Posts Tagged ‘broad money’

Australia’s money supply & credit growth in April 2008

Thursday, July 10th, 2008

Continuing from Australia?s money supply growth in March 2008, we will report on the growth of Australia?s money supply for April 2008. In that month, Australia?s broad and M3 money supply has reach yet another record high of AU$1089.4 billion and AU$1003 billion respectively (see What is money? on the explanations of the various measures of money). Between April 2007 and April 2008 (i.e. the year-to-date), Australia?s M3 money grew by 20.4%. The year-to-date growth for March 2008 and February 2008 was 21.1% and 21.6% respectively. No doubt, Australia’s money supply is still growing to record highs. But there seem to be some tentative indications that the growth is slowing since January 2008.

Credit growth is also exhibiting the same behaviour. While total credit reaches a record high of AU$1826.9 billion in April 2008, its year-to-date growth was slowing since January 2008.

The data for May and June 2008 is not out yet. If we see a sustained deceleration in both money supply and credit growth, this will mean that Australia is moving towards deflation, which is very bad for asset prices.

Australia’s money supply growth in March 2008

Thursday, June 5th, 2008

Today, we will continue from Australia?s monetary growth update?February 2008 and report on the growth of Australia’s money supply for March 2008. In that month, Australia’s broad and M3 money supply has reach yet another record high of AU$1080.8 billion and AU$992.2 billion respectively (see What is money? on the explanations of the various measures of money). Between March 2007 and March 2008 (i.e. the year-to-date), Australia’s M3 money grew by 21.1%. The year-to-date growth for February 2008 and January 2008 was 21.6% and 23.2% respectively.

From the news media, you can read a lot of reports that Australia’s credit growth (and hence, has a relationship on the money supply growth) has slowed down due to the string of interest rates hikes and slowing economy. Well, the fact remains that credit growth is still growing, although growing at a slower pace. We can argue that it is still growing too rapidly.

Think about this: if real GDP growth is growing at 3% per year while the M3 money supply grows at 21.1%, guess what will happen to price inflation? Hint: take a read at Cause of inflation: Shanghai bubble case study.

Australia’s monetary growth update?February 2008

Monday, April 28th, 2008

Today, we will show you the latest chart of Australia’s money supply growth from July 1959 to February 2008. Our previous update was at Aussie money supply growth- December 2007 update. Click on the below chart’s thumbnail to see it in full-size:

Australia?s monetary growth (July 1959 to February 2008)

The terms used in this chart was explained in What is money?.

The left axis: The dark blue line represents the growth of the monetary base, while the light blue and red line shows the growth of M3 and broad money respectively.

The right axis: The black line represents the ratio of the monetary base to broad money. As at February 2008, this ratio stands at a wafer thin margin of only 4.37%. As we said before in Australia?s monetary debasement & credit expansion, this means that approximately, every $4.37 of original cash

… in the economy gets lent and re-lent, over and over again until it becomes $100 of credit (broad money)

Please note that in that previous article, we used the currency/M3 ratio. Today’s graph uses the monetary base instead of currency in that ratio, which is more accurate representation.

Finally, the growth of M3 from February 2007 to February 2008 was still at a high level of 21.6%.

What is money?

Friday, April 25th, 2008

This is a deceptively simple question. Last time, money was simply gold and silver. But today, in this modern age of finance, money is far more complicated than what it was used to be. It has come to the point that it is very hard to even define what money is, let alone measure its quantity. Alan Greenspan, the former head of the US Federal Reserve was believed to have said ?We don?t know what money is, any more.? Today, we will explain what money is by explaining the various measures of money supply, according to the definitions of Australia’s central bank, the Reserve Bank of Australia (RBA).

A good way to see money is to think of it as an inverted pyramid, the apex of which is the most liquid form (and most favoured by drug dealers). This most liquid form of money is defined as currency. Currency is the (1) physical notes and coins that can be seen, touched and smelled and (2) held by the “private non-bank sector” (which is basically institutions, companies and individuals that are not banks and governments). Currency is mentioned in the graph in our previous article, Australia?s monetary debasement & credit expansion.

The next broader measure of money is the monetary base, which is (1) physical notes and coins held by the “private sector” (which is anything that is not of the government), (2) banks’ deposit at the RBA and (3) what the RBA owes to the “private non-bank sector.” The central bank (RBA) is the bank of the government and banks. Therefore, your bank will have an account at the RBA where it keeps its money, which is the previously mentioned (2). For (3), an example would be the Medicare rebate that you receive from the Australian Commonwealth government. It will come in the form of a cheque drawn from the RBA. The difference between component (1) of currency and component (1) of monetary base is that the former excludes physical money held by banks (e.g. notes stored inside the ATM machines).

The next measure of money is M1. It is comprised of (1) currency and (2) bank current deposit held by the “private non-bank sector.” In Australia, you may have a current deposit account that pays almost no interest and you can withdraw your money from it at any time. This money will be included in M1.

The next broader measure of money is the M3. It comprised of (1) M1 and (2) other deposits with bank (e.g. term deposits, certificates of deposits, etc).

The broadest measure of money is broad money, which comprised of (1) M3 and (2) borrowings of financial institutions from the private sector. Your money kept in high-yield cash management accounts will be part of broad money.

So, how can there be so many measures of money, from the most limited currency (AU$39.4 billion as at February 2008) to massive broad money (AU$ 1074.5 billion as at February 2008)? Well, you may want to read our earlier article, 363 tons of US dollars to Iraq?how much money will eventually be multiplied into the economy?.

Next article, we will show you an updated graph of Australia’s money supply.