Liam Dann is joined by Ganesh Nana, Berl Chief Economist, for this episode of the Economy Hub.
Opinion
Key monetary indicators in the US, Europe, Japan and China are flashing signals of an economic slowdown later this year, raising fears of a global recession in 2019 and a stockmarket slump without a shift in policy.
Monetarist experts warn that the global money supply is slowing much faster thanwidely appreciated, suggesting that the shift away from quantitative easing by the major central banks is already starting to have profound consequences.
The data appear incompatible with forecasts by the International Monetary Fund and other global bodies for a synchronised global upswing this year.
The growth rate of the "broad" M3 money supply in the US - covering a wide range of deposit accounts as well as cash - has dropped to a six-year low and is flirting with "stall speed".
Over the last three months the measure has slumped to an annual rate of 2 per cent in the US and 1.2 per cent in Japan. Broad money is often a powerful predictor of economic activity a year or so later.
Professor Tim Congdon, from the Institute of International Monetary Research said the US Federal Reserve has misjudged the full impact of reversing QE and may be making a serious policy error by withdrawing stimulus too quickly.
"I don't think there will be a recession because the Fed will change course, but there may well be a 'growth recession', and it is a big threat to asset prices," he said.
The Fed has been cutting its balance sheet by US$20 billion ($27.8b) a month.
What worries monetarists is that the institution is already pre-committed to stepping up the pace to US$50b by September and seems determined to carry out its plan regardless of the monetary effects.
The Fed's bond sales automatically slow the growth of bank deposits and curtail money creation. Some evidence is already visible in the rate of loan growth in the US, which has slumped to zero over the last five months.
The Fed's main rate has risen six times to 1.75 per cent, constricting a global financial system that has never been so leveraged to US borrowing costs.
The eurozone is at a different stage of the cycle but the money data are nevertheless disturbing. Simon Ward, from Janus Henderson, says the growth rate of non-financial M3 has dropped to 2.3 per cent over the last three months, the slowest since the eurozone debt crisis.
"They are clearly going to be in a lot of trouble by next year," said Prof Congdon.
The central bank is running out of options. It has already pushed its balance sheet to 42 per cent of GDP and is near the technical and political limits of QE.
Ward said "narrow" M1 money in the eurozone has been plummeting since last September, with a sharp fall in real M1 deposits in France and Spain that has attracted little notice so far.
With the usual delay, the slowdown is starting to become visible in the hard data.
Eurozone industrial output fell 1.1 per cent in February. The IHS Markit survey of manufacturing has slowed for two months in a row, with a marked slide in new orders.
The US Federal Reserve has been cutting its balance sheet by $27.8 billion a month. Picture / Getty Images
Britain seems to be slowing in lockstep. In a recent note, Janus Henderson went as a far as warning that "monetary alarm bells" are ringing ever louder in the UK.
Its favourite gauge - six-month real M1 - has slumped to almost zero, with an outright contraction in household deposits.
This points to a sharp economic downturn by the end of this year, coinciding with the final talks over Brexit. The group said it would be a serious mistake for the Bank of England to press ahead with further rises in interest rates into this storm.
Nor is there any comfort from China. Its explosive credit and fiscal stimulus in 2015 and 2016 is largely exhausted. Janus Henderson says the growth rate of China's "real true M1" (six-month annualised) has dropped to 1.6 per cent, down from double-digit levels in 2016.
Underlying economic growth has dropped to 5 per cent - using proxy measures - and this is showing up in rising inventories of iron ore and raw materials. China is again on the cusp of a "stop-go" mini-slump.
The global monetary slowdown is hard to separate from the effects of rising US interest rates.
The Fed's main rate has risen six times to 1.75 per cent, constricting a global financial system that has never been so leveraged to US borrowing costs.
The Bank for International Settlements estimates that offshore dollar debt in loans or equivalent derivatives has ballooned to US$25 trillion.
Three-month dollar Libor rates have risen 62 basis points to a nine-year high of 2.31 per cent since the start of the year. A report last week by the New York Fed said that US$200t of derivatives are priced off Libor - 10 times US GDP. The rates reset rapidly. The spike amounts to a global credit shock.
The Libor squeeze is gaining worldwide attention. The parallel monetary squeeze has so far gone largely unnoticed. It may be just as significant.
