Prior posts have argued that weak broad money trends in the US and Europe are not an obstacle to a continuing economic recovery because corporate liquidity is rising solidly, supporting prospects for business investment and hiring. Firms have been able to raise cash levels because of a fall in the demand to hold money by households and financial institutions, mainly reflecting negative real interest rates.
This hypothesis received further support from US fourth-quarter flow of funds accounts data released last week. A broad money measure comprising currency, banking system deposits, money market mutual funds, repurchase agreements and foreign deposits was unchanged in the year to end-December but this stability concealed a rise of 8.5% in business holdings offset by falls of 1.9% and 3.0% respectively in household and financial money – see first chart. Business liquidity grew at a 15.0% annualised rate during the second half.
The decline in household and financial money implies that there is less “sideline cash” available to flow into markets and push up prices. Expressed as a proportion of financial assets, however, money holdings are still at a “normal” level by recent historical standards – second chart. Investors may wish to rebalance their portfolios further away from cash in response to the negative real interest rate “tax” imposed by central banks.
