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frugalista

Question About Inflation

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It has often been mentioned on this website that one way the house price boom endgame might play out is that the BoE will increase the money supply, and inflate the economy, rescuing debtors.

BUT -- it seems to me they can ONLY do this IF commercial banks want to lend money (be it to the government, private individuals, companies or whatever).

If banks do not want to lend, for whatever reason, then the BoE has no mechanism to get the new money out into the economy.

Correct?

If this is correct, what are the conditions under which banks might stop wanting to lend money?

Also, what would the implication of the scenario be? Deflation?

frugalista

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If this is correct, what are the conditions under which banks might stop wanting to lend money?

If they perceive the risks to be too high. Lending should be according to a business model that is implemented by underwriters. When bad debt is not a problem they see risks as lower and lend more.

Basically, what I'm trying to say is that when IRs are on a downtrend, it's win-win for the lender and they get competetive and lend more and more. On the uptrend in IRs that goes into reverse.

It's not all about low interest rates, but also about the perceived trend. Once IRs have been stable for a while equities readjust and we're back to square one.

Edited by karhu

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May I suggest reading the Grip of Death for an insight into what a mad, world financial system we live under.

Basically, the situation is that besides notes and coins which make up 3% of the money supply all money is created through debt.

Now the catch is that in order to finance interest payments the money supply must increase or else the total debt bill cannot be met. This means that debt must increase as that is how money is created.

If the banks stop lending or bank customers stop borrowing we get a recession, if it gets really bad we get a deflationary depression.

I don't think there is much to stop banks lending save for finding customers who might pay them back - they create the money out of thin air after all.

At least that is the theory, I think.

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It has often been mentioned on this website that one way the house price boom endgame might play out is that the BoE will increase the money supply, and inflate the economy, rescuing debtors.

BUT -- it seems to me they can ONLY do this IF commercial banks want to lend money (be it to the government, private individuals, companies or whatever).

If banks do not want to lend, for whatever reason, then the BoE has no mechanism to get the new money out into the economy.

Correct?

If this is correct, what are the conditions under which banks might stop wanting to lend money?

Also, what would the implication of the scenario be? Deflation?

frugalista

The Chancellor has set the MPC a CPI target of 2%. In the event of exceptrional economic necessity, he can officially raise this target.

But imagine the political damage it would do the government, to have to do this.

Edited by Casual Observer

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The Chancellor has set the MPC a CPI target of 2%. In the event of exceptrional economic necessity, he can officially raise this target.

But imagine the political damage it would do the government, to have to do this.

So instead he modifies how the CPI is calculated.

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The Chancellor has set the MPC a CPI target of 2%. In the event of exceptrional economic necessity, he can officially raise this target.

But imagine the political damage it would do the government, to have to do this.

Okay, so gordon raises the inflation target to 3% say.

The BoE looks at this and says, right, inflation target 3%, let's slash interest rates.

But, if no banks want to borrow money (via repos) even at the slashed rate, then no new money is going out into the economy, so no inflation.

frugalista

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  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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