Bloody Marys all round
Monetary hangover is huge and will continue to cause inflation headache
A cure: place a handful of ice in a jug. Add 100ml of vodka, 500ml of tomato juice and a tablespoon of lemon juice. Shake a few drops of Worcester sauce and Tabasco (or some other Bold and Spicy condiment ) and a pinch of celery salt and pepper. Stir until the jug feels cold, strain into 2 tall glasses, top up with fresh ice, add a celery stick and lemon slice and enjoy.
How long will the inflation hangover last? Is there a cure? Today the FT tells us ‘A deluge of inflation data pushes borrowing costs to 2007 levels’. In the last week or so, ‘Stocks fall, Treasury yields rise as inflation worries weigh on markets’ or similar words have become a staple of market comment. How long will worry about inflation, and central bank reaction to inflation, last? Here is an alarming thought to ponder.
The following chart shows money growth (M1) for the largest economic blocs in the world (USA, China and Eurozone) measured as percentage of GDP. A trend line has been added based on monetary growth rates from 2003 till 2020 - excluding the massive money growth that accompanied the pandemic. The trend line suggests where money/GDP ratio may be today were it not for the monetary panic that followed March 2020.
The calculation suggests the US monetary overhang (or hangover) is huge; a gap of over 15% of GDP. For the Eurozone the gap exceeds 11%. In China, by contrast, the monetary gap is slightly negative. Oh, the M1 measure used for the US is calculated using H.6 table for currency and parts of the H.8 table detailing assets and liabilities of US commercial banks. In other words, it is a definition of M1 comparable to other countries, unlike the M1 measure published by the Fed.
Broad measures of money (M3 for instance) paint a less dramatic picture, but still suggest the inflation hangover is going to persist for another year or more. The M3/GDP gap is over 6% in the US and about 7% in the Eurozone. It is not far from trend in China.
Perhaps we should all memorise the Bloody Mary recipe. The hangover may be worse than we expected. Perhaps add an extra slug of vodka.