The verdict from G20 Money Base growth: Money is TIGHT

We hear it all the time – central banks are printing money like no time before and it is not working and now there is nothing more central banks around the world can do to fight deflation.

However, this is all a myth and this is what I will demonstrate in this post by looking at global money base growth.

We start by looking at the level of total money base of the G20 countries measured in US dollars.

G20 money base gap.jpg

The graph is clear – since early 2014 the G20 money base (denominated in US dollars) has flatlined.

Contrary to the popular perception there is not massive global money creation. Rather it is hardly surprising that we continue to see strong deflationary tendencies many places in the world as there essentially is no global money creation.

Now lets look at the same data now just in yearly growth rates instead of in levels.

G20 money base growth.jpg

Again the same picture emerges – G20 money base growth has come to a grinding halt particularly from early 2014, but in fact since early 2012 G20 money base growth has been below the pre-crisis growth rate of 15½% y/y.

Hence, it is very clear that judging from the G20 money base global monetary conditions have been tightening at least since early 2014. This of course coincide with when Janet Yellen became Federal Reserve Chair in February 2014 and US quantitative easing was coming to an end.

Ending quantitative easing in the US might or might not have been the right thing for the US economy, but it is clear that the impact on global money base growth has been significantly negative.

Tremendously stable global money base-velocity

Obviously one can question whether the money base is a good measure of monetary conditions. For this to be the case we would need to have a fairly stable development in global money demand and hence in global money base-velocity.

G20 base velocity

The graph above shows that G20 money base velocity in fact has followed tremendously stable development for the past 15 years.

Hence, over the past 15 years G20 money base-velocity has closely followed a downward trend declining on average 2,75% every quarter.

That said, since 2000 we of course have seen one major negative shock to G20 money base velocity in relationship to the onset of the Great Recession in October 2008 as the graph below  shows.

G20 velocity quarterly growth

However, from 2009 G20 money base-velocity developments more or less has been in line with the pre-crisis trend and as long as this continues to be the case I think it is fair to consider G20 money base growth as a reliable indicator of global monetary conditions. Not the only indicator, but certainly a very important indicator.

Money base slowdown at the core of the EM crisis and the drop in commodity prices

Having the sharp slowdown in G20 money base growth in mind it is hard to ignore that this more or less have coincided with a sharp drop in global commodity prices and considerable turmoil in Emerging Markets around the world.

Just have a look at the graph below.

CRB and G20 money base growth

There is far from a perfect correlation between commodity prices – he measured by Reuters CRB index – and G20 money base growth, but it is nonetheless notable that as G20 money base starts to slow down in early 2014 commodity prices fall of a cliff.

For the same reason I also think that it is wrong to attribute the drop in global commodity prices only to supply factors – such as Saudi Arabia’s oil policy or the return of Iran to the global oil markets. In fact I think the tightening of global monetary condition is the main cause of the drop in commodity prices since early 2014.

In the last couple of months we have seen a bit of a rebound in global commodity prices. This to some extent reflects supply side factors – such as increased tensions between Saudi Arabia and Iran – but again it is hard to ignore the fact that the outlook for G20 money base growth has changed in a slightly more positive direction as the Fed has softens its hawkish stance a bit.

That said, we haven’t seen a pick up in actual money base growth yet and unless we see that it is hard to see a more sustained recovery in commodity prices.

The question, however, remains whether we will actually see a pick-up in G20 money base growth going forward.

Three ways to higher G20 money base growth

Essentially there are three ways to higher G20 money base growth.

First, the Federal Reserve could re-start quantitative easing. That obviously would increase global money base growth, but right now it seems rather unlikely that the Fed is about to increase money base growth and the Fed still is overly hawkish.

Second, a sharp drop in the US dollar would by definition increase G20 money base growth denominated in US dollars, but again unless the Fed softens its rhetoric further we are unlikely to see any major correction in the dollar in the near-term.

Third, the other major central banks of the world could move into action and here I believe that it will be of particularly importance what the People’s Bank of China (PBoC) does with monetary policy. Here it is particularly notable that the PBoC has started to de-link the renminbi from the dollar and as such is gaining a larger degree of monetary sovereignty.

These three ways to increase money base growth also illustrate why the ‘dollar bloc’ is falling apart and more and more countries are likely to give up their close link to the dollar.

China has already started the process and a number of commodity exporters such as Kazakhstan, Azerbaijan and Angola have devalued their currencies substantially again the US dollar and other ‘dollar peggers’ are very likely to give up their close link to the dollar in the coming year – particularly if we do not see an increase in G20 money base growth either as a result of high US money base growth and/or a sharp drop in the value of the dollar.

Conclusion: Global monetary conditions have tightened considerably

So the conclusion is that global monetary conditions have been tightening significantly over the past two years and it is therefore hardly surprising that we have seen turmoil in Emerging Markets, collapsing commodity prices and continued global deflationary pressures.

We can see this by observing global financial markets, but as I have shown in this blog post the signal from G20 money base growth is also very clear and unless the major central banks of the world do not move into action to spur money base growth the global economy will continue be in a state of deflation.

It is about time for central banks around the world to acknowledge that they are far from helpless and take responsibility for ensuring nominal stability. Today central banks around the world unfortunately are failing to do so.

And no, negative interest rates will not do this – only more money creation will curb global deflationary pressures.

HT Jens Pedersen.

Update: the good thing about writing a blog is that you don’t have to worry about formalities, but on this one I would have put a source on the data. The source is IMF, local central banks, MacroBond and own calculations.



The ‘Dollar Bloc’ continues to fall apart – Azerbaijan floats the Manat

I have for sometime argued that the quasi-currency union ‘Dollar Bloc’ is not an Optimal Currency Area and that it therefore is doomed to fall apart.

The latest ‘member’ of the ‘Dollar Bloc’ left today. This is from Bloomberg:

Azerbaijan’s manat plunged to the weakest on record after the central bank relinquished control of its exchange rate, the latest crude producer to abandon a currency peg as oil prices slumped to the lowest in 11 years.

The third-biggest oil producer in the former Soviet Union moved to a free float on Monday to buttress the country’s foreign-exchange reserves and improve competitiveness amid “intensifying external economic shocks,” the central bank said in a statement. The manat, which has fallen in only one of the past 12 years, nosedived 32 percent to 1.5375 to the dollar as of 2:30 p.m. in the capital, Baku, according to data compiled by Bloomberg.

The Caspian Sea country joins a host of developing nations from Vietnam to Nigeria that have weakened their currencies this year after China devalued the yuan, commodities prices sank and the Federal Reserve prepared to raise interest rates. Azerbaijan burned through more than half of its central bank reserves to defend the manat after it was allowed to weaken about 25 percent in February as the aftershocks of the economic crisis in Russia rippled through former Kremlin satellites.

The list of de-peggers from the dollar grows longer by the day – Kazakhstan, Armenia, Angola and South Sudan (the list is longer…) have all devalued in recent months as have of course most importantly China.

It is the tribble-whammy of a stronger dollar (tighter US monetary conditions), lower oil prices and the Chinese de-coupling from the dollar, which is putting pressure on the oil exporting dollar peggers. Add to that many (most?) are struggling with serious structural problems and weak institutions.

This process will likely continue in the coming year and I find it harder and harder to believe that there will be any oil exporting countries that are pegged to the dollar in 12 months – at least not on the same strong level as today.

De-pegging from the dollar obviously is the right policy for commodity exporters given the structural slowdown in China, a strong dollar and the fact that most commodity exporters are out of sync with the US economy.

Therefore, commodity exporters should either float their currencies and implement some form of nominal GDP or nominal wage targeting or alternatively peg their currencies at a (much) weaker level against a basket of oil prices and other currencies reflecting these countries trading partners. This of course is what I have termed an Export Price Norm.

Unfortunately, most oil exporting countries seem completely unprepared for the collapse of the dollar bloc, but they could start reading here or drop me a mail (

Oil-exporters need to rethink their monetary policy regimes

The Colombian central bank should have a look at the Export Price Norm

Ukraine should adopt an ‘Export Price Norm’

The RBA just reminded us about the “Export Price Norm”

The “Export Price Norm” saved Australia from the Great Recession

Should small open economies peg the currency to export prices?

Angola should adopt an ‘Export-Price-Norm’ to escape the ‘China shock’

Commodity prices, currencies and monetary policy

Malaysia should peg the renggit to the price of rubber and natural gas

The Cedi Panic: When prayers don’t work you go for currency controls

A modest proposal for post-Chavez monetary reform in Venezuela

“The Bacon Standard” (the PIG PEG) would have saved Denmark from the Great Depression

PEP, NGDPLT and (how to avoid) Russian monetary policy failure

Turning the Russian petro-monetary transmission mechanism upside-down



If you want to hear me speak about these topics or other related topics don’t hesitate to contact my speaker agency Specialist Speakers – e-mail: or





The alarming drop in Chinese nominal GDP will force the PBoC to devalue again

I am in the US on a speaking tour at the moment so I have not had a lot of time for blogging, but I thought that I just wanted to share one alarming macroeconomic number with my readers – the sharp drop in Chinese nominal GDP growth.


Yesterday we got the the Q3 numbers and as the graph shows the sharp slowdown in Chinese NGDP, which started in early 2013 continues. A similar trend by the way is visible in Chinese money supply data.

This is of course very clearly shows just how much Chinese monetary conditions have tightened over the past 2 years and this is of course also the main reason for the sell-off global commodity prices and in the Emerging Markets in the same period.

One thing in the number, which is interesting is that Chinese real GDP growth is now outpacing nominal GDP growth. As a consequence the Chinese GDP deflator has turned negative. Said in another way – China has deflation and in fact the pace of deflation is accelerating.

PBoC – it is time to let the Renminbi float

Even though the People’s Bank of China (PBoC) has devalued the Renminbi slightly against the dollar the PBoC still manages the Chinese currency tightly against the US dollar. As a consequence the PBoC continues to import the tightening of monetary condition from the US on the back of the sharp appreciation of the dollar over the past year or so.

However, China does not need monetary tightening. The sharp decline NGDP growth rather shows that China need monetary easing!

So unless Fed Chair Janet Yellen changes her mind and ease US monetary policy the PBoC will have to devalue the Renminbi again and potentially completely decouple from the dollar and letting the Renminbi float freely.

To me it is only a matter of time before we get another Chinese devaluation and that very well could spell the end to the ‘dollar bloc’ as we know and that certainly should be welcome. On the other hand if the PBoC does not realize the need to de-couple the Renminbi from the dollar then it is very likely that Chinese growth will slump further and it will then only be an question of time before Chinese goes into recession.

This topic will be central to my lecture at the Dallas Fed on Thursday. See here.

PS My US trip so far has been very inspiring and I hope in the coming weeks to share some of my impressions.


If you want to hear me speak about these topics or other related topics don’t hesitate to contact my speaker agency Specialist Speakers – e-mail: or

The ‘dollar bloc’ was never an optimal currency area and now it is falling apart

Global stock markets are in a 2008ish kind of crash today and I really don’t have much time to write this, but I just want to share my take on it.

To me this is fundamentally about the in-optimal currency union between the US and China. From 1995 until 2005 the Chinese renminbi was more or less completely pegged to the US dollar and then from 2005 until recently the People’s Bank of China implemented a gradual managed appreciation of the RMB against the dollar.

This was going well as long as supply side factors – the opening of the Chinese economy and the catching up process – helped Chinese growth.

Hence, China went through one long continues positive supply shock that lasted from the mid-1990s and until 2006 when Chinese trend growth started to slow. With a pegged exchange rate a positive supply causes a real appreciation of the currency. However, as RMB has been (quasi)pegged to the dollar this appreciation had to happen through domestic monetary easing and higher inflation and higher nominal GDP growth. This process was accelerated when China joined WTO in 2001.

As a consequence of the dollar peg and the long, gradual positive supply shock Chinese nominal GDP growth accelerated dramatically from 2000 until 2008.

However, underlying something was happening – Chinese trend growth was slowing due to negative supply side headwinds primarily less catch-up potential and the beginning impact of negative labour force growth and the financial markets have long ago realized that Chinese potential growth is going to slow rather dramatically in the coming decades.

As a consequence the potential for real appreciation of the renminbi is much smaller. In fact there might be good arguments for real depreciation as Chinese growth is fast falling below trend growth, while trend itself is slowing.

With an quasi-pegged exchange rate like the renminbi real depreciation will have to happen through lower inflation – hence through monetary tightening. And this I believe is part of what we have been seeing in the last 2-3 years.

The US and China is not an optimal currency area and therefore the renminbi should of course not be pegged to the dollar. That was a problem when monetary conditions became excessively easy in China ahead of 2008 (and that is a big part of the commodity boom in that period), but it is an even bigger problem now when China is facing structural headwinds.

Yellen was the trigger

Hence, the underlying cause of the sell-off we have seen recently in the Chinese and global stock markets really is a result of the fact that the US and China is not an optimal currency area and as Chinese trend growth is slowing monetary conditions is automatically tightened in China due to the quasi-peg against the dollar.

This of course is being made a lot worse by the fact that the Fed for some time has become increasingly hawkish, which as caused an strong appreciation of the dollar – and due to the quasi-peg also of the renminbi. And worse still – in July Fed chair Janet Yellen signaled that the Fed would likely hike the Fed funds rate in September. This to me was the trigger of the latest round of turmoil, but the origin of the problem is a structural slowdown in China and the fact China is not an optimal currency area.

China should de-peg and Yellen should postpone rate hikes

Obviously the Chinese authorities would love the Fed to postpone rate hikes or even ease monetary policy. This would clearly ease the pressures on the Chinese economy and markets, but it is also clear that the Fed of course should not conduct monetary policy for China.

So in the same way that it is a problem the Germany and Greece are in a monetary union together it is a problem that China and the US are in a quasi-currency union. Therefore, the Chinese should of course give up the dollar peg and let the renminbi float freely and my guess is that will be the outcome in the end. The only question is whether the Chinese authorities will blow up something on the way or not.

Finally, it is now also very clear that this is a global negative demand shock and this is having negative ramifications for US demand growth – this is clearly visible in today’s stock market crash, massively lower inflation expectations and the collapse of commodity prices. The Fed should ease rather than tighten monetary policy and the same goes for the ECB by the way. If the ECB and Fed fail to realize this then the risk of a 2008 style event increases dramatically.

We should remember today as the day where the ‘dollar bloc’ fell apart.

PS I have earlier argued that China might NEVER become biggest economy in the world. Recent events are a pretty good indication that that view is correct and I was equally right that you shouldn’t bet on a real appreciation of the renminbi.


If you want to hear me speak about these topics or other related topics don’t hesitate to contact my speaker agency Specialist Speakers – e-mail: or

%d bloggers like this: