The following two charts highlight the monetary tensions in the global economic outlook.

The first chart shows that six-month growth in G7 real narrow money (i.e. an M1-type measure comprising cash and current accounts) rose to its highest level since May 2009 last month, based on preliminary data. Allowing for the normal lead of about six months, this is a positive signal for the global economy in late 2011 and early 2012.

Underlying this improvement, however, is a very unusual divergence between monetary strength in the US and Japan and weakness in the Euro area, as shown by the second chart. Viewing the Eurozone in isolation, falls in real narrow money on the current scale have only ever been observed before recessions.

The risk, therefore, to the hopeful global view expressed in these notes is that a downward economic spiral in the Eurozone, via direct and financial spill-over effects, neutralises or outweighs the impact of monetary stimulus elsewhere.

If the global economic upswing expires, the ECB’s finger-prints will be all over the murder weapon. The decision this year to increase interest rates despite a contracting real money supply ranks among the most egregious monetary policy blunders of recent decades, on a par with the Bundesbank undermining the Louvre accord to stabilise the dollar by hiking rates in 1987, thereby triggering the October stock market crash. ECB loosening – rather than an expansion of the EFSF, further fiscal retrenchment, structural reforms etc – is the key requirement for ending the Eurozone crisis.