Archive for the ‘Money Supply’ Category


Requirements and Incentives for Central Bank Deposits in Major English Speaking Countries.

In Money Supply on May 19, 2011 by CQCA

Why do some countries’ banks keep excess reserves? Much of the reason has to do with financial stability and the limited amout of options to invest such a large amount of money. There are also requirements and incentives for keeping reserves at the central bank.

The chart above shows the required reserve rate and interest paid on deposits at the central bank. The United Kingdom, Canada, Australia, and New Zealand do not have reserve requirements.

New Zealand pays the highest interest rate on deposits. In addition to not having a reserve requirement, Australia also does not pay any interest on deposits.

Banks are currently limited by what they can do with this money. Investing that in the stock market would be difficult and risky. There is currently no demand for mortgages or any traditional uses for bank credit. The only realistic market that could handle such a large movement of capital flow would be government debt.

In the above chart, the blue columns reflect the interest rate paid on deposits at the central bank. The red columns reflect the average one year treasury yield on local government debt.

Australia does not pay a deposit rate, and it also has the highest yield on treasury securities, therefore Australian banks have the most to lose by keeping their money at the central bank. In Canada and the United States, the central bank deposit rate is higher than the treasury yield, so they are actually making more money by keeping it on reserve at the central bank. I am not quite sure why U.S. and Canadian banks have responded so differently to essentially the same condition. I also do not know where Canadian banks have invested their money. It is possible that Canadian banks have purchased Canadian treasury securities with the expectation that yields will fall in the future, whereas U.S. banks are waiting for the yield on U.S. treasuries to increase in the future, and are therefore waiting.

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Bank Reserve Trends of Major English Speaking Countries.

In Money Supply on May 18, 2011 by CQCA

After the start of this financial crisis, U.S. bank reserves began to rise dramatically. The exact numbers were discussed in a previous post. Another post looked at Canada’s bank reserves, specifically.

The above chart shows the bank reserve trends of five major English speaking countries. The data was taken from each country’s central bank and indexed to January, 2007. Australian and U.S. bank reserves both increased by 100% between August, 2008 and September, 2008. Australian bank reserves increased to a factor of 23.86 (above the January, 2007 level) by December, 2008. They then decreased to pre-crisis levels by mid-2009.

Canadian bank reserves then spiked from an indexed rate of 1.09 in January, 2009 to an indexed rate of 40.46 by June of the same year. In other words, the amount of money held in Canadian bank reserves multiplied by a factor of 40 in six months. In less than a year and a half, Canadian bank reserves had gone from low to low in the chart shown above.

U.K. bank reserves were the next to spike up. They have remained almost level since that time.

New Zealand’s bank reserves only reached a high indexed point of 1.23 in November, 2008. In March, 2011, bank reserves were 27% lower than in January, 2007.

U.S. bank reserves are the only bank reserves to be at a higher rate now than at any time during the crisis.

Much of these reserves came from bank bailouts, also known as printed money. As this money gets loaned out, it then multiplies on itself. This process has already begin in Canada and Australia, but has not really yet begun in the U.S. or the U.K. If U.S. bank reserves remain in reserves, U.S. deposits will be the safest in the world. More likely, though, is that this money will eventually make it into the money supply and cause the money supply to expand at an uncontrollable rate.

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Eleven Currencies That Need to Be Devalued in Forex Markets.

In Money Supply on May 17, 2011 by CQCA

After I finished the calculations of the money supply data, I wanted to compare groups of currencies. The most useful one, I believe, is the difference in money supply growth between the U.S. Dollar and currencies that are pegged to it.

The U.S. Dollar has been inflated less than most other currencies in the world, although that is not saying much. Most freely floating currencies reflect the local countries’ monetary policies, but pegged currencies try to avoid supply and demand. Considering eleven of the currencies shown above increased their money supply by almost double, or more, the rate of the U.S. Dollar over the last five years, reality should indicate their forex value should have to drop.

This has already happened to the Venezuelan Bolivar. In January, 2011, it was devalued by almost half. This should indicate the direction the other currencies are headed.

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Trade Flows and Currency Flows.

In Money Supply on May 14, 2011 by CQCA

The Census Bureau recently reported that the United States imported $48.2 billion more than in exported in March, 2011. For the first three months of 2011, the U.S. imported $140.6 billion more than it exported. If this is multiplied by four (to equal 12 months), our trade deficit for the year will probably be around $562.4 billion for all of 2011. The number was $495.7 billion in 2010.

At some point, the United States economy is going to have to create wealth to sustain itself, instead of consuming the rest of the world’s wealth. The good news is that between February and March, 2011, the United States imported $1.6 billion more capital goods, and $2 billion fewer consumer goods. These capital goods can then be used to produce more goods in the future.

The problem with increasing U.S. exports is that it will both improve and worsen its economic condition, in the short run. When the United States purchases a foreign good, U.S. Dollars go abroad. This allows the U.S. to export inflation. If a foreign country were to begin purchasing U.S. goods, they would most likely use U.S. Dollars. Foreign governments, alone, held $3 trillion in U.S. Dollar denominated foreign exchange reserves at the end of 2010Q4, according to the IMF.

If the United States were to turn around its trade deficit at the end of the year by exporting enough to close the projected $562.4 billion trade deficit, that would be a direct injection of half a trillion Dollars into the U.S. economy.

The United State’s domestic money supply (M2) surpassed $9 trillion in April, 2011. Increased exports would increase M2 by more than 6%. Although the U.S. economy will be creating more wealth by exporting more goods, the inflation that was pushed abroad in the past will come back home in the future.

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China’s M2 Still Expanding Despite Reserve Requirement Rate Hikes.

In Money Supply on May 12, 2011 by CQCA

The People’s Bank of China announced that the reserve requirement for Chinese banks will be raised to 21%, effective May 18th.

Reserve requirements indicate how much money banks can loan out in relation to deposits. If $100 is deposited in a bank with a 50% reserve ratio, then $50 can be loaned out. The problem with this that now two people have a claim on that $50, the depositor and the debtor. Since two people have claims on the same amount of money, the total amount of “money” in the system has increased by $50, or 50%. However, it does not stop there. The debtor will most likely use that $50 to purchase a good or service. The person that receives the money for delivering that good or service will most likely deposit it in a bank. Another bank can then take that $50 and loan out $25 (because there is a 50% reserve requirement on the deposit). The money supply now stands at $175. This process will continue until that original $100 turns into $200. This is pure inflation, and represents no real increase in the wealth of the society.

The only way to stop this system is to have a 100% reserve ratio. In this case, the amount of credit in the system represents the amount of savings in the system. However, even a 50% reserve requirement this day and age is unheard of. The current rate for the U.S. is 10%. This means that $100 deposited in U.S. banks turns into $1,000.

China is trying to increase its reserve requirements to decrease inflation. However, this does not seem to be working.

In January, 2010, Chinese M2 stood at 62.5 trillion Renminbi. In March, 2011, after multiple reserve requirement hikes, Chinese M2 stood at 75.8 trillion Renminbi. This represents a 21.28% increase in a little over a year. Where is China’s new money coming from?

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Reflections on Finishing the Money Supply Data.

In Money Supply on May 11, 2011 by CQCA

The scary (but expected) aspect of the world’s money supply over the last five years is that no country has actually deflated its currency. Every single fiat currency in the world was expanded between 2005 and 2010.

What scares me more is that the majority of this inflation took place in the developing world. By contrast, developed economies like the U.S., the E.U. and Japan, were all on the lower end of the inflation spectrum, even though they could have been better. Economic development, as well as personal wealth creation, comes from increased savings. The central banks of the poorest countries in the world have created currencies that destroy the value of savings.

Similarly, the BRIC countries have all inflated their currencies by more than 100% each. Their astounding growth over the last five years is likely to have been the result of an inflationary bubble. All inflationary booms eventually turn into economic busts. Imagine what will happen when the currencies used by 2.8 billion people all go bust.

I do not trade in foreign currency. Talk about throwing bad money after bad. But, if someone gave me a $1 million and told me I could only invest it in forex markets, I would short the Hong Kong Dollar and have delivery made in Bahamian Dollars.

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Annualized 2005-2010 Monetary Inflation Rates.

In Money Supply on May 10, 2011 by CQCA

The chart above uses the same data as was used for the total increase in each country’s money supply, but shows the annualized rate of increase for each. In other words, it shows how much each currency was increased each year to reach the five year level.

The Japanese Yen money supply increased at a rate of 1.99% every year. The U.S. Dollar money supply increased 5.74% every year. Angola increased its money supply 49.45% each year.

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The Longest Chart on the Internet.

In Money Supply on May 9, 2011 by CQCA

I took all the charts that I have posted in pieces, and placed them in one chart. I believe this is the longest chart on the internet.

I went down the list of countries by nominal GDP, according to the IMF. This list does not include North Korea, Cuba, and Somalia, as well as a few other islands. These countries do not publish money supply data.

The first thing people usually notice about this data is how low the U.S. Dollar has actually been expanded. Most brush it off in disbelief, saying that M3 is not reported, so there is no way of knowing. I should talk about the methodology.

The money supply is divided into a few categories. M0 is notes and coins that we actually carry. M1 is M0 plus demand deposits (money that you can take out of the bank at any time). M2 is M1 plus time deposits (money that can only be taken out after a certain time.) M3 includes M2 plus large time deposits and domestic currency held abroad or foreign currency held in-country. The research above was done using M2.

M3 could have been used, but there is a problem with both including it and excluding it. By excluding it, the total increase in the money supply of each country has not been fully captured, so the numbers above should actually be higher. However, if M3 was used as the metric, each number would have also included foreign currency, so the money supply of some countries would have been expanding at a higher rate, but through no fault of the domestic central bank. Liberia, for example, relies on U.S. Dollars for about half of its money supply.

The other problem with using M3 is that U.S. Dollars would have been double counted, in some cases. A U.S. Dollar that is held in Mongolia would have been counted as both U.S. M3 and Mongolian M3, so the calculated monetary inflation rate would have been pushed higher than it actually is.

Some of the percentage increases in the chart above reflect M3. It depends what each country’s central bank, or an IMF report, disclosed as M2 or M3. If they were not clear, I just used the largest number.

Even though the outline I used above for M0, M1, M2, and M3 are the general guidelines, every central bank uses a slightly different definition. The World Bank, for instance, has data on the M2 of almost every country. However, those numbers include foreign currency held domestically, so it should actually be titled M3. The Bank of England said “Screw it,” and decided they were only going to report M0 and M4, which is a category they made up. My point is that not all currency data is compatible.

Two countries are not on the list: Zimbabwe and Bermuda. Zimbabwe is the Charlie Sheen of monetary inflation. Bermuda’s data is way too low, and the World Bank does not have any data for them, so I have no way of checking.

The important lesson to take away from this is that most of the world has inflated its domestic money supply by more than 100% over the last five years.

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Money Supplies of the World, Continued (7).

In Money Supply on May 8, 2011 by CQCA

The chart above shows the monetary expansion for the top (or bottom?) 141 to 152 economies in the world by GDP. Most of them are islands. As a group, they are actually considerably more responsible with their money supplies than the rest of the world, although that is not saying much.

Seychelles expanded slower than the U.S. Dollar. The Eastern Caribbean Dollar is used by Anguilla (UK), Antigua and Barbuda, Dominica, Grenada, Montserrat (UK), Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines.

Surprisingly, IMF or World Bank data only had to be used for Djibouti, The Gambia, Comoros, Tonga, and São Tomé and Príncipe. The rest came from each country, or currency’s, central bank.

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Money Supplies of the World, Continued (6).

In Money Supply on May 7, 2011 by CQCA

The chart above shows the monetary inflation of the top 121 through 140 countries, based on nominal GDP. Suriname was the highest inflator of the group, at 403.01%. The lowest inflator was the Central African Republic, at 41.92%.

I am almost finished compiling this data, so I will discuss more about the overall trends later. One specific thing about this chart, though, is that the Central African Republic was the lowest inflator of these twenty countries. The Central African Republic uses the CFA Franc, which stands for Franc Coopération financière en Afrique centrale. (It’s written in italics and uses accent marks, so I think it’s French.) The CFA Franc is also used by Cameroon, Chad, Republic of the Congo, Equatorial Guinea, and Gabon. Even though they use the same currency, and have the same central bank, their rate of monetary expansion over the last five years have been at different rates. Equatorial Guinea, for example, increased its money supply of CFA Francs by 228.82% over the same period. I don’t know why.

Once I get done with the whole list (almost there!), I’ll group countries together by location or development.

Sources: Mostly the IMF, except for the Central Bank of Tajikistan, National Bank of Moldova, Bank of Guyana, and Maldives Monetary Authority.

Related Posts:
The Largest Economics and Monetary Expansion.
Money Supplies of the World, Continued.
Money Supplies of the World, Continued (2).
Money Supplies of the World, Continued (3).
Money Supplies of the World, Continued (4).
Money Supplies of the World, Continued (5).

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