As main manager of the M&G (Lux) Optimal Incomeone of the largest in Europe, Richard Woolnough addressed crucial topics such as inflation derived from monetary policies, the need to adjust the amount of money in circulation according to the economic cycle and his perspective on the work of central banks in a wheel press during the M&G European Media Day 2024which took place last week in London at the headquarters of M&G Investments.
According to him, central banks must look forward and not focus on data from the present or immediate past: “And I think the ECB will do it.” However, he recognizes that monetary policy takes time to be effective.
Relationship between money supply and inflation
Richard Woolnough has spent over 15 years analyzing quantitative easing (QE) and quantitative unwinding (QT). He considers that, in addition to the energy supply and labor data, The size of the money supply is a crucial factor driving inflation.
During the COVID-19 pandemic, Central banks implemented unprecedented QE to stabilize the economy, injecting large amounts of money into circulation. Initially, this measure did not generate the expected inflation, making the policy more acceptable. However, as the manager points out, recent data shows that too much QE does result in inflation, especially in countries that applied more aggressive monetary responses during the pandemic.
Now, Central banks face the challenge of reversing this process through QT to reduce the money supply and control inflation, a complex and unprecedented transition. Woolnough points out that inflation results from an imbalance between the supply of money and the supply of goods. In 2022, a lot of money was chasing a limited supply of goods, which was inflationary. Reversing this situation and restoring monetary balance will be a significant challenge for central banks.
Quantitative neutrality
The manager of one of M&G’s flagship vessels introduces a new concept which is QN (quantitative neutral) saying “that is the ultimate goal of central banks and that means that in a stable state of economic growth, with money printing to facilitate inflation in the economy. In this steady state, there is a simple requirement of having enough tokens money in the system to achieve the desired growth in the country’s nominal GDP, which is defined as the combination of real growth and inflation.”
The expert It is questioned whether central banks will intervene soon, recognizing that “there is a risk of recession, being more aggressive and quick in easing, since high rates for longer will have a monetary effect.”
Role of fiscal and monetary policy in the economy
Woolnough also stressed the importance of fiscal policy and its coordination with monetary policy. During the pandemic, fiscal expansion was facilitated by monetary expansion, allowing for a more robust economic response.
However, he warned that if fiscal policy is not supported by monetary policy, the results can be very different: “If you have an expansion of fiscal policy but the central bank does not facilitate it, then you have a problem. It is a very different than if you have a large fiscal deficit that is facilitated by the central bank.”
The expert explained that monetary policy has a significant impact on the economy and financial markets. The creation and cancellation of money affects the money supply and, therefore, inflation. Therefore, it must be handled carefully to avoid errors that could lead to recessions or economic booms: “If you run monetary policy too tight, you get a recession.. If you run monetary policy too loose, you get a boom. “That’s what we face every day when we talk about emerging markets.”
Current and Future Challenges
Woolnough concludes by noting that central banks face significant challenges in managing monetary policy. Write-off is a new phenomenon and its long-term impact is not yet fully understood. According to him, Investors should keep an eye on these developments and consider both inflation and deflation in their strategies.since the degree of monetary cancellation is historically unprecedented and could lead to inflation reaching new lows as money cancellation intensifies.
“The cancellation of money is a new monetary phenomenon. We should start thinking more about deflation than inflation next year“says Woolnough. The manager estimates that To achieve monetary normality by the end of 2024 the US Federal Reserve should be printing money at a rate of 4% – 5%, assuming 2% GDP growth and 2% inflation.
Woolnough’s analysis and views suggest that the flexibility and adaptability of central banks will be crucial to managing inflation and avoiding a severe recession. The relationship between money supply and inflation remains a central issue, and monetary cancellation could play a significant role in shaping the future economic landscape. Additionally, several factors could lead central banks to resume money printing in late 2024, underscoring the complexity and uncertainty of the current economic environment.
: “If we do a rough calculation, the Fed should be printing money in December this year”){kind=link}