Over the past several months, starting with the great US stock market surge back in October 2011 which was not paralleled by virtually any other index in the world (and especially not Spain which recently breached its March 2009 low), there has been a great deal of speculation that just because the US stock market was doing “better”, that the US economy has by implication “decoupled” from Europe. Well, as yesterday’s GDP number showed in Q1 the economy ended up rising at a pace that was quite disappointing, but more importantly, which even Goldman admits is due for a substantial slow down in the coming months. And ironically, in the past 6 months it was not the Fed, but the ECB, that injected over $ 1.3 trillion in the banking system. One would think that this epic “flow” of liquidity from the central bank would result in a surge in the only metric that matters to ‘Austrians’, namely the expansion in money (or in this case the widest metric officially tracked on an apples to apples basis – M2). One would be very wrong. Because as the chart below shows, while US M2 has soared from the 2009 troughs, money “movement” in Europe has barely budged at all.
Comparing the change in “credit” between the US and Europe:
Needless to say, the lack of growth is not for lack of trying. Observe:
The implications of this simple observation are rather profound:
- It elegantly confirms that any discussion of “decoupling” has nothing to do with the absolute or relative state of the economies in question, and quite the opposite: economic state is derived based on how the market is doing, which in turn flips all the fundamental assumptions of economics on its head.
- More importantly, the core premise of Austrian price formation is validated by the mindless droning of TV anchors who constantly regurgitate “decoupling, decoupling, decoupling”, when in reality all they observe is the relatively flow through of money into the broader economy (read An “Austrian View” Approach To Equity Prices for much more on this fascinating topic).
- Most importantly it shows that since European M2 has barely budged despite the trillions of new liquidity injected, that the capital shortfall hole is so very vast, that the continent’s banks will need at least several trillion more (which they will, more on that tomorrow) in ECB injections before the money gets even remotely close to entering the broader economy and thus spurring not only growth, but more importantly in this day and age of endless cause-effect confusion, asset prices.
Of course, the reality that everything in this world is determined simply by a) how fast central banks print and b) how faster they print relative to each other, would make the well paid jobs of professional financial analysts who focus on such trivia as fundamentals, technicals, geopolitics and what not, obsolete.
Which is why don’t expect to hear much about this line of thought anywhere else. After all there are daily/weekly newsletters to be sold, soft dollars to be pocketed, and mindless screaming matches to sustain eyeballs which can then be monetized in exchange for Nielsen ratings and moderate (and declining) ad rates.