Monday, 12 August 2013

M2 Money Supply in Norway Increases 5.2% on Last Year, but...

Base money (the monetary base) in Norway increased somewhat in June according to the latest numbers released by Statistics Norway. Contrary to the course of action chosen by other central banks such as the Bank of England and the Federal Reserve, the central bank of Norway (Norges Bank) has shrunk the monetary base significantly following the expansion during the "financial crisis" of 2008/2009. As a result, the monetary base in Norway is today 48.4% lower than the NOK 167.428 billion record high reported in July 2009.

The drop in Norway's monetary base has however not lead to a drop in money supply. While in the UK and the US the money multipliers have contracted substantially, in Norway they have expanded. As a result, the M2 money supply is now 19.7% higher than it was in July 2009, the month when base money peaked. In June, the M2 expanded by 5.2% on the same period last year, 1.1 percentage point higher than the 4.1% average year on year (YoY) growth rate during the last 12 months. But, as the bottom chart shows, the 5-year annualised growth rate for M2 (and M1) has for the last two years or so dropped significantly compared to the historical trend. Having averaged 8.4% from December 2000 to June 2011, the 5-year annualised growth rate dropped to just 4.6% in June 2013. On the same basis, M1 money supply growth dropped from 9.6% to 2.9%. In addition, the current YoY growth rate for the M2 of 5.2% is 2 percentage points lower than the 7.2% average since December 2006. The longer term growth rate for M2 money supply has hence definitively been heading down, not only during the last 24 months or so, but in recent months as well.

Austrian Business Cycle Theory tells us that a even a slowing down of the growth rate in broader measures of the money supply (and credit) following periods of (significant) expansion can trigger a collapse of the economy. Norway is an interesting case in that respect and we'll therefore continue to closely watch the money supply developments going forward as well. Especially now as the Norwegian stock market is heading toward new record highs once again.

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