The money supply numbers show the ECB is pushing on a string

by Shaun Richards

Sometimes we find something revealing in an unexpected area. It is especially unexpected because Isabel Schnabel is the heavy hitter in European Central Bank public relations terms. She can be relied upon to approve of everything and wrap it in something which sounds scientific and technical and also to deny anything unfavourable. Yet she let something slip in an interview with LETA of Latvia

The world economy is recovering more quickly than we had anticipated. And the sizeable fiscal package envisaged by the Biden administration will likely have positive spillover effects in the euro area. So we are seeing light at the end of the tunnel.

The fiscal package she mentions first is the US one which is quite a thing to say when ECB policy has as its main priority these days the intention of supporting fiscal policy in the Euro area. In fact we get told that immediately.

Looking ahead, fiscal and monetary policy support will remain crucial and must not be withdrawn prematurely.

Now let me switch to her first mention of Euro area fiscal policy.

That is why the efficient use of public funds, especially those of the “Next Generation EU” instrument, is so important. These funds should be used to foster the transition to a greener and more digital economy.

You may note that we are back to what regular readers will regard as the familiar reform agenda. This was a paragraph or so added onto every policy press conference demanding Euro area reform. It became one of the certainties of life as in spite of the occasional rhetoric about improvement it was always back. Also note that the funds are for some unspecified future date rather than the apparent immediacy of the Biden plan.

We do get another reference but for someone like Isabel this is very mealy mouthed.

But in light of the positive developments to which I have alluded, the historically favourable financing conditions and an expansionary fiscal policy, annual growth is likely to be in the same ballpark as projected in December.

Based on our current projections, the euro area economy should be back at its pre-crisis level by mid-2022.

This matters also because the window may be closing for fiscal policy to some extent. This is because as I have been pointing out for most of this year bond yields have been rising and the US ten-year yield is now 1.43%. This may not bother Germany much because it only means it is being paid less to issue bonds ( its benchmark yield is -0.27%). But a squeeze may arrive in places like Italy ( 0.72%) where the SuperMario effect has now gone.

Indeed the topic of using negative interest-rates is coming under fire if this question is any guide.

In Latvia there is a feeling that low interest rates are not enough to lift the bank credit market, for example.

The answer is an exercise in evasion.

As to the ECB we know the issue is on its mind from this from President Lagarde earlier this week.


So she is now hinting at doing more after hinting at doing less ( not fully using the 1.85 billion Euros of the PEPP version). Not a big deal for us as we expected it to be fully used ( they always are…) but in terms of Forward Guidance it is a case of putting one’s Hermes shod foot in the Open Mouth Operations.

Money Supply

We get a broad hint as to how hard the ECB has been trying from this.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, increased to 16.4% in January from 15.6% in December.

This is a much higher rate than we saw post credit crunch and the same is true about the “whatever it takes” period from 2015 when we saw negative interest-rates and a large QE programme. Now we see the ECB pumping 121 billion, 130 billion and 113 billion into the aggregate in the 3 months to January as a sort of oiling the wheels for fiscal policy.

This is in effect the quantity side of supporting fiscal policy as we observe the money flowing into the system as the ECB buys bonds, mostly government ones. It used to be the case that this was considered to be high-powered money which would help drive an economic recovery via expenditure of the new money balances. That has gone from being very vocal to mirroring Paul Simon.

People writing songs that voices never share
And no one dared
Disturb the sound of silence

Now the emphasis is on government’s spending the money created ( for them being able to finance spending via bond issuance). So far with its various programmes the ECB has bought around 3.3 trillion Euros worth but as you have seen above it does not seem too keen on the results.

But those who think monetary data has an influence will be worried about this.

Broad Money

Another way of looking at the situation is to use the broad money numbers as a guide to push provided to nominal GDP.

Annual growth rate of broad monetary aggregate M3 stood at 12.5% in January 2021, after 12.4% in December 2020 (revised from 12.3%)

So there has been a large push and it has been pretty much the ECB which has done this.

The annual growth rate of the narrower aggregate M1, which comprises currency in circulation and overnight deposits, increased to 16.4% in January from 15.6% in December. The annual growth rate of short-term deposits other than overnight deposits (M2-M1) decreased to 1.1% in January from 1.7% in December. The annual growth rate of marketable instruments (M3-M2) decreased to 18.2% in January from 25.0% in December.

In fact in January it more than did it if I may put it like that as the M2 and solely M3 components shrank.

If this flows into nominal GDP then there is a question as we know that over the period no economic growth is expected therefore in theory the rest is inflation. Some of that the ECB is able to turn a blind eye too via the deliberate exclusion of owner-occupied housing from its official inflation measure. As you can see below that will account for quite a bit of the pressure.

House prices up by 4.9% in the euro area (EA-19) and by 5.2% in the EU-27 in the third quarter of 2020, compared with the same quarter of 2019. ( Eurostat)

But there is a fair bit left. So what does Isabel think about it?

The pandemic has put downward pressure on inflation, which we have countered through the introduction of various crisis measures,

Make of that what you will


In a nutshell the ECB finds itself observing the part of economic theory that was called a liquidity trap. A fair bit of the detail is different as times have moved on but if we look at the period since 2015 and the results the phrase “pushing on a string” fits neatly. It is also a sign of the times that it has been able to avoid opprobrium for one of the consequences by simply omitting it from its inflation measures.

In 2020 it pushed even harder and now it faces various challenges. One of that it is in something described by Elvis Presley.

We’re caught in a trap
I can’t walk out
Because I love you too much, baby

Some countries are now so dependent on negative interest-rates and QE that we can switch to Queen for any likelihood of change.

I’m floating around in ecstasy
So, (don’t stop me now)
(Don’t stop me)
‘Cause I’m having a good time, having a good time

You do not have to take my word for it because Isabel Schnabel admitted it in her interview.

The low interest rate environment is driven by long-term structural trends such as demographics, which play an important role in the Baltic states, globalisation and a decline in productivity growth. There is a relatively strong desire to save and a subdued willingness to invest, which is putting downward pressure on interest rates not just in Europe, but across all advanced economies.

If negative interest-rates were a success she and her colleagues would be looking to bask in the credit, whereas apparently it is nothing to do with them at all! That is a poor potent for the future and means if true we may as well dispense with them and let AI do the job much more cheaply.


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