Global Money Supply Dynamics: Trends and Challenges

The money supply exerts significant impact on key aspects of economy including asset prices, consumer spending, and investment decisions. Fluctuations in the money supply can often affect inflationary pressures, impact the pace and scope of economic growth, and play a fundamental role in shaping or destabilizing financial markets. Therefore, understanding the dynamics of money supply across the globe (global money supply) provides critical insights into the future economic landscape.

Following a pandemic-fueled 24.2% surge combined in 2020 and 2021, the global money supply (broad money1) experienced a contraction throughout 2022 and 2023. This trend was particularly pronounced in advanced economies that experienced a 6.4% decrease against a 0.9% downturn globally. By Q3 2023, both the global real money supply (adjusted for inflation) and the money supply-to-GDP ratio had reverted to pre-pandemic levels. On a longer timeframe, between 2000 and Q3 2023, the global money supply surged from USD 26 trillion to USD 125 trillion, marking an annual growth rate of 7.1%. During the same period, world real GDP and inflation exhibited approximate growth rates of 3.5% and 4.2%, respectively. Concurrently, the ratio of money supply to nominal GDP rose from 78% to approximately 120%. Looking more closely, between 2001 and 2011, a 10.4% annual growth rate of the global money supply coincided with several events, including a spike in commodity prices, robust global trade growth, and the 2008 financial crisis. Subsequently, global money supply growth moderated to 4.2%, aligning with a decline in commodity prices between 2011 and 2019.

Divergent Trends in Money Supply Growth Across Economies

As of Q3 2023, advanced economies accounted for 54.6% of the global money supply, compared to 45.4% for emerging markets and developing economies (EMDEs). The money supply, however, shows distinct trends across economies. Between 2000 and 2023, the annual growth in the money supply stood at 5.0% in advanced economies, 12.5% in EMDEs, and 9.2% in EMDEs excluding China. To highlight a few big players, the money supply saw an annual growth of 6.5% in the United States, 5.4% in the Euro Area, 6.0% in the United Kingdom, and 15.1% in China. Within advanced economies, Australia and Canada recorded rates around 7.5%, exceeding the global average, while the United States and the United Kingdom aligned more closely with the global trend. Japan and Switzerland, on the other hand, saw significantly slower growth at 2.2% and 3.9%, respectively.

Money Supply Impacts on Asset Valuation

The impact of money supply on asset valuation is profound, playing a key role in financial markets for assets like gold, equities, and real estate. World equity market capitalization, for instance, rocketed from USD 17 trillion in 1995 to USD 100 trillion by 2022, with an annual growth rate of 6.7%, which is remarkably similar to the global money supply growth rate over the same period. In the United States, the S&P 500 price index mirrored the growth of the U.S. M2 money supply over the past century. Similarly, all three major U.S. stock market indices—the S&P 500, Dow Jones Industrial Average, and Wilshire 5000—exhibited near-identical growth rates of around 6.5% in tandem with M2 from the 1990s to 2022. Furthermore, the gold price also seemed to dance to the tune of money supply. From the 1960s to 2022, its annual growth rate of 6% matched that of the U.S. M2, suggesting an adjustment based on money supply after the Bretton Woods system's demise in 1971. Nonetheless, the relationship between money supply and asset valuation is intricate and multifaceted, with numerous factors, beyond just money supply growth, influencing prices during specific periods.

Despite factors like globalization and technological advancements dampening the direct impact of increased money supply on consumer inflation, surging asset prices, particularly in real estate, have the potential to intensify inflationary pressures. Notably, the relationship between real estate prices and money supply growth has strengthened in recent years. From 2010 to 2022, both global money supply and the residential property price index exhibited a significant positive correlation. This trend is not confined to developed economies like the United States, the Euro Area, the United Kingdom, or Canada; it is also evident in developing nations like India. Escalating housing costs, consistently outpacing inflation rates across diverse economies, have prompted households to allocate a larger proportion of their budget to housing, thereby contributing to an overall inflationary effect.

Managing Future Money Supply: Challenges and Proposed Policies

In the foreseeable future, the trajectory of global money supply growth remains uncertain. Although some economies have effectively managed this, mounting public debt in several countries continue to drive expansionary monetary policies. Moreover, with the majority of the world's population residing in developing economies, their projected growth is expected to lead to simultaneous increases in both money supply and commodity prices. These circumstances pose significant challenges for effectively managing and controlling future money supply.

To address these challenges, three crucial policies can be adopted:

(1) Targeted Money Growth: Real economic activities must be prioritized by directing funds into productive investments and infrastructure, while simultaneously combating corruption and excessive speculation, particularly in developing economies.

(2) Enforcing Fiscal Discipline: Governments must responsibly manage expenses and debts, focusing on reducing spending and augmenting revenue through tax reforms.

(3) Ensuring Financial Stability: Sustaining a stable economic environment necessitates decent governance and continuous monitoring of financial institutions.

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1 The global money supply (broad money) offers comprehensive coverage of nearly the entire world economy. Specifically, data from 86 countries, representing 96.4% of the world's GDP, is directly sourced from national central banks and statistics centers. For the remaining countries, information is gathered from reputable institutions like the World Bank and IMF. Rigorous cross-verification ensures data reliability. The global money supply is calculated by converting money supply values from local currency units to US dollar.

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