“Money makes the world go round” as the song from the musical Cabaret tells us. But the chart above, from BofA Merrill Lynch, suggests there isn’t too much money circulating in the world’s largest economy today.
It shows M3 (the broadest measure of money supply). Merrill note that its growth is now close to the lowest level seen since 1960. And a new estimate today suggests it fell 10% in the past 3 months – something not seen since the 1930’s Depression.
The reason is that banks are being forced to cut their leverage, after the financial crash. But this is easier said than done:
• Traditionally, prudent leverage was thought to be 12.5: 1. In other words, banks had to keep $1 in reserve for every $8 of lending
• But during the Boom, banks used leverage of two or three times this amount. This meant they had only $4, or even $2.50, for every $100 lent.
Deleveraging, as the blog has noted before, “is an ugly word and it has ugly implications“. The slowdown in M3 is a clear warning that the return to prudent lending policies could be a very painful experience over the next few years.