Latest fraudulent alert - last updated on Apr 2023. To find out more information and how to protect yourself, please click here.

Investment Institute
Viewpoint Chief Economist

Magic Money Bonsai

  • 13 February 2023 (5 min read)

  • Monetarism is trying a comeback. It may not help much to deal with our current inflation predicament
  • Japan is a case in point. Rather than the gyrations in money supply, it’s the emergence of actual inflation which is questioning the current policy stance just as an “outsider” is about to take the helm of the BOJ.

The quest for the “dovish pivot” has been halted for now by the dataflow and stern signals from policymakers. It’s a fragile truce between the market and central banks though, so strong is the nostalgia for the friendly monetary policy of the previous decade. Yet, times are definitely changing, and the arrival of an “outsider” at the Bank of Japan is another sign. With Kuroda, the “last dove standing” is leaving the global stage, even if we don’t expect action from the BOJ for months after Ueda takes office in April.

It’s probably unsurprising in these circumstances that monetarism is attempting a comeback. We explore the pros and cons of returning to the “Old Faith”. Claudio Borio, who has just produced a thought-provoking note on the information content of excess money growth, concludes that taking on board developments in money supply would have improved the accuracy of the forecasts of the current inflation shock.

Our contention though is that, as much as the wild money creation of the pandemic may well have played a role in the current high-inflation episode, focusing on the gyrations of M3 may not help us in gauging the chances of proper disinflation in 2023 and 2024. The pandemic phase was very specific, as money supply rose for largely exogenous reasons – an acceleration in QE. In our view, a permanent high inflation/high money growth configuration would require the endogenous engine of money creation – bank credit – to switch on, which is not happening – quite the opposite if one takes a look at the credit impulse in Europe. However, the pandemic was not only characterized by excess money growth, but also by a collapse in the velocity of money, as cash holdings remained idle. The fate of this accumulated cash will determine to a large extent how the economy – and inflation – lands in the coming two years. This gets us back to the very reasons why monetary policy frameworks focused on monetary aggregates were quietly shelved two decades ago: as appealing as they might be theoretically, their practical use is limited.

Related Articles

Viewpoint Chief Economist

Draghi Captures the Zeitgeist

Viewpoint Chief Economist

Zoom on the Boom

Viewpoint Chief Economist

Postcard from Davos


    This website is published by AXA Investment Managers Asia Limited (“AXA IM HK”), an entity licensed by the Securities and Futures Commission of Hong Kong (“SFC”), for general circulation and informational purposes only. It does not constitute investment research or financial analysis relating to transactions in financial instruments, nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy, sell or enter into any transactions in respect of any investments, products or services, and should not be considered as solicitation or investment, legal, tax or any other advice, a recommendation for an investment strategy or a personalised recommendation to buy or sell securities under any applicable law or regulation. It has been prepared without taking into account the specific personal circumstances, investment objectives, financial situation, investment knowledge or particular needs of any particular person and may be subject to change at any time without notice. Offering may be made only on the basis of the information disclosed in the relevant offering documents. Please consult independent financial or other professional advisers if you are unsure about any information contained herein.

    Due to its simplification, this publication is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee such opinions, estimates and forecasts made will come to pass. Actual results of operations and achievements may differ materially. Data, figures, declarations, analysis, predictions and other information in this publication is provided based on our state of knowledge at the time of creation of this publication. Information herein may be obtained from sources believed to be reliable. AXA IM HK has reasonable belief that such information is accurate, complete and up-to-date. To the maximum extent permitted by law, AXA IM HK, its affiliates, directors, officers or employees take no responsibility for the data provided by third party, including the accuracy of such data. This material does not contain sufficient information to support an investment decision. References to companies (if any) are for illustrative purposes only and should not be viewed as investment recommendations or solicitations.

    All investment involves risk, including the loss of capital. The value of investments and the income from them can fluctuate and that past performance is no guarantee of future returns, investors may not get back the amount originally invested. Investors should not make any investment decision based on this material alone. 

    Some of the services listed on this Website may not be available for offer to retail investors.

    This Website has not been reviewed by the SFC. © 2023 AXA Investment Managers. All rights reserved.