A post last week suggested that 4% UK broad money growth was sufficient to support a solid economic recovery because the velocity of circulation may be rising. Expressed differently, the demand to hold money may be declining as cash hoarding related to last year’s crisis reverses

One sign of declining money demand is a recent pick-up in mutual fund inflows. Net retail sales of unit trusts and OEICs totalled £14.0 billion in the first seven months of 2009, up from £3.9 billion in all of 2008, according to the Investment Management Association. Sales are on course to reach about £24 billion for the full year, well above the prior annual record of £17.7 billion in 2000.

If a £20 billion rise in mutual fund buying between 2008 and 2009 reflects a reduced demand for money, money supply numbers will understate the growth in cash available to finance economic recovery by £20 billion this year. This is equivalent to 1.3% of the MPC’s favoured broad money measure, M4 excluding cash holdings of “intermediate other financial corporations”.

As the earlier post noted, some monetarist economists argue that QE should be expanded further until broad money growth reaches 6% per annum or higher. With money demand likely to be rising by significantly less than 6% pa, however, this would risk creating excess liquidity, leading to new asset market bubbles and – further ahead – another pick-up in inflation.