Thursday, Feb 19, 2009
Proportion of money backed by debt is falling
FXStreet: UK M4 Money Supply Growth Picks Up, Defies Falling Borrowing
The banks are expanding M4 through lending to each other using BoE as a guarantor intermediary. This lending is not as you imagine, A lends to B. Rather A lends to B, and also B lends to A. Hence the M4 expansion. However, banks are rather unusual because they produce nothing and so their debt expansion does not expand the economy in the way that, for example, I borrow a chicken from you and I give you a box of spuds back, would (encouraging both spud and chicken production). Somewhat sadly, "Borrowing by non-financial corporations is actually falling around 5% on the year,". Or our economy is shrinking, to put it another way. The weird thing about government money-printing-controlled default-led deflation is that the amount of money actually backed by a (continued in comment)
13 Comments
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1. paul said...
Interesting thread on whats happening here with QE, and the fact that no-one - not even the economists asking questions - understand how the bank of england is actually going to do QE.
I left my comments on this topic over there.
2. stillthinking said...
The weird thing about government money-printing-controlled default-led deflation is that the amount of money actually backed by a debt is shrinking. I still have my £10 pounds but the guy who makes lager doesn't owe it. He doesn't need to have it apart from for static taxation purposes.
I think about Japan a lot, and it seems to me that Japan -should- have a massive inflation problem, because the money they have all saved isn't backed up by anybodies debt, apart from their government. Personally, if I had huge savings, and everybody I knew had huge savings, I would be concerned about my ability to spend the money (everybody already has a ton of the stuff). But this hasn't happened...basically if I think that Japan should have inflation, but it doesn't, then my opinion must be wrong, unless Japan inflates in the future. Twenty years of high domestic savings is a long time and there is no inflation in Japan.
Anyway the UK economy is shrinking at 5% according to this, not 2.7%.
3. stillthinking said...
sneaking in mid-comment like that...
4. goweresque said...
Stillthinking: very interesting what you say about Japan, and why they don't have inflation. Could it be down to different national outlooks? Here in the UK we have a spend spend spend philosophy, so any money that people get (by rising asset prices - houses for example) is quickly spent (via MEW in the case of houses). No one builds up a capital base. Is that different in Japan? Are people against debt there? Is it stigmatised in a way not (now anyway) in the UK? We have very lax views here - it used to be socially unacceptable to be bankrupted for example, now everyone knows someone who has done it.
5. 51ck-6-51x said...
I don't think it would make sense for the BoE to release the nominal* details of it's plans as such common foreknowledge would cause problems in the markets. However I do not think making it common knowledge that the securities to be purchased will be gilts would cause any issues. Furthermore I do not see any problem with them informing everyone of the process (which would most likely be direct purchase from banks with central bank accounts which would be fully or partially unfunded purchases).
* By nominal I mean the quantities.
6. stillthinking said...
My view is that because Japan has no social security system, the Japanese are far more concerned about the future, and so they save more. I can understand their inclination to save, but the whole point of savings is that some people have debt, and some people have savings. If everybody has savings, and those savings are not represented in a hard desirable asset of some kind, then how are they savings? The Japanese, to me, seem to be relying on their foreign reserves. When inflation eventually does arrive, they will intervene in the currency markets to support the yen by selling dollars etc. All of the Japanese savings are external, liabilities abroad.
7. stillthinking said...
I read that post Paul, but I couldn't see any comments on it, great article. The reason the UK government is moving ahead with qe now is presumably because gilt coverage at auction has fallen to the extent that they are unsure about the ability to offload the next set. It was 2.2 then 1.4 oversubscribed (from memory) so the next time there won't be enough buyers unless they put up the yield, and even putting up the yield won't work if there is no belief in the ability to repay.
8. mark wadsworth said...
Stillthinking, a large part of the reason that Japan did not have inflation was because their interest rates were so low, people borrowed JPY and converted it to foreign currencies (the 'carry trade'). So the money the BoJ was pumping out was spent in Australia or the USA, which led to the property price bubbles in those countries.
9. Alphabetzoo said...
This is no surprise whatsoever. Steve Keen predicted this - long (but readable) article here.
Plus Martin Wolf tells us why we're copying Japan's bad example. My best friend lives in Japan and says it is scary how little the western media has reported on what has been going on there - they tried to bail out their banks and simply saddled themselves with the lost decade and enormous debt - debt which has forced the government to start dismantling their social safety net. Hospitals are being closed and there is civil unrest growing. That's where we're heading too, unless we follow the imaginative solutions by people like Willem Buiter and his 'good bank' proposal (which will lead to the write-off of all this unpayable debt and the bankruptcy of the shareholders of the banks - the people who really should pay the price, not taxpayers).
10. bellwether said...
ST Japan did have a huge credit bubble before the decade + deflation so isn't it simply that the rebalancing exercise has been so huge that inflation has been impossible? Actually isn't Japan still drowing in debt?
QE would as you have said many times kill the capacity if the UK to sell debt and kill its currency at the same time - it would be at this point a decision to cut itself off from the world. It's not likely to happen but because our lives have been embedded in inflation for 2 generations this is difficult to conceptualise. Flashman was speaking yesterday of hedges which got me wondering if there is such a thing in a hedge in deflation, everthing goes down so there is no counter cyclical action to create the components of a hedge - my point tho is that inflation riddles how we think, an assumption at so many levels.
Have you read the stuff that I think Techieman posted by Pretcher?
11. stillthinking said...
bellwether, curious you mention hedging against deflation, because if the economy shrinks, then all measurements of stored wealth must lose value, so there can't be a hedge. We genuinely do get poorer all round IMO. However, I have no debt and also no savings. So I am immune like a far off farmer.
No I haven't but I will, after finding them of course..
12. bellwether said...
http://www.elliottwave.com/
can download all 60 pages from here. It's really good.
13. hpwatcher said...
Stillthinking, a large part of the reason that Japan did not have inflation was because their interest rates were so low, people borrowed JPY and converted it to foreign currencies (the 'carry trade'). So the money the BoJ was pumping out was spent in Australia or the USA, which led to the property price bubbles in those countries.
They did have a big manufacturing base too....unlike the uk.