The key chart
“Money sitting idle in a savings account does not contribute to GDP”
Dirk H. Ehnts, Modern Monetary Theory and European Macroeconomics
The key message
UK money supply (M4ex) increased 13.9% YoY in November 2020. Does this mean that investors positioned for a pick-up in UK inflation should be getting excited?
No, not yet (if at all).
As mentioned in previous posts, the message from the money sector is very different now from previous periods of rising money supply. The key 2020-21 messages remain:
- heightened household uncertainty
- weak household consumption
- subdued overall credit demand
None imply ST inflationary pressures.
Household uncertainty – the chart that matters
Household M4 accounts for 64% of total M4ex. In November 2020, UK households increased their sterling money holdings by £17.6bn, up from £9.4bn in October. This represents the second highest monthly flow after May 2020’s £25bn and was almost 4x the size of the average monthly flow in 2019. Uncertainty reigns in the UK household sector.
Weak household consumption – the chart that matters
Households also made net repayments in consumer credit for three consecutive months between September and November 2020 of £0.8bn, £0.7bn, and £1.5bn respectively. The -6.7% YoY decline in consumer credit in November was the weakest level since the series began in 1994.
Subdued credit demand – the charts that matter
Finally, the gap between growth in M4 (13.9%) and ML lending (4.5%) remains at a record high of 9.4ppt. In other words, this is not a normal cycle with synchronised money and credit trends (albeit with traditional leading and lagging relationships). Consequently, and with credit demand remaining subdued, investors should be wary of assuming normal relationships between money supply and inflation (to the extent that such relationships exist at all).
Conclusion
“Monetary policy effectiveness is based on certain stable relationships between monetary aggregates.”
Richard Koo, The Holy Grail of Macroeconomics
To repeat the penultimate lesson from the money sector in 2020 – periods of monetary expansion differ in terms of their drivers and implications. The message in the pre-GFC period was one of over-confidence and excess credit demand. In contrast, the current message is one of elevated uncertainty, weak consumer demand and subdued overall credit demand (with the added uncertainty regarding the extent to which rising savings are forced or precautionary).
It is too early for UK investors who are positioned for a pick-up in inflations to get excited.
[Note that this post was drafted before the announcement of further UK lockdown restrictions on 4 January 2020]
Please note that the summary comments above are extracts from more detailed analysis that is available separately.