Money creation becomes nuclear |

In most countries / regions, the growth rate of money supply bottomed out in 2019 and at the start of this year it was on a clear upward trend. Then came the ‘coronavirus crisis’, involving widespread economic lockdowns and unprecedented central bank money / credit creation designed to counter the effects of the lockdowns. The result was a veritable explosion in monetary inflation rates around the world in March and April (April being the last month for which there is complete information on the money supply). Here are some examples:

1) The combination of US and Eurozone money supply we call G2 True Money Supply (TMS) was at its lowest level in 10 years in the middle of last year. It is now at an all time high. It is by far the most bullish force currently acting on stock and commodity prices.

Graph of% change in US dollars and euro G2

2) At the start of last year, Australia was at risk of currency deflation, but that country’s currency inflation rate has since climbed to a record high of 24%. This is not bearish against other currencies and especially not against the (we suspect the AUD $ will trade at par with the USD within two years), as the AUD exchange rate is much more influenced by the raw material. markets than by the local monetary inflation rate. However, this suggests that in Australia the prices of goods, services and assets will increase significantly over the next few years.

Australia M1 YOY%

Australia M1 YOY%

3) The Bank of Canada has been a little more cautious than most other central banks in recent months, but in response to the recent crisis, it has done enough to drive the country’s monetary inflation rate up to nearly from a 10-year peak. A year ago, it was near its lowest level in 20 years.

Chart Canada M1 ++

Chart Canada M1 ++

4) We occasionally read articles that attempt to demonstrate that the pumping of money by the central bank does not lead to higher prices, the situation in Japan being cited as evidence. Japan is supposed to be relevant because the Bank of Japan (BOJ) has aggressively monetized assets for a long time with minimal effect on prices.

As we have noted several times in the past, prices have remained stable in Japan because Japan’s monetary inflation rate has hovered at a relatively low level for decades. Whatever the BOJ has done, it has NOT been pumping money at a rapid pace. Even now, in the face of further monetary stimulus, the year-over-year growth rate of the M2 money supply in Japan is less than 4%. This contrasts with a growth rate of the money supply in the United States of nearly 20%.

Therefore, the low rate of price inflation in Japan is not a mystery. This is exactly what one would expect from an economy with a low rate of monetary inflation and some productivity growth.

Japan M2 YOY% Change

Japan M2 YOY% Change

In summary, outside of Japan, the supply of currencies is increasing at such a rapid rate that there will be substantial price increases over the next two years. However, the price increases will not be uniform. For example, due to a high unemployment rate, the price of labor will likely lag behind, and due to their relative supply situations, the price of is unlikely to increase as much as the prices of,,, and .

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