Friday, 30 January 2015

Monetary Inflation Surges in Eurozone, M3 Growth Hits 68 Month High

I couple of weeks ago I wrote that monetary inflation had been picking up in the eurozone. The comments were based on November 2014 data. The numbers for the final month of 2014 are now in, and they show a significant increase in the money supply:

  • M1 money supply increased 9.6% compared to the same month the previous year (y/y), up from the 7.3% reported for November. This was the highest y/y growth rate reported for 54 months (since June 2010).
  • M2 money supply increased 4.6% y/y, up from 3.6% in November.

  • M3 money supply increased 4.9%, up from 3.1% in November, the biggest expansion for 68 months (April 2009).

  • As ECB QE is yet to commence, the monetary base declined slightly on a y/y basis.

From what I can spot on eurozone bank balance sheets, the money supply increase was not driven by lending as it was unchanged on last year (though lending to governments made a small jump in December).

Part of the growth in the money supply can however be explained by a €153.9 billion increase in the value of government securities held by eurozone banks. Holdings of non MFIs (monetary and financial institutions) securities excluding governments fell in December on a y/y basis.

Whether the increase in the money supply has been driven by Draghi's long promised arrival of QE or not is largely irrelevant at this stage. What is relevant however is that the eurozone is now moving into a more inflationary environment, which, in my opinion, can only make an already struggling eurozone economy even worse going forward. As money is created as debt and debt is what made the eurozone problems possible in the first place, it should be obvious for all to understand that creating even more money is hardly a cure.

"...those engaged in futile and hopeless attempts to fight the inevitable consequences of inflation-the rise in prices-are disguising their endeavors as a fight against inflation. While merely fighting symptoms, they pretend to fight the root causes of the evil. Because they do not comprehend the causal relation between the increase in the quantity of money on the one hand and the rise in prices on the other, they practically make things worse." 
Ludwig von Mises