The first green shoots have begun to emerge in money supply data from across the world, raising hopes of a tentative global recovery by later this year.
I don’t know why more economists (I am not one, just a wanna-be) don’t use an analogy that I find useful: money created out of nothing and injected into the banking system by buying government bonds is like mainlining heroin.
I have no experience with such activity, but the analogy is useful nevertheless. The addict (and we are addicted to easy money, aren’t we?) is seeking another “high” and shoots himself with heroin. Over time, however, it takes more and more heroin to achieve the same high.
Eventually, of course, the addict either dies from an overdose, or goes through rehab and suffers the painful inevitable withdrawal. The longer the addict puts off the day of withdrawal, the worse it will be.
And so we come to the whole point of Ambrose Evans-Pritchard’s article from the British liberal paper Telegraph: money supply is (and has been since the middle of June) increasing greatly. He provides a useful graph of world money supply and if you look carefully, you’ll see a sharp upturn in that supply taking place starting in June.
I went to the Federal Reserve charts available here and found the same thing: the Adjusted Monetary Base, which had declined sharply since the middle of February, has enjoyed a significant “bounce” upward, again starting at about the middle of June.
And the effects of that additional injection of money and credit is having its expected (temporary) effect. Evans-Pritchard quotes Mr. Simon Ward at Henderson Global Investors who tracks these sorts of things:
Mr. Ward said global industrial output should start to “bottom out” by October. The rebound is a huge relief to monetarists following the sudden collapse of M1 growth from a peak of 5.1pc last November, a rare pace of decline with echoes of early 2008…
Any world recovery is likely to be very fragile as the US and Europe battle the headwinds of debt deleveraging, and China struggles to manage the fall-out from its last credit blitz. There is no margin for policy error anywhere. Yet the bulls have a nice puff of wind in their sails for now. Enjoy it.
At least he’s honest about one thing: the high will be temporary; our stock market just went over 13,000 on the Dow for the first time since April, after hitting a bottom of just over 12,000 in late May/early June. That coincides nicely, doesn’t it, with the increase in the supply of money beginning in early June?
But the heroin addict will enjoy another high, putting off the inevitable crash for another little while.