What Is Important?

Traditional economic and financial analysis in our view falls short. A recent IMF study showed that out of 88 recessions Worldwide since 2010, the economics consensus had only managed to predict 11 three months before the year in question, and still 3 out of the 11 were mistakes: a hit rate of less than 10%. So what is missing! We concentrate on different things. Here is a quick re-cap: # we believe in the quality theory of money, rather than the quantity theory. Here money circulates because it has value, it does not have value because it circulates. This means that changes in its value (the exchange rate) cause monetary velocity to speed up and slow down # consequently changes in monetary velocity and changes in cross-border capital flows (which far outstrip trade flows) combine to disrupt asset markets, and should ultimately but not always affect the real economy through duration adjustment via the changing tempo of capital spending # a distinct financial cycle exists which can differ from the more familiar economic cycle # liquidity is money in the form of means of purchase, whereas savings is money as means of settlement. Both are important but at different points on the monetary circuit. Imbalances between liquidity and savings are the main cause behind swings in the financial cycle # separating liquidity from savings reflects a flow of funds view of the World, where sources of funds precede uses of funds and where flows and stocks are tied together for consistency. In other words, debt flows cannot continue to build for ever # the 'price of money' is the exchange rate not the interest rate. The latter is NOT set by Central Banks but by the market based on the marginal productivity of capital. Central Banks are monopoly supplies of means of settlement money in crises # monitoring the flow of liquidity and the pattern of cross-border flows is critical to understand the asset economy and the real economy. Liquidity is a leading indicator and we put much effort into tracking its movements across 80 economies on a monthly basis. These GLI (Global Liquidity Indexes) have been regularly produced since the mid-1980s and are available by subscription.