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City Am: Bubblenomics Will Fuel Demand And Inflation

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http://www.cityam.com/article/bubblenomics-will-fuel-total-demand-british-economy#sthash.IWZ0eGXO.uxfs

One way of assessing this is to look at the supply and velocity of money. Simon Ward of Henderson believes that the adjusted broad money supply is up by 5.2 per cent on a six-month annualised measure. Given that the speed at which money is changing hands may also have risen because it is so costly to hold cash, demand is now probably growing at a rate which will eventually trigger inflation or greater bubbles and requires a tighter, not a looser, monetary policy.

The UK economy is unbalanced in many ways, many people are in deep sh!t, but many benefited from record low interest rates. And a lot of people and companies are siting on a lot of savings. If these people start to spend more, measurable by this "Velocity" of money circulating around, then it's like having more money printed, suddenly, and out of the control of the BoE. The only solution then will be to increase IRs, to "dry" this excess of "liquidity". In short: Human "spirits", or confidence, improves, people start to spend more, the economy (appears to) "recover", general mood improves even more, V keeps increasing and triggers prices inflation.

Edited by Tired of Waiting

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http://www.cityam.co...h.IWZ0eGXO.uxfs

The UK economy is unbalanced in many ways, many people are in deep sh!t, but many benefited from record low interest rates. And a lot of people and companies are siting on a lot of savings. If these people start to spend more, measurable by this "Velocity" of money circulating around, then it's like having more money printed, suddenly, and out of the control of the BoE. The only solution then is to increase IRs, to "dry" this excess of "liquidity". In short: Human "spirits", or confidence, improves, people start to spend more, the economy (appears to) "recover", general mood improves even more, V keeps increasing and triggers prices inflation.

You don't think selling £375bn of gilts back into the market might have an impact on liquidity?

Quite apart from the rising pound in your scenario and the fact that one of the main drivers of inflation currently has been fiscally administered prices. i.e. Osborne. They've been desperately trying to create velocity and inflation after all.

This is the classic mistake made in 1938 and in Japan. Why argue for a repeat of that? Doesn't make sense at all.

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Demand and inflation is all there is now. We're involved in a massive experiment here to keep us held down in one place that will be followed around the world when people get fed up with rebelling.

Life should be about having new experiences, meeting new people, discovering new places etc it shouldn't be about amassing assets, paying debts and the resultant stress.

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You don't think selling £375bn of gilts back into the market might have an impact on liquidity?

Quite apart from the rising pound in your scenario and the fact that one of the main drivers of inflation currently has been fiscally administered prices. i.e. Osborne. They've been desperately trying to create velocity and inflation after all.

This is the classic mistake made in 1938 and in Japan. Why argue for a repeat of that? Doesn't make sense at all.

Of course they have been trying to create some inflation, with QE. And I think they are happy with the current levels. But they had to pump a lot of cash into the system to get to this level of inflation, as V fell after the crisis. But my point above is that the BoE can't control V as well as their printers. V is influenced by how people "feel". And if V goes back up, inflation goes up, above desirable levels, even without newly printed cash. The BoE can't control that, V, and will then be forced to push IRs quite high.

.

Edited by Tired of Waiting

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Of course they have been trying to create some inflation, with QE. And I think they are happy with the current levels. But they had to pump a lot of cash into the system to get to this level of inflation, as V fell after the crisis. But my point above is that the BoE can't control V as well as their printers. V is influenced by how people "feel". And if V goes back up, inflation goes up, even without newly printed cash.

.

It doesn't matter how they feel if they can't get a mortgage or if they're already maxed out. Carney alluded to the fact that household indebtedness has fallen 20 points from its peak. So clearly they're very conscious of this.

Obviously there are different views on the output gap, but there appears to be some way to go before wage rises start to have a significant impact on inflation. Govt still have massive cuts planned and are obsessed with the supply side.

Hopefully at some point real wages will start to rise and they'll be able to stop offsetting falling 'V' with an increase in the Bank's b/sheet.

If you followed what Carney said that's probably 2-3 years off AT LEAST, and I'd suggest we're then going to run slap bang into the next recession (on historical average).

We may see rates rise suddenly to 4 or 5% again, but I'd be very surprised. I doubt they'll get much higher than 2%. In any event there's plentry of scope for the banks to narrow their lending spread so I doubt even if they eventually did raise the policy rate it's going to have much impact on borrowing rates.

This could well be generational - at least until the boomers are mostly dead - and/or we have a new global monetary system.

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You don't think selling £375bn of gilts back into the market might have an impact on liquidity?

I don't think anyone seriously believes that QE will be unwound.

There is a massive, ongoing, structural deficit that shows no real sign of being meaningfully addressed. Attempting to sell the hundreds of billions of pounds worth of existing QE-ed Gilts into the market as well as the >100 billion quids worth needed to fund the deficit (which up until now have mostly ended up owned by the BoE) would send bond yields soaring and interest rates would shoot up accordingly.

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It doesn't matter how they feel if they can't get a mortgage or if they're already maxed out. Carney alluded to the fact that household indebtedness has fallen 20 points from its peak. So clearly they're very conscious of this.

That is why I wrote in my OP: "The UK economy is unbalanced in many ways, many people are in deep sh!t, but many benefited from record low interest rates. And a lot of people and companies are sitting on a lot of savings. If these people start to spend more (...)"

Obviously there are different views on the output gap, but there appears to be some way to go before wage rises start to have a significant impact on inflation. Govt still have massive cuts planned and are obsessed with the supply side.

Hopefully at some point real wages will start to rise and they'll be able to stop offsetting falling 'V' with an increase in the Bank's b/sheet.

If you followed what Carney said that's probably 2-3 years off AT LEAST, and I'd suggest we're then going to run slap bang into the next recession (on historical average).

We may see rates rise suddenly to 4 or 5% again, but I'd be very surprised. I doubt they'll get much higher than 2%. In any event there's plentry of scope for the banks to narrow their lending spread so I doubt even if they eventually did raise the policy rate it's going to have much impact on borrowing rates.

This could well be generational - at least until the boomers are mostly dead - and/or we have a new global monetary system.

Sure, that scenario was within my forecasts as well. What surprised me in that City AM's article was that "broad money supply is up by 5.2% on a six-month annualised measure". This is much higher than I had thought, and if this continues it will push inflation higher, well above the 2.5% limit Carney set up Wednesday.

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That is why I wrote in my OP: "The UK economy is unbalanced in many ways, many people are in deep sh!t, but many benefited from record low interest rates. And a lot of people and companies are sitting on a lot of savings. If these people start to spend more (...)"

Sure, that scenario was within my forecasts as well. What surprised me in that City AM's article was that "broad money supply is up by 5.2% on a six-month annualised measure". This is much higher than I had thought, and if this continues it will push inflation higher, well above the 2.5% limit Carney set up Wednesday.

But UK CPI is already 2.9%!

And QE is supposed to be noninflationary, which is nonsense. Its inflationary effects are manifest first in financial assets, then in commodities, and last of all in consumer prices.

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I don't think anyone seriously believes that QE will be unwound.

There is a massive, ongoing, structural deficit that shows no real sign of being meaningfully addressed. Attempting to sell the hundreds of billions of pounds worth of existing QE-ed Gilts into the market as well as the >100 billion quids worth needed to fund the deficit (which up until now have mostly ended up owned by the BoE) would send bond yields soaring and interest rates would shoot up accordingly.

Oh I see! I had totally misread RK's "You don't think selling £375bn of gilts back into the market might have an impact on liquidity?"

I thought he was just talking about QE.

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You don't think selling £375bn of gilts back into the market might have an impact on liquidity?

Quite apart from the rising pound in your scenario and the fact that one of the main drivers of inflation currently has been fiscally administered prices. i.e. Osborne. They've been desperately trying to create velocity and inflation after all.

This is the classic mistake made in 1938 and in Japan. Why argue for a repeat of that? Doesn't make sense at all.

Sorry, I had misread your post before. Trying again:

Exactly! Trying to reverse or even just stop QE would be disastrous for the government's accounts, as interest costs would go through the roof!

But not doing it would allow a inflationary spiral, which would be even more disastrous, and for the whole country.

Rock and hard place.

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If you followed what Carney said that's probably 2-3 years off AT LEAST, and I'd suggest we're then going to run slap bang into the next recession (on historical average).

He also said take what I say with a pinch of salt. He's guessing like everyone else but feels if he talks in a manner that comes across like he knows what he's talking about people will listen and fall for it.

Edited by interestrateripoff

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But UK CPI is already 2.9%!

I know, it's all bonkers, that's why Carney used those weasel words re. BoE projections for 18-24 months being above 2.5%. But it'll be interesting to see what happens when CPI goes above 3% (any moment now), re. Carney's credibility.

And QE is supposed to be noninflationary, which is nonsense. Its inflationary effects are manifest first in financial assets, then in commodities, and last of all in consumer prices.

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What actually happens is only relevant if it forces their hands. Otherwise low rates will stay.

They've borrowed and spent the thick end of a trillion quid in five years keeping prices up and rates down. Do our creditors have the means to let them repeat the exercise?

No.

The market determines the cost of money. Not Carney, not Bernanke, not Kuroda. Their hand is going to be forced.

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They've borrowed and spent the thick end of a trillion quid in five years keeping prices up and rates down. Do our creditors have the means to let them repeat the exercise?

No.

The market determines the cost of money. Not Carney, not Bernanke, not Kuroda. Their hand is going to be forced.

That argument fails the logic test.

If the market (our creditors) determined the cost of money, then their hand would have been forced in the last 5 years would it not?

What are our creditors and/or 'bond vigilantes' waiting for?

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I know, it's all bonkers, that's why Carney used those weasel words re. BoE projections for 18-24 months being above 2.5%. But it'll be interesting to see what happens when CPI goes above 3% (any moment now), re. Carney's credibility.

With the talk of forward guidance however (i.e. the BOE might increase interest rates if unemployment falls below 7%) , inflation is no longer the only measure by which the BOE will consider raising interest rates.

This is all taking a very nasty turn and the "one off", "exceptional" (as described at the time) actions taken in 2008 are now seen, by policy makers (and to some extent the general public), after adjusting their measures to remove conflicting information and therefore satisfy their bias, as normal, even healthy.

The result being that we are entering into a tightening spiral of extreme monetary and fiscal policy, that begets ever more extreme monetary and fiscal policy, on an ever shortening scale of time.

I think in the next few years there will be growth above that of the last 3 years but inflation will be higher, and the politicians will crow loudly about what a success it all is, even though in reality the purchasing power of many will continue to decline.

Despite this, interest rates will remain at 0%, and the BOE might engage in a little more QE at the slightest sign of a wobble.

There will be another downturn, preceeded by a crisis, within another 5 years (given that the credit cycle operates over a 7-10 year period), and that's when I believe the policy response will become very dangerous, because QE will have long (for almost 10 years) been seen as a benign saviour ("remember the doomsays back in 2009 " they will say, "it didn't cause inflation back then, and it saved our economy").

Edited by GradualCringe

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I know, it's all bonkers, that's why Carney used those weasel words re. BoE projections for 18-24 months being above 2.5%. But it'll be interesting to see what happens when CPI goes above 3% (any moment now), re. Carney's credibility.

What credibility?

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That argument fails the logic test.

If the market (our creditors) determined the cost of money, then their hand would have been forced in the last 5 years would it not?

What are our creditors and/or 'bond vigilantes' waiting for?

They think they're making a nice, guaranteed return (they know the BOE will buy bonds at the slightest hint of trouble) in a risky environment.

If the BOE carry on, I can assure you, the BOE will end up being the monopoly buyer of gilts.

This whole argument is getting quite boring, learning even a little history shows that monetary fraud will not solve the problems caused by economic misallocation. Worse still, every time it is attempted, those doing so, seem to think that their circumstances uniquely allow them to make a success of it.

The pro loose fiscal and monetary policy brigade bring up the same points time after time:

- "Where are the bond vigilantes?" (it's a market rigged by money printing),

- "Why are yields so low?" (it's a market rigged by money printing),

- "There has been no inflation" (Yes there has, there was enough money printing to reverse the deflation seen in 2008, and flow massively into assets),

- "If everyone prints money our currency will be fine" (no, given enough money printing, inflation will happen to everyone).

This sort of thinking is so dangerous because it means they won't stop until we are all ruined.

Edited by GradualCringe

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But UK CPI is already 2.9%!

And QE is supposed to be noninflationary, which is nonsense. Its inflationary effects are manifest first in financial assets, then in commodities, and last of all in consumer prices.

But what matters is wage inflation. Only wage inflation can reduce the real value of debts, so until wage inflation kicks in there will be a dangerous dance with price inflation, the hope being that it will not become too hot. And the policy allows 'get outs' so that extreme price inflation would allow a change of course.

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But what matters is wage inflation. Only wage inflation can reduce the real value of debts, so until wage inflation kicks in there will be a dangerous dance with price inflation, the hope being that it will not become too hot. And the policy allows 'get outs' so that extreme price inflation would allow a change of course.

The BOE have absolutely no control over where prices will increase, in response to QE. None at all. There is no dance, just print, because it's the only thing they can do, and lie to themselves.

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If the BOE carry on, I can assure you, the BOE will end up being the monopoly buyer of gilts.

With the pension funds being legally obliged to buy gilts, I wonder how far we are from a market where the majority of buyers are there by force.

learning even a little history shows that monetary fraud will not solve the problems caused by economic misallocation. Worse still, every time it is attempted, those doing so, seem to think that their circumstances uniquely allow them to make a success of it.

I'm still busy converting my increasingly worthless £ into real stuff (building materials, useful and not very nickable)

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The pro loose fiscal and monetary policy brigade bring up the same points time after time:

- "Where are the bond vigilantes?" (it's a market rigged by money printing),

- "Why are yields so low?" (it's a market rigged by money printing),

- "There has been no inflation" (Yes there has, there was enough money printing to reverse the deflation seen in 2008, and flow massively into assets),

- "If everyone prints money our currency will be fine" (no, given enough money printing, inflation will happen to everyone).

This sort of thinking is so dangerous because it means they won't stop until we are all ruined.

Where the bond vigilantes? The Greek govt was asking the same thing in the Autumn of 2009 with bond yields near an all-time low.

Six months later it was bankrupt. :lol:

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Where the bond vigilantes? The Greek govt was asking the same thing in the Autumn of 2009 with bond yields near an all-time low.

Six months later it was bankrupt. :lol:

+ 1

When it goes, it goes quick.

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