Hot money, cold credit – Globe Asia – June 2013

In his latest article in Globe Asia, Professor Steve Hanke discusses the strange anomaly that increases in money supply do not lead to commensurate increases in lending by banks to private borrowers.

“In the Eurozone, the growth rate in the money supply has historically moved in the same direction as private credit growth. Recently, however, this relationship has reversed. Despite a very modest rebound in the annual growth rate of the money supply (3.1%), growth in private credit has turned sharply negative, indicating a severe credit crunch (see the accompanying chart).

How can Europe’s money supply (M3) be growing while private credit is shrinking? First, it is necessary to determine what is driving money supply growth in the Eurozone. As it turns out, a whopping 40% of the contribution to the growth in M3 over the last year has come from an increase in bank lending to governments.”

Read the full article to find Professor Hanke’s explanation of the phenomenon.