Some idling on the money supply

I don’t find aggregate measures of the money supply particularly enlightening, and usually when I focus on the money and credit aggregates at all it is on the credit side of things.  In a floating exchange rate system, credit growth tends to result in money creation, rather than vice versa.  Whether it results just in money creation, or in some mix of money and offshore financing, depends largely what people do as a result of whatever gave rise to the credit creation.

Cross-country monetary aggregate comparisons are also fraught.  Different countries measure the money supply in different ways, and the importance of the types of institutions whose liabilities are captured in the money supply measures differ from one country to another (banks are much less important in the US than in most other advanced countries).

All that said, I put a chart of money supply growth since 2007 in my post yesterday.  I did so simply to respond to a not-overly-well-considered claim by Kirk Hope that New Zealand had not relied on monetary policy, or money supply growth in particular, to the same extent as the other large industrial countries he cited.

Then I noticed that a few people had looked at the chart and concluded that New Zealand had had wildly rapid growth in its broad money supply, one observing that

One reason house-price inflation took off: QE.NZ. We may not have had QE officially, but compared to “New Zealand has had the second fastest rate of money supply growth” of all major developed countries – around half of which was borrowed into existence to buy houses.

So I thought I should do a slightly better chart.  After all, countries with faster population growth should probably expect faster money supply growth (they need more), and it makes sense to look at these things in real terms –  after all, Japan has had deflation over that period and Turkey has had rather high inflation.

For what it is worth the OECD has broad money supply data for 19 countries (including the euro area as a whole) and I added in the German data I used in the post yesterday.  For those countries, I got population data from the IMF and inflation data from the OECD, and calculated real money supply growth per capita for those countries between 2007 (just before the recession) and 2015.

And here is the resulting chart

broad money

I’m not sure I’d want to take much from it.  On this measure, and despite having had larger cuts in interest rates than all (?) of these countries since 2007, we’ve had rather moderate real per capita money supply growth (although still ahead of the UK, Japan and the euro-area of the dreaded QE).  It has been faster than underlying productivity growth to be sure, but not dramatically so.

Bank balance sheets just haven’t been growing very rapidly (in real per capita terms) over that period.  And much of the credit (and money supply) growth, I would argue, is the endogenous response to higher house prices, rather than some independent factor pushing house prices up.  The interaction of planning restrictions and population pressure have pushed real house (+land)prices in our biggest city up sharply, and unsurprisingly people need to take out larger loans than previously to purchase houses.  When they take out such loans, the stock of credit rises, and so does the stock of deposits (the money supply).  If, in aggregate, people treat higher house prices as new wealth and consume more then over time money supply growth will tend to lag behind credit (their spending will flow into a current account deficit, funded typically by bank foreign borrowing).  If, on the other hand, people in aggregate treat higher house prices as an additional cost, undermining their sense of well-being, the effect could be the other way around.  But just because credit/money rises we shouldn’t necessarily think of banks as the driving force in the process –  more an accommodating one, mostly responding to other structural (and perhaps speculative) forces.

11 thoughts on “Some idling on the money supply

  1. Higher house prices are just a (paper) wealth transfer to one cohort at the expense of another so in aggregate, there is no net gain – as you say, “we all need a place to live”. If somewhat true, a banking sector concentrated on a relatively unproductive asset which is partly funded by the generosity of offshore money markets, isn’t the best spot – or at least that’s what history suggests. Granted, NZ is a relatively safe/ transparent country with well defined property rights and a floating FX rate so there doesn’t seem much on the horizon to indicate a build up of risk. Then again, it always is quiet before a storm.


    • Higher house prices are a net gain to NZ when the capital comes a external source eg China. One of the reasons our cash savings is rising fast is due to house sales by local kiwis to new residents bringing in foreign capital. Kiwis are banking cash to the tune of $26 billion from $116 billion in Dec 2013 to $151 billion in Dec 2015. Household debt has risen only $18 billion over the same period from $145 billion to $163 billion.

      Our local banks have a Bank stability issue due to too much savings in our banking system. Cash savings deposits are running ahead of the debt. For banks that means deteriorating Net Asset(Cash Savings is a liability to banks) positions and increasing interest costs is an expense payable. Interest rates on deposits will continue to be under downward pressure in order for the banks to maintain their profits.

      Household debt is not rising fast enough which means banks start to take huge risks in the commercial sector eg Dairy because they are under tremendous pressure to lend out the high level of savings currently in the NZ banking system.


      • …ggs! With all this saving slushing about, why is NZ still a net importer of capital? And if the banks aren’t lending enough against houses, perhaps the RBNZ should opt for self certified 100% LTV mortgages rather than attempting to put a brake on credit growth: I’m in for that….!


      • As I have said before you have to look at the 2 sides to the equation. Bank Balance Sheet risks can have a asset impairment risk and a savings(liability) risk. RBNZ and most economists have a one sided myopic via on asset impairment risks to the extent that they completely forget there is also a liability risk ie savings rising too fast has equal Bank Stability risks.

        The intent of OBR(Open Bank Resolution) is to allow the RBNZ access to freeze a banks operations and to shave the savings(liabilities) in order to ensure bank solvency and to repair the Bank’s Net Asset position in the event of asset impairment. Wheeler has therefore received an additional tool that he can use in the event of a bank failure ie OBR.

        He therefore must surely recognise that when he sets interest rates too high in a global context he risks increasing savings too fast. And that itself creates bank stability risks.


      • I have a problem with the term net importer of capital. NZ Households Balance Sheets are very strong with cash in the bank and short term investments exceeding NZ household debt. If you add in Housing assets and that asset has a massive trillion dollar number with only 13% of debt against a 1.2 trillion dollars of assets.

        As Wheeler has indicated in his last speech, NZ banks have sufficient local savings and are not dependent on overseas debt.

        Perhaps net importer of capital suggests that many of our companies are overseas owned eg our banks certainly are. I would have thought that it is good that foreign capital considers NZ a prime destination for investments. Is that bad?

        Perhaps our government issues too many government bonds for its spending. But you do need to factor in the Christchurch rebuild and you do need to factor in our massive assets that are severely under resourced. How do we get higher productivity if our assets are not fully exploited?? Perhaps it is not that our population is growing that Michael wants to put forward as a reason for our productivity poverty. Perhaps it has more to do with severe constraining of our investments and exploitation of our resources and our lack of investment infrastructure in preference for fish and bird habitats.


  2. Fair comments, altho the question is still one of whether any fault rests with the banking system, or whether it is usually mostly a fairly passive facilitator, financing the opportunities that come along. If we have a policy framework that drives rapid population growth, and which makes urban land artificially scarce, it is hardly surprising if (a) the tradables sector opportunities aren’t great, and (b) if much/most lending ends up facilitating/financing housing/land.

    Of course, we see somewhat similar patterns in other Anglo countries, so it isn’t the full story, but a country with, say, zero population growth would probably see quite different patterns of finance (a lot less gross housing lending stock).


    • ….a tough question to answer but a good one to chew over! Find it interesting to compare some Anglo countries to that of creditor nations which have recorded relatively rapid money/credit growth – notably China: is she about to experience a domestic debt crisis while still being a major creditor nation? should the CNY FX rate be left to float? It seems Japan was in a similar position in the early ’90s and used a generous dollop of regulatory foreberance to manage her questionable domestic bank claims but could do so given its creditor status. Again, it doesn’t seem like NZ or other Anglo debtor nations with rising/elevated property prices are about to burst but the starting positions seem less than ideal. “Global imbalabces” I guess even though at that level, every debit has a corresponding credit….


    • Zero population growth has a problem if it is due to an aging population. Stagnation means a smaller and smaller tax pool to go around. Someone needs to care for old people. They are non productive and they do not pay tax. You cannot expect a smaller and smaller pool of young people to take care of a larger and larger population of aging people.

      As we have discussed the impact of 3.2 million tourists and 110k international students contributing almost $14 billion to the economy and a 31% increase over the last 12 months has a more significant impact on our accomodation and urban resources than keeping population growing at the rate of Natural birth with 14k real migrant arrivals and 30k returning kiwis.


  3. Trust John Key. He knows how to make money. He is the Tourism Minister by choice. This is the area that he can make the largest impact within the shortest period of time. He has diversified us from being significantly reliant of Diary. The demand from Tourists and International students have boosted construction activity in hotels and in apartment building which then feeds back in wages to the general population. All good.


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