Economists have long debated the effect of money printing and money supply on prices levels. A directly related topic that gains less attention is the relationship between growth in the supply of money and equity market appreciation. This is somewhat peculiar given that the “printing money” effect on the world’s equities is more relevant right now.

In order to show the connection, there are three sections here. The first inspects the growth in the global money supply by country since 2007. The second section addresses the performance of equity prices by country since 2007. The third section connects the two.

As a spoiler, a simple regression connection between the two comes out at 0.26. The 0.26 connection means that a 1 percent increase in a given country’s money supply is, at the mean, correlated with a 0.26 percent increase in stock prices. So, a quarter of a country’s money supply growth shows up in increased stock prices.

Money Printing – Money Supply Growth since 2007

Here’s a look at how quickly the supply of money has grown since 2007 by country. As a technical note, the supply of money is represented by M2. M2 comprises currency in circulation and bank vaults, bank reserves, traveler’s checks, demand deposits, checkable deposits, savings deposits, and time deposits.

Overall, the country with the largest increase in their money supply is Venezeula at 867 percent. Following Venezeula’s lead are Azerbaijan (755 percent), Ghana (583 percent), Mongolia (558 percent), Bolivia (455 percent), Iraq (377 percent), and Argentina (354 percent).

On the other end, the country with the lowest increase in the supply of money is Portugal at 2.2 percent. Portugal is followed by Ireland at 2.9 percent, Greece at 4.1 percent, Luxembourg at 13.7 percent, and El Salvador at 16.8 percent.

(As a note, a country’s money supply can increase even if they don’t control their money policy, as is the case in EU member states, because money supply encompasses loan growth and other banking variables.)

money supply Money Printing
Money Printing

Growth in Stock Prices

The second component is the growth in stock prices since 2007.

Here’s that look.

(An important note to keep in mind is that all numbers are in local currency.)

The country where stocks appreciated the most (again, as a reminder, in local currency) is Iran at 670 percent. On the other end, the worst performing equity market since 2007 is Botswana at -98 percent.

The following table contains the results for all the country’s included in the sample.

equity market appreciation by country Money Printing
Money Printing

Connecting Money Printing with Stock Prices

The scatterplot graphic contains the connection between the two.

Is there a relationship?

The simple answer is yes, there certainly is.

How big of a relationship?

On the average, the positive regression line between the two comes out at 0.26, meaning that a 1 percent increase in the money supply equates to a 0.26 percent increase in stock prices.

money supply growth and equity markets Money Printing
Money Printing

Money Printing – Conclusion

Overall, in connecting the enormous increase in money since 2007 with stock prices by country, the connection comes to 0.26, meaning a 1 percent increase in money is associated with a 0.26 percent increase in stock prices (at the mean, presuming linear).

Although a linear model may not be the most desirable, and acknowledging that many other factors affect stock prices, it’s hard to ignore the connection between money supply growth and equity markets. Certainly, if central banks ever get serious about their money printing, stock prices will no doubt feel some effect.