.

In theory the ECB would welcome this but it is more of a residual item than a cause. What I mean bu that is that is that furlough type payments have been combined with an inability to spend in many areas leading to a rise in savings. We have seen that pretty much everywhere. So it is hardly a surprise to see bank deposits they are part of this.


This is is a lagging rather than leading indicator but there was a possible wind of change here.

the annual growth rate of credit to the private sector stood at 4.9% in September, compared with 5.0% in August.


If we look at what we would normally expect then the rise in narrow money growth should be impacting the economy towards the end of this year and into 2021. The problem is that the economic push is colliding with more Corona Virus restrictions. Just looking at the money supply suggests a bright economic run but in reality official forecasts are going to need their red pen.

If we look into the detail we see that much of the push is also related to government action.

The annual growth rate of credit to general government increased to 18.8% in September from 16.5% in August,

That is from the M3 series and we get another perspective into things we have already noted. Governments are spending heavily leading to deposits rising in one area and the ECB via QE financing much of it to prevent any drain on the money supply from the borrowing. We had got used to some of that but the difference now is the scale as we mull how much of an impact the ch-ch-changes have on the economic consequences of a money supply boost.You may like to look up Goodhart’s Law at this point.

Moving on there is another cloud in the sky because the traditional response of banks to a downturn seems to be in play.

Banks tightened their criteria for approving loans to enterprises and consumers as well as the terms and conditions on the credit they did approve, the survey showed. They expected further tightening in the fourth quarter. ( Reuters)

So for the ECB it is time to consider the advice provided by Bananarama.

It ain’t what you do it’s the way that you do it
It ain’t what you do it’s the way that you do it
It ain’t what you do it’s the way that you do it
And that’s what gets results.


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