Great Graphic: US Money Printing is Not All That

This Great Graphic was posted on the FT Alphaville, which in turn appears to have gotten it from Credit Suisse, w ho relied on Thomson Reuters data.

A prevalent monetarist argument is that foreign exchange prices should reflect the relative changes in the stock of money.  This is part of the reason why so many expect QE to be negative for a currency.  This is especially true of the US, where many expected the aggressiveness of QE3+ (QE infinity in derision) to have undermined the dollar.


We showed in an earlier post that the actual performance of the dollar since QE3+  was announced in mid-September is not what many would have expected.  And more:  if one ignored QE completely and instead focused on ECB and EU efforts to  boost confidence that EMU is not about to implode or cease, and the chasing of fund managers who were caught wrong-footed (first being under weight European bonds and stocks then being underweight Japanese equities), one have a better chance of understanding what has driven the dollar.

The charts here show that China has had more rapid growth in its money supply in absolute terms and relative to GDP than Japan, the euro zone and the US.  Moreover, the growth in US M2 relative to GDP has been the slowest of these countries/regions.  Just like Milton Friedman taught that one should not confuse low nominal rates with easy policy, one should not confuse QE with rapid growth in the money supply. 

In addition to supporting our more constructive dollar outlook, the charts also support our view that if the China reduced its management of the yuan, it is more likely to fall than appreciate, despite its trade surplus.