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"Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice" - Adam Smith

Chart of the week: US broad money still reliant on QE

Written by Gabriel Stein | Monday 16 December 2013

Summary: Tepid US broad money growth still dependent on QE

What the chart shows: The chart shows the annual percentage change in US broad money and in credit to the non-bank private sector. Broad money is the recreation by Stein Brothers of the M3 measure discontinued by the Federal Reserve in March 2006.

Why the chart is important: US broad money growth continues to oscillate around 5%. This is better than the 4% M4 growth seen in the UK and considerably better than the 1.4% recently registered for October in the euro area. Nevertheless, US bank balance sheets – and hence broad money growth – still seem dependent on continued quantitative easing. Since the Fed’s ‘taper terror’ subsided in September, broad money has grown by $135bn, compared with the $160bn the fed has spent on buying assets from the banking system over the same period. Total bank credit has grown by $36bn and loans and leases by $19bn (the difference between total bank credit and loans and leases in bank credit is lending to the public sector). By contrast, cash assets have grown by $191bn. What this all means is that US banks are still stocking up on cash and that credit growth remains weak. The economy seems strong enough to support the beginning of a QE taper; but the development of bank balance sheets over the first two or three months after a taper begins, will be a key pointer as to when it will actually end.

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Chart of the week: US home equity withdrawal picks up

Written by Gabriel Stein | Tuesday 10 December 2013

Summary: US mortgage equity withdrawal has picked up – but the scope for more isn’t there

What the chart shows: The chart shows mortgage equity withdrawal as a share of the change in personal disposable income

Why the chart is important: In 1957, US households’ equity in their houses was three times the value of their mortgages. As recently as 1989, it was twice as much. By Q1 2009, the value of the mortgages was close to twice the equity. Since then, by dint of furious deleveraging, US households have restored parity between mortgages and homeowners’ equity. In recent quarters, they have taken to withdrawing some equity from housing in order to underpin spending. But, the scope to do so on a pre-crisis scale – when mortgage equity withdrawal could reach up to 10% of the change in disposable income – is no longer there. This means that US consumption will depend on the actual change in household incomes, with some input form a pure wealth effect. Given the current weakness of US income growth, this means that the American recovery, while continuing, will remain sluggish.

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Chart of the week: French economic sentiment a cause for concern

Written by Gabriel Stein | Monday 02 December 2013

Summary: French economic sentiment highlights causes for concern

What the chart shows: The chart shows the European Commission’s Economic Sentiment index for France and Germany

Why the chart is important: Recent French data highlight that France is in danger of missing out on the euro area recovery – such as it is. Some numbers are improving, eg unemployment and household consumption of manufactured good. But this improvement is minimal. Admittedly, so too is the deterioration in other series, eg the economic sentiment index. But it is worrying that the weakness is broadly based – four of the five sub-indices showed falling confidence in November – and also that it is there at all at a time when the rest of the euro area is showing some improvement. France is also very much looking like missing out on the general EA foreign trade improvement. One key problem is that successive French governments did little or nothing to reform the economy over the past ten years. What makes this even more worrying is that the current government is, if anything, undoing even the small reforms that have been implemented, hinting that French growth will underperform that of other EA countries over the medium-term as well.

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Chart of the week: RBA attempts to talk dollar down, markets push it up

Written by Gabriel Stein | Monday 25 November 2013

Summary: RBA attempts to talk dollar down, markets push it up

What the chart shows: The chart shows the Australian dollar exchange rate against the US dollar as well as on a trade-weighted basis

Why the chart is important: Over the past few years, central banks have taken a renewed interest in exchange rates. This is partly because of concerns that other central banks may be engaging in what the Brazilian Finance Minister Guido Mantega in 201 called ‘currency warfare’, ie, attempts to drive down their own currencies in order to gain a competitive advantage; and partly because they try to do it themselves. In theory, a central bank can always push down the exchange rate of its currency, since it can print and sell unlimited amounts. In practice, it is somewhat more difficult. Over recent months, Governor Stevens of the Reserve Bank of Australia, and other RBA spokesmen, have tried to talk down the Aussie dollar. The currency has come down from 96.7 US cents per Aussie dollar in late October to 91.4 (and from 73.3 to 70.2 in a trade-weighted index). However, and the exchange rate has shown itself more resilient than the RBA would like, showing that there is a limit even to what central banks can do against the market..

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Chart of the week: Inventory build-up a major contributor to US GDP

Written by Gabriel Stein | Monday 18 November 2013

Summary: Inventory build-up was a major contribution to Q3 GDP

What the chart shows: The chart shows the contribution of the change in inventories to US quarterly annualised GDP growth

Why is the chart important: US Q3 GDP growth was surprisingly strong at 2.8% (quarterly annualised rate; in the UK, we would say 0.7%). A breakdown of the numbers shows that 0.8 percentage points was due to an accelerated inventory build-up. This was almost certainly was involuntary. Over time, the contribution of inventories change to output growth tends to cancel out. While a positive contribution for three consecutive quarters or longer is not unheard of, it is rare. Bear in mind that what matters is not the absolute change in inventories, but the change in the change. In other words, a slower pace of inventory accumulation means a drag on GDP growth. The conclusion is that the current quarter and probably the next as well, will see a possibly substantial deduction from growth due to inventories.

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Chart of the week: Euro banks still holding lots of reserves at ECB

Written by Gabriel Stein | Monday 11 November 2013

Summary: Euro area banks’ reserves at ECB have come down, but remain elevated by pre-crisis standards

What the chart shows: The chart shows euro area monetary financial institutions’ (MFIs, ie, mainly banks) deposits with the ECB and national central banks, specifically deposits related to ECB monetary policy operations.

Why the chart is important: Although MFI deposits with the Eurosystem have come down substantially since a peak of more than €1.1tn in the immediate aftermath of the ECB’s two three-year longer term refinancing operations (LTROs) in late 2011 and early 2012, they remain high compared with the situation before the Great Recession. What this shows is that EA MFIs are – on average – flush with liquidity, but see no outlet for this so they leave their funds on deposit with the ECB. The ECB may now be moving towards a further LTRO. But the Bank may also try to boost broad money and credit growth by other means. One possibility which has been mentioned is introduce negative interest rates in these deposits, ie, to charge banks for holding their money with the ECB. Ideally, this would cause banks to shift their funds to other uses, primarily by lending them to the nonbank private sector. There may finally be scope for this. The ECB’s Q4 bank lending survey shows demand for loans expected to rise in the current quarter for the first time in two or three years (two years for companies, three for households). Banks are also expecting to ease lending standards. This could potentially be very powerful. If, for example, EA MFI reserves were to shift back to their pre-crisis levels of around €200bn, with the rest deployed elsewhere, it could boost EA M3 by €270bn, equivalent to a 2.7% jump in the stock of broad money in a very short period of time. The effect is likely to be less than that; but it would help to oboost credit and broad money growth and also to avert threatening deflation.

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Chart of the week: Deflation risk as Eurozone inflation falls to 4-year low

Written by Gabriel Stein | Monday 04 November 2013

Summary: Euro area inflation is at a 4-year low; a bout of falling prices in 2014 is possible

What the chart shows: The chart shows the twelve-month per cent euro area inflation, headline and core,

Why the chart is important: Deflation, like rapid inflation, is bad for countries. This is even more the case when there is a debt overhang, as there currently is in many euro area countries. A number of factors highlight the risk of falling prices in the EA in 2014. Broad money growth is once again slowing. There are large and persistent negative output gaps in all EA countries, showing substantial slack in the economy. The euro is now more likely to rise than to fall. And, finally, the scope for further increases in taxes and administered prices is limited. In theory, the ECB could easily avert deflation by boosting broad money growth. But technical problems and a disinflationary bias mean that this is unlikely to happen. The most we are likely to see are, in order of likelihood, a cut in the policy interest rate; the introduction of negative interest rates for bank reserves held with central banks; and attempts to talk down the euro. The first and the third will have little effect, the second may prove somewhat useful. 

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Chart of the week: US monthly cash balance

Written by Gabriel Stein | Monday 21 October 2013

Summary: A shutdown is easiest in Q2

What the chart shows: The chart shows the US Federal Government monthly cash balance over the past ten years

Why is the chart important: One (of many) problems relating to the discussion about the US Federal Government debt ceiling is the monthly pattern of revenue and expenditure. The first three months of the fiscal year – October to December – tend to be deficit months. Only in January ist here usually a cash surplus. But by that time, the cumulative balance is already so deep into the red that it is impossible to catch up. It also means that government spending is quickly hit by the need to restrict expenditures to revenues. With the recent agreement on the debt ceiling, the US government is functioning until February next year. At that stage, there may be a further cliff-hanger of shutdowns and debt ceiling threats – or there may not. But from a government perspective, calendar Q2 is easier to deal with than calendar Q4 or Q1, since revenues tend to exceed expenditures for a brief period.

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Chart of the week: Eurozone bank deposits recover slightly

Written by Gabriel Stein | Friday 04 October 2013

Summary: Drain on bank deposits in periphery easing

What the chart shows: The chart shows deposits held by ‘other general government/other EA residents’ relative to the situation in January 2012 and January 2013

Why is the chart important: Bank deposits are the key component of broad money. The crises in the periphery countries was accompanied by substantial drains of deposits as households and companies moved money out of (distrusted) local banks, either to hold as cash or – more likely – to deposit in (trusted) banks in core euro area countries. But this also meant a drastic fall in broad money, in turn crippling banks further. As the euro area situation has stabilised and conditions have improved, however, marginally, this process has begun to reverse. In Greece, Spain and Ireland, bank deposits are now increasing. This does not mean that there is a strong and durable recovery on. But it does show improved confidence and gives some hope that the bottom may have been reached.

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Chart of the week: US balance sheets contract

Written by Gabriel Stein | Tuesday 17 September 2013

Summary: US banks’ falling holdings of risk assets could mean trouble

What the chart shows: The chart shows US commercial banks’ holdings of Treasury and Agency securities

Why is the chart important: Two common themes in the aftermath of the Great Recession have been politicians attempting to make banks safer by mandating higher capital ratios; and also attempting to make banks lend more. These are generally mutually contradictory. Current US developments are a case in point. US banks have in the past stocked up on ‘safe’ assets in the form of Treasury and Agency bonds. But, recently, their bond holdings have shrunk, partly because of higher interest rates, which push down the value of bonds. At the same time, banks have been discouraged from buying ‘risk’ assets. Instead, the Fed’s QE enabled banks to pile into cash. But now the Fed is poised to turn off the cash tap. This could threaten current healthy broad money growth; and potentially derail the US recovery.

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