Together with the parallel deceleration in loan growth, this points to a lower pace of underlying monetary dynamics and thus moderate inflationary pressures. However, in times of financial turmoil and economic uncertainties, the behaviour of money holders, borrowers and lenders may give rise to sudden changes in money and credit dynamics, and the backward-looking nature of annual growth rates may then not immediately provide a reliable signal for current dynamics. Looking forward, a complementary perspective, however, would focus less on the analysis of growth rates and more on the level of excess money accumulated in the past. The level of excess monetary liquidity that may have built up during a boom phase can be reabsorbed through a de-leveraging process. More precisely, over the medium term, the deceleration in the pace of money growth may lead to a direct unwinding of accumulated monetary liquidity (i.e. via de-leveraging in a number of sectors of the economy), thereby dampening price pressures. However, a protracted destruction of monetary liquidity would most likely have adverse effects on the real economy and increase the risk of deflation. On the other hand, if the excess monetary liquidity is not reabsorbed via de-leveraging, then the existing liquidity accumulation of recent years would still be available once the economy improves and may then lead to spending and inflationary pressures over the medium to longer term. Another useful monetary indicator is provided by the growth rates of M1.
Allow me to recapitulate the consequences in a few words: various banks, stock brokerage firms and securities houses lost part or even all of their staff, their business premises, their backup facilities and their lines of communication. The markets remained closed on the following day, the equity markets even until the end of the week. From a systemic point of view, of even greater consequence than the closing of the equity market was the fact that the two markets for US government paper and for commercial paper, the main vehicles for short-term liquidity equalisation between market participants, had ceased to operate. Payment and settlement systems started to break down. Securities and credit balances totalling billions were thus blocked at some banks while lacking at others. Even though the terror attacks were concentrated on New York and Washington, in the beginning they not only paralysed Wall Street but they also threatened to undermine significant parts of the international financial system. It is much too soon, and this is not the proper place, to make an assessment of the profound human, social and political implications of the terror attacks. The resilience of the banks and the financial markets must be emphasised, however. A week after the attacks, business was almost back to usual again. In most cases, the banks and securities houses affected managed to solve their problems, some of which were immense. Neither a stock market crash nor a breakdown of parts of the financial system set in either in the United States or anywhere else.