Jump in money supply ‘could boost asset prices’

A surge in the British money supply is likely to bolster asset prices, according to Lombard Street Research.

The economic consultancy’s argument is based on the rapid expansion of M4 – a measure of “broad money” that includes deposits in bank and building society accounts as well as coins and notes. Mark Richards, an economist at Lombard, estimates that M4 deposits at non-bank financial companies expanded by 11.7bn in May. To put this figure into context, it is more than the total of all insurance company, pension fund and unit trust net investment in the first quarter.

“This jump in cash could continue to suppress yields,” says Richards. “Prices of other asset classes should also receive a boost.”*

He points out that strong asset price growth in the early 1970s and mid to late 1980s was preceded by rapid financial sector money growth. In comparison, the recent rise in money supply growth is small. However, he goes on to argue that “three-month annualised growth rates in excess of 20% cannot continue without asset price inflation.”

Examining the importance of money supply seems to be coming back into vogue after years of neglect. In a speech last month, the governor of the Bank of England, Mervyn King, warned that the rapid rise of broad money threatened to bolster inflation.

Monetarism was at its height in the late 1970s and early 1980s when Margaret Thatcher was leader of the opposition and then prime minister.* Mark Richards “Frenetic financial money growth to fuel asset prices” Lombard Research, UK Bulletin, June 29, 2005.