Working Age Population in China and Japan

Working Age Population in China and Japan, Actual and Forecast

Working Age Population in China and Japan, Actual and Forecast

*The Chinese National Statistical Office indicated that the working-age population actually declined starting in 2012 when the definition of working-age population was revised to ages 15–59 from ages 15–64.

Source: Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat, World Population Prospects.

Chart from The Escape from Balance Sheet Recession and the QE Trap: A Hazardous Road for the World Economy

United States Monetary Base and Money Supply after Financial Crisis

United States Monetary Base, Money Supply and Loans and Leases in Bank Credit after Financial Crisis
United States Monetary Base and Money Supply after Financial Crisis

Note: Commercial bank loans and leases, adjustments for discontinuities made by NRI.
Sources: FRB; U.S. Department of Commerce.

Traditional economics teaches that these three indicators should move together. In other words, a 10 percent increase in the monetary base should ultimately lead to a 10 percent increase in the money supply and a 10 percent increase in private credit. That rule was largely valid in the pre-Lehman textbook world, when the three lines moved more or less together.

But this correlation between the three indicators has broken down completely in the post-Lehman world. The level of liquidity in the system, rebased to 100 at the time of the Lehman failure, rose to 466 as the Fed supplied liquidity under QE. Under ordinary circumstances this would cause both the money supply and private credit to increase from 100 to 466. Yet as the chart shows, the money supply has grown to only 146, and private credit has barely recovered to pre-Lehman levels at 105. In other words, these indicators have completely decoupled. Some academics and pundits argue that the economy would improve if only the central bank would turn up the dials on the printing press, but the only aggregate the printing press can influence directly is the monetary base. It is the money supply and private credit, indicators of money available for private-sector use, that have a direct impact on GDP and inflation.

Monetary policy is effective if central bank accommodation increases money and credit for the private sector to use. In the United States, however, there has been little growth in either private credit or the money supply. As a result, U.S. inflation has slowed even after three rounds of quantitative easing by the Fed, as shown by the bottom line in the chart. That we have not seen a more pronounced economic recovery and an acceleration of inflation is attributable to the absence of growth in private credit and the money supply.

Monetary Base vs. Money Supply

What is the difference between monetary base and money supply?

Monetary base, or base money, which tells us how much liquidity the central bank has supplied; the money supply, which indicates how much money is actually available for use by the private sector. A central banks can always supply liquidity (base money) by buying government or corporate bonds from private financial institutions. But for those funds to leave the financial sector, banks must lend them to someone in the real economy (private credit). In other words, liquidity (base money) provided by the central bank will stay in the banking system unless private financial institutions extend more credit to private borrowers.

The money supply, an indicator of how much money is available for the private sector to use, is mostly made up of bank deposits. Economists watch the money supply closely because it tends to be closely correlated with the inflation rate and nominal GDP.

Europe House Price Bubbles

Europe House Price Bubbles: Ireland, Spain, and Greece

Europe House Price Bubbles

Notes: Ireland’s figures before 2005 are existing house prices only. Greece’s figures are flats’ prices in Athens and Thessaloniki.

Source: Nomura Research Institute (NRI), calculated from Bank for International Settlements (BIS) data.

Chart from The Escape from Balance Sheet Recession and the QE Trap: A Hazardous Road for the World Economy