Wednesday, 4 September 2013

Euro Area Money Supply Growth Continues to Contract, Base Money Slides Further

As is customary in this inflationist world, all the money supply measures hit new highs for the month of July for the euro area as well. The most recent monetary statistics released by the ECB show however that growth rates are falling.

Compared to the same period one year ago, M1 money supply increased 6.8%, while M2 and M3 increased 3.8% and 1.6% respectively. As the charts below demonstrate, the growth rates for all the three money supply measures have been falling in recent months.

The monetary base (base money), contrary to money supply, continues to head downwards. At the current amount of approximately €1.270 trillion, the base has contracted 22.1% this year alone and is currently 28.4% lower than the all-time high set in June 2012. Compared to previous month the base declined by 1.4%. The ECB could however increase the base through the Outright Monetary Transactions (OMT) bond-buying program if a euro zone government asks for financial assistance. Such purchases would however be "fully sterilised", meaning the ECB would offset these purchases by taking an equal amount of money out of circulation (e.g. here).

There however remains legal obstacles to the OMT and according to Bloomberg "Germany’s top court will likely rule on whether the OMT contravenes the nation’s constitution after federal elections scheduled for Sept. 22 [2013]". The OMT has been effective of course according to the ECB (here). The markets appear to agree as bond yields in periphery countries did stabilise when the OMT was announced about a year ago and have remained fairly lower since (e.g. the 10-year Greece bond yield was about 21.8% at this time last year and is today about 10.5% - here). As it is nothing more than a pyramid scheme (e.g. see here) we'll see how effective the OMT is when the euro area debt problems once again hit the front pages and beyond.

Someone once said a government can print its way into problems, but never out of them. This is no different for the euro area.

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