The European Central Bank (ECB) has recently reported that money growth in the eurozone saw a decline in August. The M3, a broad measure of money supply, witnessed a drop for the first time in over a decade.
This further dip in money supply during August is encouraging news in the context of inflation targeting. Excessive money growth can lead to high inflation in the medium term.
I’ve mentioned before that it’s surprising ECB governors rarely spoke of money supply growth in their recent speeches. It’s akin to discussing why a ball falls without referencing gravity. Recently, an ECB executive’s speech could easily be mistaken for one by a director of the World Wildlife Fund, with topics often circling around the climate and nature conservation.
Refreshing turn
However, in the last week of September, a board member from ECB dedicated an entire speech to the topic of money supply growth. While it wasn’t Christine Lagarde, who often speaks about climate, it was her colleague on the executive board, Isabel Schnabel.
In what can only be described as a meticulous and balanced address, Schnabel highlighted that the money supply in the eurozone has surged by 30 percent since the pandemic. Concurrently, inflation went from slightly above one percent to nearly 11 percent. Outside the eurozone, the rise in inflation mirrored the increase in the money supply.
Looking back, Schnabel analysed, such a significant growth in money supply might suggest that inflation won’t just revert to two percent after all disruptions are resolved. Instead, it could indicate a more permanent inflation rate above this figure.
In essence, Schnabel’s talk emphasised the link between money and inflation. It’s quite revealing that it feels refreshing to hear a central banker address the longstanding relationship between money growth and inflation.
Missed opportunity
One downside, however, is that such insights should have come sooner from the president of De Nederlandsche Bank (DNB), especially considering our rich monetary history in the Netherlands where money growth remains a central theme. It’s rather unfortunate that this crucial term didn’t make an appearance in the bank’s recent annual report.
From my perspective, the Netherlands has deviated from two historical trends recently, and it’s not looking good. Firstly, a sound fiscal policy is no longer viewed as paramount in The Hague. Consequently, the Netherlands seems more open to a lenient fiscal policy approach within the eurozone. In a geopolitical sense, our nation has distanced itself from Germany.
Fundamental value
The same trend can be somewhat observed in monetary policy. Perhaps it’s just my observation, but the essence of DNB — the importance of money and the duty of central bankers to monitor and curb money supply growth — is eroding.
I appreciate Schnabel’s recent discourse. I’ve consistently stressed, through columns, talks, and books like ‘Turning Point 1971’, the close relationship between the rate of money supply growth and inflation in the medium term. Both economic history spanning centuries and fundamental economic principles reaffirm this. When there’s an abundance of something, its value diminishes. When scarce, its worth increases. The same applies to money: the more available it becomes, the less valuable it is. That’s what inflation is, money becoming less valuable.
Edin Mujagić is the chief economist of OHV Asset Management and author of ‘Keerpunt 1971’. He pens ‘ECB Watch’, focusing on the European Central Bank’s monetary policy for Investment Officer, every last Friday of the month. This column was first published on InvestmentOfficer.nl.