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Deflation Vs Inflation.....here's My Arguement To Clear Things Up.

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OK, most people on here seem to be in the inflation camp, whilst the government is waring us of the dangers of dreaded deflation.

We have been seeing a massive default / deleveraging at the consumer and corporate level. This rush to cash has given rise to all of the deflation hype. Maybe broad money supply (M4) which includes all money created by fractional reserve banking system has indeed fallen, I dont have the links to reliable data on this, but thats whats being suggested.

The governmants and central banks have responded by printing (electronic) cash and feeding into the system in terms of loans to banks and corporations. Whils these amounts are eye-wateringly large they probably still dont totally compensate for the broad money supply drop, because the velocity of money has fallen off a cliff....everyone is just sitting on the cash.

Problem comes when it is realised that money has been devalued and folk start to borrow and spend again. When leverage returns (and it will at some point) it will be off a much larger narrow money supply (M2) base. Once fractional reserve banking goes to work on this much larger money base we will see huge growth in broad money supply (and hence price inflation).

In which areas this inflation will manifest itself in terms of price rises is another arguement.

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OK, most people on here seem to be in the inflation camp, whilst the government is waring us of the dangers of dreaded deflation.

We have been seeing a massive default / deleveraging at the consumer and corporate level. This rush to cash has given rise to all of the deflation hype. Maybe broad money supply (M4) which includes all money created by fractional reserve banking system has indeed fallen, I dont have the links to reliable data on this, but thats whats being suggested.

The governmants and central banks have responded by printing (electronic) cash and feeding into the system in terms of loans to banks and corporations. Whils these amounts are eye-wateringly large they probably still dont totally compensate for the broad money supply drop, because the velocity of money has fallen off a cliff....everyone is just sitting on the cash.

Problem comes when it is realised that money has been devalued and folk start to borrow and spend again. When leverage returns (and it will at some point) it will be off a much larger narrow money supply (M2) base. Once fractional reserve banking goes to work on this much larger money base we will see huge growth in broad money supply (and hence price inflation).

In which areas this inflation will manifest itself in terms of price rises is another arguement.

The natural course of events would have been the deleveraging and deflation, but with the effective government guarantees on all deposits, they will have no choice but to print furiously to settle these obligations. It depends on how much other governments print as to how much GBP devalues relative to other currencies, but over the medium term I think we will see high inflation on essentials like food and other imported stuff. Houses will be one of the last things to experience this inflation as they will become expensive to maintain and will be subject to taxes.

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OK, most people on here seem to be in the inflation camp, whilst the government is waring us of the dangers of dreaded deflation.

We have been seeing a massive default / deleveraging at the consumer and corporate level. This rush to cash has given rise to all of the deflation hype. Maybe broad money supply (M4) which includes all money created by fractional reserve banking system has indeed fallen, I dont have the links to reliable data on this, but thats whats being suggested.

The governmants and central banks have responded by printing (electronic) cash and feeding into the system in terms of loans to banks and corporations. Whils these amounts are eye-wateringly large they probably still dont totally compensate for the broad money supply drop, because the velocity of money has fallen off a cliff....everyone is just sitting on the cash.

Problem comes when it is realised that money has been devalued and folk start to borrow and spend again. When leverage returns (and it will at some point) it will be off a much larger narrow money supply (M2) base. Once fractional reserve banking goes to work on this much larger money base we will see huge growth in broad money supply (and hence price inflation).

In which areas this inflation will manifest itself in terms of price rises is another arguement.

Good post ;)

But wont the destruction of bank equity bases through increased loan losses/provisions and the requirement for banks to use less leverage mean their ability to create M4 remains subdued for a decent while yet? (I'm thinking medium term, 2 years)

Apologies if I have said somehting stupid or got my terminology wrong - my economics is pretty basic :(

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You can't predict inflation or deflation 100% because it depends on the emotional reactions of the bankers/governments i.e. will they be brave/reckless/desperate enough to flood the system with liquidity? If so, it's hyperinflation. If not, then the natural course is deflation.

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Good post ;)

But wont the destruction of bank equity bases through increased loan losses/provisions and the requirement for banks to use less leverage mean their ability to create M4 remains subdued for a decent while yet? (I'm thinking medium term, 2 years)

Apologies if I have said somehting stupid or got my terminology wrong - my economics is pretty basic :(

I agree, for the time being QE is filling a hole left in banks balance sheets....maybe not UK banks, but thats another story.

The problem comes later when, if, they BoE decides they have done enough overprinting and want to suck it all back.

the very same balance sheets are going to become less liquid, obviously.....so I cant really see holders of QE assets wanting to pass the cash back very easily.

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I agree, for the time being QE is filling a hole left in banks balance sheets....maybe not UK banks, but thats another story.

The problem comes later when, if, they BoE decides they have done enough overprinting and want to suck it all back.

the very same balance sheets are going to become less liquid, obviously.....so I cant really see holders of QE assets wanting to pass the cash back very easily.

Now we get to the interesting bit for me ;)

How do they suck it back in (I think I mean "how do they reduce M2?"?

Im sorry if Im a bit thick :(

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Now we get to the interesting bit for me ;)

How do they suck it back in (I think I mean "how do they reduce M2?"?

Im sorry if Im a bit thick :(

In a bit thick on this question as well, im afraid.

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Now we get to the interesting bit for me ;)

How do they suck it back in (I think I mean "how do they reduce M2?"?

Im sorry if Im a bit thick :(

They sell the bonds back onto the market and burn the money (in theory).

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Does that mean its a good question?

(Btw, seeking information not praise)

Its a question raised here every time the QE is discussed it seems.

I dont know.....

BoE....hey Mr Bank, you know that gilt you sold me last year,, you know the one with QE, well, now I want you to buy it back please? ( this from the BoE Brochure issued in the last few days, although I have imagined the conversation, obviously)

Mr Bank... Oh Hi Merv, Im busy right now, can I get back to you on that?

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Its a question raised here every time the QE is discussed it seems.

I dont know.....

BoE....hey Mr Bank, you know that gilt you sold me last year,, you know the one with QE, well, now I want you to buy it back please? ( this from the BoE Brochure issued in the last few days, although I have imagined the conversation, obviously)

Mr Bank... Oh Hi Merv, Im busy right now, can I get back to you on that?

Okay (sound of brain working) :blink:

If they buy the gilt back with short term BoE paper M2 is unchanged?

Maybe they buy it back with the assets they bought off the commercial bank previously under the asset guarantee scheme?

So M2 has gone down?

Is that how it works?

Can't see the commercial banks going for that in a hurry agreed ;)

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I agree, for the time being QE is filling a hole left in banks balance sheets....maybe not UK banks, but thats another story.

The problem comes later when, if, they BoE decides they have done enough overprinting and want to suck it all back.

the very same balance sheets are going to become less liquid, obviously.....so I cant really see holders of QE assets wanting to pass the cash back very easily.

Depends what the assets they sold originally are now worth... If they have achieved inflation the debts might now be payable again and they will take them back. It's all a question of "confidence" the banks will start lending again (they have little choice) and people will get the credit they desire.

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Now we get to the interesting bit for me ;)

How do they suck it back in (I think I mean "how do they reduce M2?"?

Im sorry if Im a bit thick :(

there is a film on youtube that explains this called "money as debt 2 promises unleashed". The film is in 8 parts on youtube, lasts about 80 mins but is well worth it and explains a vast amount.

http://www.youtube.com/watch?v=cUou51iI4vw...feature=related

Edited by richyc

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Okay (sound of brain working) :blink:

If they buy the gilt back with short term BoE paper M2 is unchanged?

Maybe they buy it back with the assets they bought off the commercial bank previously under the asset guarantee scheme?

So M2 has gone down?

Is that how it works?

Can't see the commercial banks going for that in a hurry agreed ;)

I dont know....the BoE and the FED for that matter have these "assets" on their books, Gilts and other things no doubt, but Ill just talk about Gilts.

they paid for them with new cash, cold hard BoE promissory notes (electronic of course)

so they now have cash out there as a liability, which came from nowhere. (not sure how you double entry that)

so the theory is that the cash comes back when a bank purchases a BoE owned gilt and the money is destroyed.

as you say, I cant see investors going for it unless there is a sweetener in the package....yet more cost for the taxpayer.

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OK, most people on here seem to be in the inflation camp, whilst the government is waring us of the dangers of dreaded deflation.

We have been seeing a massive default / deleveraging at the consumer and corporate level. This rush to cash has given rise to all of the deflation hype. Maybe broad money supply (M4) which includes all money created by fractional reserve banking system has indeed fallen, I dont have the links to reliable data on this, but thats whats being suggested.

The governmants and central banks have responded by printing (electronic) cash and feeding into the system in terms of loans to banks and corporations. Whils these amounts are eye-wateringly large they probably still dont totally compensate for the broad money supply drop, because the velocity of money has fallen off a cliff....everyone is just sitting on the cash.

Problem comes when it is realised that money has been devalued and folk start to borrow and spend again. When leverage returns (and it will at some point) it will be off a much larger narrow money supply (M2) base. Once fractional reserve banking goes to work on this much larger money base we will see huge growth in broad money supply (and hence price inflation).

In which areas this inflation will manifest itself in terms of price rises is another arguement.

It never ceases to amaze me, how many people can't spell - argument.

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It never ceases to amaze me, how many people can't spell - argument.

Mistakes are often made in grammar and punctuation also. Nevermind eh.

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Good post ;)

But wont the destruction of bank equity bases through increased loan losses/provisions and the requirement for banks to use less leverage mean their ability to create M4 remains subdued for a decent while yet? (I'm thinking medium term, 2 years)

Apologies if I have said somehting stupid or got my terminology wrong - my economics is pretty basic :(

You seem pretty switched on to me, as your view is the same as mine. The Bank of England would not have printed all that money if they were not certain there have been a number of changes that means leverage will remain low.

I am not expecting a monetary explosion any time soon.

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You seem pretty switched on to me, as your view is the same as mine. The Bank of England would not have printed all that money if they were not certain there have been a number of changes that means leverage will remain low.

I am not expecting a monetary explosion any time soon.

thats not what the brochure says....they EXPECT leverage to occur on the back of rising asset values.

or maybe they are lying.

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I'm not sure many people here understand what you mean by M2, to be fair. Sadly, this is probably the wrong place for a proper discussion. Let me know if you find a better one. :(

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I'm not sure many people here understand what you mean by M2, to be fair. Sadly, this is probably the wrong place for a proper discussion. Let me know if you find a better one. :(

perhaps you could enlighten?

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I dont know....the BoE and the FED for that matter have these "assets" on their books, Gilts and other things no doubt, but Ill just talk about Gilts.

they paid for them with new cash, cold hard BoE promissory notes (electronic of course)

so they now have cash out there as a liability, which came from nowhere. (not sure how you double entry that)

so the theory is that the cash comes back when a bank purchases a BoE owned gilt and the money is destroyed.

as you say, I cant see investors going for it unless there is a sweetener in the package....yet more cost for the taxpayer.

This is the bit I don't get again because of no disciplined study or economics :(

So you are saying if they purchase it with funds coming from, say, customer deposits, then M2 is diminished?

(Charterhouse I admit my grasp of what M2 actually is tenuous, but I think I understand what the "money multiplier" effect is... maybe) ;)

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This is the bit I don't get again because of no disciplined study or economics :(

So you are saying if they purchase it with funds coming from, say, customer deposits, then M2 is diminished?

(Charterhouse I admit my grasp of what M2 actually is tenuous, but I think I understand what the "money multiplier" effect is... maybe) ;)

then watch the film ;) you will understand more than if you spent days on forums.

http://www.youtube.com/watch?v=cUou51iI4vw...feature=related

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This is the bit I don't get again because of no disciplined study or economics :(

So you are saying if they purchase it with funds coming from, say, customer deposits, then M2 is diminished?

(Charterhouse I admit my grasp of what M2 actually is tenuous, but I think I understand what the "money multiplier" effect is... maybe) ;)

I dont think bank credit can be used to settle this purchase, nor any other. It would have to be funds in central bank credit.

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