Jörg Krämer

The author is chief economist at Commerzbank.

(Photo: Dietmar Gust / Euroforum)

For years nothing happened with the M3 money supply, which includes cash, checking accounts and other money-related bank deposits. But since the corona pandemic, money supply growth has accelerated – to 9.2 percent recently, as the European Central Bank (ECB) announced on Monday. In the coming months, the plus should be double-digit. The money supply is an issue again. And a danger.

ECB President Christine Lagarde said at the last press conference that the money supply is increasing primarily because the economy needs more liquidity because of Corona. In fact, during the crisis, banks have given businesses more credit and credited them to their bank accounts, increasing M3.

But Lagarde did not mention that it is primarily the ECB that is fueling monetary growth. Finally, as part of its Corona purchase program, it also purchases bonds with a volume of EUR 1.35 trillion. A good part of the money ends up in the bank accounts of citizens and companies and inflates the money supply.

The ECB directly increases the money supply when it buys government bonds from insurance companies, pension funds or other large investors and transfers the equivalent value to accounts with commercial banks. But even when banks buy government bonds from investors or finance ministers, the ECB’s bond purchase program plays an important role. Because many banks only buy such bonds on a large scale because they can pass them on to the ECB.

The risk of bubbles on the financial market is increasing

These indirect and direct purchases of government bonds by the ECB have been three times as important since the Corona outbreak for accelerating the money supply as bank loans to companies.

The whole thing would be unproblematic if the states, like the companies, only temporarily took on more debt and soon repaid it. Then the money supply would shrink again. But in most countries there are no functioning debt brakes that force states to repay their debts. The budget deficits are likely to remain high anyway in the coming year due to the consequences of the corona crisis.

In addition, the ECB’s Corona bond purchase program will run at least until the middle of next year and may then be extended in one form or another. In short, the state’s hunger for credit and the ECB’s willingness to satisfy it will keep the money supply going up for quite a while. Too much money is in circulation.

That should not cause inflation to rise in the next two to three years because high unemployment keeps the rise in labor costs down. But too much liquidity drives asset prices higher. With the inflation of the money supply, the ECB unintentionally promotes the emergence of new, dangerous bubbles in the financial and real estate markets.

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