Economics wonkiness ahead, but the Bank of England has been trying to modify the way it measures broad money in the UK since September 2007.
Excluding the deposits of ‘intermediate other financial corporations’, the Bank argues, would provide an “economically more relevant measure” of broad money than that based on the traditional M4 definition. IOFCs include central clearing counterparties, mortgage and housing credit corporations, bank holding companies, SPVs, etc.
Stripping that out, as you can see below, yields a remarkably different picture than the M4 figures we’re used to:
So what, you say? Money supply measures = boring.
We tend to agree but, as the ever-eloquent Sean Corrigan of Diapason Commodities Management points out, rightly or wrongly*, this seems to be yet another instance of a central bank screaming to itself about deflationary risks. Here’s his commentary:
The point here is not that this represents some angels-on-a-pin advance in the interpretation of monetary arcana, but that the Old Lady seems to be engaged in the attempt to prove to herself (and to her critics in the world at large) that credit provision to the all-important private non-financial sector is still barely growing – especially if we strip out the rate of CPI change to allow for the ‘real’ effects of what credit is still being extended. Rather than a roaringly inflationary ~18% gain in M4 being underway, the widget makers and corner shops which are the source of our material well-being are only adding something like a trifling 4% per annum nominal to their balances, with the rest being tied up in the kind of self-referential (and usually self-reverential) paper shuffling and bubble-blowing at which modern financial markets are so adept.
More QE anyone?
For the record, the Bank plans to start publishing a monthly version of M4 and M4 lending excluding intermediate OFCs from Sept. 1, 2009.
* There’s some suggestion that M4 excluding IOFCs may be a questionable measure of money supply. JP Morgan economist Allan Monk for instance, wrote in a recent report that M4 ex-IOFC “is a poor guide to data based on the full quarterly survey of deposits, and significantly overstated the slowing in money growth through 2008.”
Related links:
Measures of M4 and M4 lending excluding intermediate OFCs – BoE paper