Global liquidity peak spells trouble for late 2012 Daily Telegraph sets it out. Paschal Donohoe please note.

The global liquidity cycle has already rolled over. Assuming that no
fresh action is taken, world economic growth will peak within a couple
of months and then fade in the second half of the year – with grim
implications for Europe’s Latin bloc.

Monetarists have had a good run during the Great Recession, and were
quick to spot the turn-around in the US economy in mid-2011.


By Ambrose Evans-Pritchard, International Business Editor

Data collected by Simon Ward at Henderson Global Investors shows that
M1 money supply growth in the big G7 economies and leading E7 emerging
powers buckled over the winter.

The gauge – known as six-month real narrow money – peaked at 5.1pc in
November. It dropped to 3.6pc in January, and to 2.1pc in February.

This is comparable to falls seen in mid-2008 in the months leading up
to the Great Recession, and which caught central banks so badly off
guard.

“The speed of the drop-off is worrying. This acts with a six months
lag time so we can expect global growth to peak in May. There may be a
sharp slowdown in the second half,” said Mr Ward.

If so, this may come as a nasty surprise to equity markets betting
that America has reached “escape velocity” at long last, that Europe
will scrape by with nothing worse than a light recession, and that
China is safely rebounding after touching bottom over of the winter.

Stocks usually turn about two months before the real economy peaks,
but not always.

Stephen Jen from SLJ Macro Partners said the world economy is weaker
than it looks, with monetary stimulus losing traction in the West just
as China, India, Brazil, et al, hit the buffers, constrained by
inflation and their own credit woes.

“The risk here is that the credit cycles in emerging markets mature
and start to deflate just as developed markets struggle with their own
deleveraging process. We think 2012 will be a tough year for risk
assets,” he said.

Monetary data for China is remarkable. Real M1 contracted in January,
weaker than post-Lehman. The rate rebounded in February but only to
zero.

It is too early to judge whether China really can deflate its property
bubble with carefully-calibrated credit curbs, achieving a feat that
has eluded very clever officials across the world over the last
century.

But bear in mind that China has racked up loan growth of 87pc of GDP
over the last five years – according to Fitch study that should be
compulsory reading – compared to less than 50pc in Japan leading up to
the Nikkei bubble, or in Korea before the 1998 crisis, or in the US
before the subprime debacle.

We know from China Iron and Steel Association that steel output has
dropped from 2m tonnes a day last year to 1.7m this year – with chilly
implications for Vale and Brazil’s real, or BHP Billiton and the
Aussie dollar.

We know too that R&F Properties in Guangzhou reported a 40pc fall in
house sales over the first two months of the year, with a 22pc drop in
price. Like others, I am watching the Confucian ‘soft landing’ with
curiosity.

Monetarism is not an exact science. The latest global signal may prove
a false alarm. But monetarists have had a good run during the Great
Recession, and were quick to spot the turn-around in the US economy in
mid-2011.

What they see now is that US money is losing its fizz. Both M1 and M2
have flattened so far this year, and even contracted slightly in
recent weeks.

Meanwhile velocity has plunged, with the M2 gauge dropping below 1.6
last week for the first time since records began in 1959 (as shown in
the chart from the Federal Reserve Bank of St Louis below).

Nick Bullman from the consultancy CheckRisks said that should give
pause for thought. “It’s terrifying that markets are rising given
what’s going on in the real world,” he said.

Rightly or wrongly, the US Federal Reserve does not intend to do
anything about this. Time is running out for Ben Bernanke before the
US election season closes the political window on fresh stimulus, yet
he gave no hint of largesse in his latest testimony to Congress. He
fretted about inflation instead, causing gold to crash over $100 (£64)
an ounce within hours.

Regional Fed hawks are in any case near revolt. Dallas Fed chief
Richard Fisher dismissed talk of more QE was “wishful thinking“. “It
is not our job to prop up Wall Street,” he said

So the Fed is hunkering down even though Mr Bernanke himself warns
that the US faces a “massive fiscal cliff” later this year as
automatic tax increases come into force.

Across the Atlantic, a German temper tantrum has made almost it
impossible for Mario Draghi to deliver any more magic at the European
Central Bank. His €1 trillion (£837bn) blast of liquidity for banks
under the ‘LTRO’ scheme – actually just €530bn in fresh money – has
averted a collapse of the Latin banking systems and bought another
lease of life for monetary union.

However, banks parked €827bn back at the ECB for safe-keeping last
week. They are still slashing their balance sheets to meet the EU’s
ill-timed demand for 9pc core Tier I capital ratios by June. What the
Draghi Bazooka has done is to slow the pace of deleveraging, not stop
it. This comes at a cost of big distortions to the credit system and
structural subordination of private creditors.

The ECB’s January data showed that real M1 deposits were still
collapsing at frightening rates across Europe’s arc of depression,
with six-month falls of 12.9pc in Greece, 9.2pc in Ireland, 9pc in
Portugal, 8pc in Italy. And remember, this is a leading indicator.
Italy is already in a slump. Its industrial output has fallen 5pc over
the last year. It faces a further fiscal squeeze of 3.5pc of GDP this
year in the middle of a deep recession. Buona fortuna.

France’s Nicolas Sarkozy was quick to declare Europe’s debt crisis
“solved” after the Greek deal. Such claims are jejune. He ignores the
cancer eating EMU: the 1930s Gold Standard mechanism that imposes all
the burden of adjustment on the weaker economies, trapping Italy,
Spain, Portugal and Ireland in debt deflation, and trapping his own
country in structural decline.

Europe’s policy-makers are implicitly relying on a fresh cycle of
global growth to do their work for them, and lift Club Med off the
reefs. If recovery flags again, the strains will become intolerable.
With Spain’s youth unemployment already hitting 51.2pc, how much more
will it take before the political fuse detonates?

For all the talk, the EU has not yet embraced fiscal union,
debt-pooling, or budget transfers, or put in place a viable political
structure to overcome the deformities of monetary union, or even
diagnosed the problem properly. The Greek saga has been a long-drawn
exercise in evasion.

A full global recovery this year may disguise this for a little
longer. Any relapse will bring matters to a head yet again within
months.