There is something rather unusual going on with the Pound Sterling's M2 Money Supply, which seem to have had little attention.
It is very clear to all that the UK government is creating a fiscal mess.
Between April through June 2025, borrowing stood at £60 billion, which was £6.7 billion higher than the same period in 2024/25.
It’s not the best look, yet despite this excess borrowing the GBP M2 money supply has remained consistently flat (too flat…)
Normally, this level of borrowing would expand the M2, but the fact it hasn’t suggests the government isn’t tapping the Bank of England for direct money creation. Instead, someone is buying this debt outright.
"New money is always created through credit…but not all credit requires money printing."
As the latter part of this statement suggests, there must be a genuine buyer…
Now this could be perfect timing, and relate to reallocations from sovereign wealth funds who are moving out of US bonds and over to the UK gilts. Or there is internal demand from UK citizens due to the 10 year sitting near to 4.8%.
Either or, its striking that the debt requirements equally match demand, leaving the M2 flat. In turn, giving Labour the leg room to avoid further inflation.
Is this really genuine demand? Or is something more concerning going on here?
A Fidelity fund manager stated a month ago after buying gilts - “We simply didn’t think that the Labour party could or would risk a completely avoidable gilt market implosion"
It feels as though hedge funds have been given the quiet assurance, that their capital will be backstopped by the government, so they can view this trade as “risk free”.
We’ve seen this before many times over, and its never the hedge funds that take the hit.
While inflation may ease in the short term, the debt still exists and will need to be repaid eventually.
Another brilliant example of short-termism where you "kick the can down the road" for the next political party to handle.
The real question is: how long can M2 stay flat before the dam finally bursts?
