By Asseged Major

​Central Bankers Combat inflation by causing Money Supply to be reduced. As the economics saying goes, inflation is “too much money, chasing too few goods.” Central Bankers will reduce the supply of money available, so it causes less money available in the economy to purchase goods, in response accumulated inventory builds up of unsold goods for producers, producers will respond by reducing the prices of those goods so they can get rid of them and sell them. There are lag effects of Central Banks interest rate policy on the Economy, and not a perfect relationship with the Money Supply. But essentially higher interest rates overall will reduce the Money Supply in the Economy.

In figure (1) Chart below, all of the countries except for China and Japan and just recently Brazil, have been conducting restrictive monetary policy and raising interest rates. As you can see in the chart comparing “Peak Inflation in 2022” Column with “Current - Nominal Inflation 2023” Column, All the countries listed have reduced inflation from the Peak Inflation Levels in 2022, and most by a very significant amount. 

​Looking at “Money Supply Growth” column in Figure 1 Above, only 5 Countries/territories out of 14 Total Countries/territories have reduced their  “Money Supply Growth” currently from 1 Year Ago. The 5 Countries and territory that have reduced their “Money Supply Growth” are USA (-3.70 %), Euro Zone (-2.10 %), Germany (-1.90 %), UK (-3.10 %), Switzerland (-10.35 %). The rest of the countries/territories have experienced an actual increase in Money Supply, even though nearly all those Countries Central Banks have been raising interest rates for over a Year. ( In Figure 1 Yellow Highlight indicates Countries with Increased Money Supply (YoY), and Decreased Inflation (YoY). )  

So why has Money Supply actually increased in those countries, while the Central Banks in those countries have been raising interest rates, which causes the Money Supply to decrease ? It is mainly due to the Private Sector increase in Loan amounts in the economy. The Central Bank with higher interest rates can affect the Loans Market, but they can’t directly stop Banks and Finance Companies from giving Loans. If Banks and Finance Companies continue to increase the Loan amounts, it will increase the Money Supply in the system. When a Loan is given by a Commercial Bank or Finance Lender, it will eventually be deposited in the banking system, which leads to an increase in excess reserve for a bank, in which that bank can create another loan, which this cycle continually repeats,  which causes a Money Multiplier effect,  where the actual Money Supply increases in the Financial System. The relation can be shown by observing the money supply growth and private sector loans amounts in the economy. 

​For example, Australia had an increase in 1 year change of Money Supply Growth of 3.86 % as of July 2023. Looking at Figure 2, shows the Private Sector Total Loans Amount in Monthly Periods for Australia, in Australian Dollars. Australia Private Sector Loan Amounts monthly have grown Increasingly in this same time period, as its Money Supply Growth. 

​The opposite case is for the US Economy. The US Economy had a decrease in 1 year change of Money Supply Growth of -3.70 % in July 2023. Looking at Figure 3, it shows the Private Sector Total Loans Amount has been decreasing in the US Economy during the same time. As is what would be expected from Higher Interest Rates from a Central Bank, and a decreasing Money Supply. 

The next question is if Money Supply is increasing in these Economies, how come inflation is decreasing ? Economic theory suggests it is likely due to the decrease in the Velocity of Money in those economies. The Velocity of Money is the turnover rate of a currency in the economy. In other words, how many times the currency is being transacted for purchases/sales in the economy. It is a measure of consumers and businesses willingness to spend money in the economy. The higher the velocity of money, the more likely the Economy will increase in GDP Growth, the lower the velocity of money, the more likely the Economy will decrease in GDP Growth. This relationship is explained in the Equation of Exchange, 

In the Equation of Exchange,  MV = PY 
M = Money Supply
V = Velocity of Money
P = Prices
Y = Real Output (Real GDP)

For the scenario where in an Economy there is an increase in Money Supply, and still experience a decrease in inflation (Prices) like most of the countries that was shown on in Figure 1, this would mean in the Equation of Exchange, (M) Money Supply value would increase, and (P) Prices value would decrease, for the Equation of Exchange to hold true, this would mean (V) Velocity of Money would have to decrease. For simplicity’s sake of using basic numbers, look at the following, 

Example of an Economy, when the Money Supply Increases, and Inflation (Prices) Decreases, using the “ Equation of Exchange ” 

Equation of Exchange 
MV = PY

Initial Economy - Time Period 1  
MV = PY 
6(2) = 3(4)      
​
In Time Period 2 , the Economy Money Supply (M) has increased to 8, and the Prices (P) has decreased to 2, and Real GDP ( Y ) has increased to 4. In order for the Equation of Exchange to hold true, meaning for both sides of the Equation to equal each other (MV=PY), than Velocity of Money (V) must decrease in value mathematically. Look below, 

Economy in Time Period 2
MV = PY 
8V =  2(5)
8V = 10 
V= 1.25 ,   
the Velocity of Money (V) is lower here in Time Period 2 than Time Period 1 (1.25 < 2 ) 

MV = PY 
8(1.25) = 2(5) 
        10 = 10 ,
Hence, Both Sides Equal each other (MV=PY), the Equation of Exchange Holds True.

Thus in order for Money Supply to Increase to 8, and Inflation to Decrease, where Prices to Decreased to 2, the Velocity of Money had to Decrease to 1.25, in order for the Equation of Exchange to hold True. In this scenario regardless how much Prices (P) decrease, Velocity of Money (V) would always decrease. In Sum, this mathematical expression shows Inflation Decreased, even while Money Supply Increased, and it is due to the Decrease in the Velocity of Money. 

The Velocity of Money would decrease regardless if the Real GDP (Y) increased or decreased. The only caveat is if the Real GDP (Y) level equaled or exceeded the Money Supply level, in that case the Velocity of Money would stay constant or actually increase. For instance, in this example, if Real GDP (Y) equaled 8 or Higher, then Velocity of Money would be constant or increase, look at following, 

MV = PY 
8V =  2(9)    *Note : Here  Real GDP (Y) = 9, the Real GDP (Y) > (M) Money Supply
8V = 18 
V= 2.25 ,   
The Velocity of Money Increased higher in Time Period 2 ( 2.25 > 2 ),  because Real GDP (Y) is higher than Money Supply (M), (8 < 9) . 


If Theory followed into practice, as long as the Real GDP (Y) does not equal or exceed the Money Supply level, than this would explain for Most of the Countries in Figure 1, where they experienced a Increase in Money Supply,  But still a Decrease in Inflation, which is likely due to a Decrease in Velocity of Money. Also most of the countries that experienced this had a Positive Real GDP (Y), which fits this example scenario.   

​An Example is Canada, where its Real GDP Level is below the Money Supply Level, and it has experienced a Increase in its Money Supply Growth and a Decreasing Inflation Rate (YoY). As of of July 2023 Canada Real GDP is 2.2 Trillion Canadian Dollars, this is lower than the Money Supply in Canada at 2.4 Trillion Canadian Dollars. In other words the Money Supply Value exceeds the Real GDP Value currently in Canada. Look below at Figure 4.

2.2 Trillion < 2.4 Trillion

          Real GDP < Money Supply

Y < M

​​At the Same Time as of July 2023 Year to Year Money Supply Growth increased 2.60 %, and its Inflation Rate is at 3.3 %, which has decreased from its recent Peak Inflation Rate of 8.1 %, and at the same time in which Velocity of Money has been decreasing, Look at Figure 5. 

In Contrast to Canada, in the US Economy, the US Real GDP Value is higher than the Money Supply Value. As of September 2023, the US Real GDP Value is $ 22.4 Trillion, and the Money Supply is $ 20.7 Trillion, Look at Figure 6.  

​22.4 Trillion > 20.7 Trillion 

          ​Real GDP > Money Supply 

​Y > M

​Unlike Canada and including the 10 other countries, the US Economy Money Supply Growth has decreased, and the actual Velocity of Money is increasing. Looking at  Figure 7, since the 3rd Quarter of 2021, the Velocity of Money has been increasing for the US Economy. The Velocity of Money has increased from below (1.16) to currently (1.32). The Increase in Velocity of Money has led to an increase in spending in consumption, which  increases Real Output (Y) in the US Economy, as Real GDP Growth continues to grow in 2023. As of September 2023, US Money Supply Growth decreased (-3.61 %), and Inflation Rate of 3.7 %, which is a decrease from its recent peak of 9.1 % .  The US Economy has experienced a decrease in Money Supply and Prices, while an increase in Velocity of Money, and Real GDP Growth.                                                

​Disclaimer : 
Paraimbal, LLC is a registered CTA & CPO ( Commodity Trading Advisor and Commodity Pool Operator ) with the CFTC (Commodity Futures Trading Commission) and NFA Member. This content is for informational purposes only. This information is of the opinion of Paraimbal, LLC and Asseged Major. This information is not mean’t to be investment advice. This is not a offer to participate a futures trading program, or securities.

By Asseged Major

​Globally Stock Market Performance has increased so far. On a Year-to-Year basis, major stock indices, of the US Stock Market (S&P 500) is up 19.59 %, the Japanese Stock Market (Nikkei 225) gain of 22.84 %, Germany Stock Market (DAX) gain of 27.01 % , France Stock Market (CAC 40) gain of 23.95 %. (Look at Figure A)

The US Economy has been over performing and doing better than market forecasts so far. The US Economy has experienced a Moderate growth environment with decreasing inflation. The US Economy has been Beating Market forecasts for each of the first 2 quarters. Economists and Forecasters were forecasting a flat to slight negative growth in the first 2 quarters. A sizable number of Economists and Forecasters were predicting a recession in 2023, that has become highly unlikely now. From the start of the year, the “ Wall Street Journal Economic Survey ” , median forecasts from Economists for the 1st Quarter and 2nd Quarter of 2023, were (+ 0.10 %) GDP Growth and (- 0.37 %) GDP Growth. The “Federal Reserve Survey of Professional Forecasters” median forecasts were (+ 0.2 %) GDP Growth for both quarters. The US Economy came in Beating Market Forecast by huge amounts at a full gain of (+ 2.2 %) in the 1st Quarter, and (+ 2.1 %) in the 2nd Quarter. At the same time, the US Economy has been reducing Inflation significantly, from the Nominal Inflation Rate 9.1 % (June 2022), to now 3.7 % ( August 2023), (Look at figures 1–2) . 

​The US Economy has been experiencing the ideal scenario from a Central Bank perspective like the Federal Reserve, while Raising Interest Rates, experiencing a reduction of the Inflation Rate with Moderate Economic Growth. The scenario of the so called “ Soft Landing ”, achieving the price stability to reduce the Federal Reserve target of the 2 % Inflation Rate level without a recession and significant job loss. There are definitely some mixed signs in the economy that also give a different picture, where some sectors in the economy may be experiencing recession effects and are contracting while other sectors are not. This is termed what economists call a “rolling recession.”  Sectors such as Freight and Manufacturing are experiencing similar effects. The August 2023 Jobs Report added 187,000 Jobs, but sectors in Transportation and Warehousing lost (-34,000 jobs),  the August 2023 ISM Manufacturing PMI Index value of 47.6 still remains below the Contraction threshold value for 10 consecutive months. Overall, the stock market has continued to increase in 2023 and for good reasons by investors as Economic data has come in with solid economic growth and beating expectations (Look at Figure 3 above). It is likely that the 3rd quarter economic growth will be the same or better than the first 2 quarters. 
​(Data : “wall street journal economic survey”, “federal reserve bank of philadelphia-survey of professional forecasters”, US Bureau of Labor Statistics, Institute of Supply Management)

European Stock Markets have reached record highs, while countries in the region have been experiencing slow to flat growth. Currently the Stock Price levels are below their record highs by not far off. The French Stock Market, UK Stock Market, and German Stock Market all reached record highs in 2023 so far. (Look at Figures 4-7)

Euro Zone Consumer Confidence Survey had decreased for 2 months in a row. It made consecutive gains month after month, than starting a decline in August. For the month of September, it came in at (-17.8) (Look at Figure 8). Important to note that the Euro Zone Consumer Confidence Survey value is a negative value. Historically majority of the time the values in the Euro Consumer Confidence survey are in negative territory. This is the lowest value in 6 Months. It is below its long-term average. The decline in value represents a pessimistic sentiment that consumers in the Euro Zone have about the economy and is translated in there the decline in GDP Growth through consumption.  
​(Data: tradingeconomics.com|European Commission, theglobaleconomy.com|EuroStat) 

In the case of Germany, in the first 2 quarters it has reached negative economic growth for both quarters and falling below market forecasts  and yet the German Dax Stock Market is up positive with a 27.01 % Return (YoY), and 10.51 % Return (YTD). ( Look at Figures 9-10)

• Globally Stock Markets have performed as would be typically is the case in a normal economic  environment (exception of China),  where the US and major Foreign Stock Markets are up, and the US Dollar is down. Europe and Japan Stock Markets are up positive in gain, and Foreign Currencies are up in positive gain against the US Dollar, year to year basis, the US Dollar index is down -5.42 %, the Euro and Pound is up 7.89 % and 9.33 % against the US Dollar.

• The Euro Zone is currently in a slow to negative economic growth, China is currently by their historical standards are in a Slowing Economic environment, and experiencing disinflation , and mixed in with the headwinds from their Commercial Real Estate Property crisis. Japan Stock Markets have continued there gains due to interest rate differential's of easing monetary policy.

• The recent current retracement of US Stock Markets, which may have spread as losses into other Foreign Stock Markets, is the current fear from investors is the uncertainty of how long interest rates will remain high or continue to be raised by the Federal Reserve. This is more currently driven at the moment by market sentiment and emotion and can be advantageous for an investor on either side of the market.

• Overall, so far up to now it seems like the positive sentiment here in US Markets may have spread into the performance in major Foreign Markets. Given their economic environment, there is much less of a case for the Europe Stock Markets to proceed in this trend, than it is in the US and Japan Stock Markets. 
​
(Data : investing.com, 9/29/2023)

​Disclaimer : 
Paraimbal, LLC is a registered CTA & CPO ( Commodity Trading Advisor and Commodity Pool Operator ) with the CFTC (Commodity Futures Trading Commission) and NFA Member. This content is for informational purposes only. This information is of the opinion of Paraimbal, LLC and Asseged Major. This information is not mean’t to be investment advice. This is not a offer to participate a futures trading program, or securities.