A Worldwide Credit Crunch May Be Flashing A Red Alert

The Federal Reserve's latest easing came in response to fears stirred by stagnant money growth in the context of a sluggish recovery. But as economist Bluford Putnam of London's Kleinwort Benson Securities Ltd. notes in a recent analysis, depressed monetary growth is more than a U.S. phenomenon. "Money stock around the world," he says, "is growing at an historically slow pace, suggesting to monetarists a severe danger of world recession unfolding in the coming 12 months."

This slowdown is apparent both in the narrow definitions of money, which focus on cash and checking accounts, and in broader measures, which include savings accounts and other less liquid money-market instruments. And it affects such industrial nations as Japan, Britain, France, Switzerland, Canada, Australia, and New Zealand, as well as the U.S.

Just how worrisome is the money slump? Putnam notes that predictable links between money growth and such variables as inflation and economic activity seemed to break down in the 1980s, allowing many central banks to ignore their own targets. A major cause of this breakdown, he says, was the deregulation of world banking systems, which changed the nature of monetary measures in unpredictable ways.

But now money growth is receiving renewed attention. For one thing, global bank deregulation has now largely ended, suggesting that new stable relationships between the monetary aggregates and inflation and economic activity may be developing. For another, tight monetary policies have had a strong impact in countries such as Britain, Australia, New Zealand, and Canada--producing severe recessions while making significant strides in quelling inflation.

Such progress on the inflation front is welcome. But the big question is whether monetary authorities are yet aware of the degree of monetary stimulus needed to assure future economic expansion.

Putnam notes that U.S. banks weren't the only institutions hurt by the debt excesses of the 1980s. And they aren't alone in adopting new conservative lending policies to bolster their credit standings. In his view, the continuing slow growth of the broad monetary measures around the world reflects the retrenchment of national banking systems, which is tending to restrain credit expansion and undermine economic growth.

In sum, the bank credit crunch may be a global phenomenon, and it may require aggressive easing by foreign monetary authorities, as well as the Fed, to avert a continuing world economic slowdown. To central banks, says Putnam, the sluggish behavior of the broad money supply "should be an especially loud warning."

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