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marko

M4

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The tightening cycle that was predicted on here some time ago has finally started up with IR rises across the planet from central banks. Regardless of whether you think central banks are a bad or a good idea (I think they are a spectacularly bad thing), the effect of increasing the cost of money should be precipitating two important things:

1) The cost of servicing existing debt becomes more onerous. Therefore the rate of repayment of principal to the banks should increase as people try to get out of debt.

2) People are (finally) discouraged from new borrowing.

The effect of 1) should be to increase the rate at which money is retired from the economy, back to the computer chips from whence it came. The effect of 2) should be to reduce the rate at which new money (i.e. new borrowing) is entering the economy.

Therefore at some point I would expect the amount of broad money (M4) in the economy to start decreasing, as these two factors come fully into play. However, checking on the BoE website this morning M4 is growing merrily as it has for the past two years.

http://www.bankofengland.co.uk/statistics/...rrent/index.htm

Does anyone have any thoughts on whether the broad money supply WILL decrease at some point in the near future? If it does not, then I would presume that some decrease in expansion should be enough to precipitate a recession/housing crash. What is this level? How is it determined?

At what (IR) point will the debt-addled masses have had enough of making bankers rich?!!?

Edited by marko

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From Above.

"The effect of 1) should be to increase the rate at which money is retired from the economy, back to the computer chips from whence it came." :lol::lol:

The banks will sink the money supply no problem - the problem is there ismore debt than real money to pay it. Someones not gona get paid. The fight for it is going to be ferocious and bloody untill we put a stop to this lunacy.

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From Above.

"The effect of 1) should be to increase the rate at which money is retired from the economy, back to the computer chips from whence it came." :lol::lol:

The banks will sink the money supply no problem - the problem is there ismore debt than real money to pay it. Someones not gona get paid. The fight for it is going to be ferocious and bloody untill we put a stop to this lunacy.

I completely agree. Given that most of the money in the economy is issued as debt, at some point in the future it has to be paid back (with interest!) - there is not enough real money in the economy.

Hypothetically, as the amount of money supply in the economy shrivels, we will have the ugly situation where debtors are increasingly desperate to retire their debts first with the money that is left (to some extent this is the permanent situation in the economy anyway - debt is required to introduce money into the economy, so someone has to go into debt, but we would all rather it was someone else of course).

However, M4 is still climbing - as long as people are prepared to shoulder more and more debt, thereby pumping more money into the economy, then the merry-go-round of insanity continues. I suppose the ideal situation for the banks is people just making minimum repayments, IO etc., at which point the whole system is IDENTICAL to serfdom, albeit concealed.

I want to know at what point enough is enough. Will we see M4 decrease ever?

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Another aspect of this situation is that we will not be able to pull out of a recession. As new liquidity appears in the market place it will be absorbed as debt servicing. Debt servicing creates no wealth because it is non productive.

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Surely the biggest problem would be for everyone with REAL money saved in a bank to all withdraw those savings?

If the banks’ reserves are as low as 3 - 15% (depending on which source you look at) then it would not take very long before big problems occurred.

Perhaps this is a tactic we could try?

There seem to be a lot of people on this forum with savings (just waiting to see what will happen in the housing market).

Potentially it would only take one e-mail to create a run on the banks. (Something along the same lines as the now infamous Paris / Hilton one!)

Perhaps I will look into this, I haven't got much to do this afternoon!

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Surely the biggest problem would be for everyone with REAL money saved in a bank to all withdraw those savings?

If the banks’ reserves are as low as 3 - 15% (depending on which source you look at) then it would not take very long before big problems occurred.

Perhaps this is a tactic we could try?

There seem to be a lot of people on this forum with savings (just waiting to see what will happen in the housing market).

Potentially it would only take one e-mail to create a run on the banks. (Something along the same lines as the now infamous Paris / Hilton one!)

Perhaps I will look into this, I haven't got much to do this afternoon!

Hah, an email coordinated run on the banking sector - this is a wild idea!

However, I rather suspect that the banks would be bailed out in this event as they so often have before.

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Surely the biggest problem would be for everyone with REAL money saved in a bank to all withdraw those savings?

If the banks’ reserves are as low as 3 - 15% (depending on which source you look at) then it would not take very long before big problems occurred.

Potentially it would only take one e-mail to create a run on the banks.

That is a very scary thought.

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In Argentina they tell people there savings have not been stolen but that they are suspended until things recover. And you don't think it can happen here. Think again. They have learned from Argentina and will act with greater finness if the people panic and try a run on the banks or a bank. Look at the frontage of any bank and you can see how the design allows for steel shutter to be fitted real quick. Not the tacky battered shutters of Buenos Aries but those that have required forethought, design and manufacture - wonder where they store them.

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In Argentina they tell people there savings have not been stolen but that they are suspended until things recover. And you don't think it can happen here. Think again. They have learned from Argentina and will act with greater finness if the people panic and try a run on the banks or a bank. Look at the frontage of any bank and you can see how the design allows for steel shutter to be fitted real quick. Not the tacky battered shutters of Buenos Aries but those that have required forethought, design and manufacture - wonder where they store them.

This is why physical gold in your hand has its advantages.

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This is why physical gold in your hand has its advantages.

Especially when there is 5 times more gold in futures than exists in reallity!. We even have imaginary gold now!.

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This is why physical gold in your hand has its advantages.

Agree. The whole financial system is predicated on ignorance...or maybe faith?

Either way, a run on the banks would be a pretty sight indeed. It has happened before many a time. I guess the risks are even greater nowadays with reserves so low - mind you I expect that means the evil b_uggers have prepared all the more for it.

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Hi Marko

I started a thread a few weeks ago on M4, and I did a bit of research on the BoE website. In summary, here are some figures on M4 over the last 20 years:

Date M4 adj for RPI (millions) % change

31-Dec-87 295,206 -----------------------

31-Dec-88 324,781 ----------------------- 10

31-Dec-89 358,857 ----------------------- 10

31-Dec-90 367,312 ----------------------- 2

31-Dec-91 371,506 ----------------------- 1

31-Dec-92 372,042 ----------------------- 0

31-Dec-93 383,407 ----------------------- 3

31-Dec-94 388,464 ----------------------- 1

31-Dec-95 413,660 ----------------------- 6

31-Dec-96 442,219 ----------------------- 7

31-Dec-97 451,333 ----------------------- 2

31-Dec-98 476,493 ----------------------- 6

31-Dec-99 488,106 ----------------------- 2

31-Dec-00 513,864 ----------------------- 5

31-Dec-01 543,595 ----------------------- 6

31-Dec-02 565,127 ----------------------- 4

31-Dec-03 589,264 ----------------------- 4

31-Dec-04 620,963 ----------------------- 5

31-Dec-05 683,827 ----------------------- 10

As you can see, M4 did not actually fall throughout the last crash. I think a levelling off of M4 is enough of a signal (as you can see this occurred rapidly between 1989 and 1990).

The reason for this, and the reason why M4 may increase throughout a crash is that money is borrowed for other purposes - e.g. business investment/survival.

On the thread I started, a few people mentioned that M4 is still going up due to money being borrowed for e.g. stock market and commodities investment.

If this picture unravels as is now suspected (i.e. all asset classes dropping in value) then perhaps we will see real falls in M4 this time.

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I suspect that if there was a run on the banks, the central banks would simply create more liquidity by printing more money or issuing more debt. The result would be higher (or even hyper) inflation, eroding the real value of everyone's savings (and debts). Not a pretty situation but surely preferable to a collapse of the banking system.

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It is good that people are focusing on the root cause of inflation. However, the only way of stopping hyperinflation is to reduce credit in the economy.

It is interesting to look at Argentina in this respect, they did not turn off the credit tap.

In Argentina before the crisis, a land rich in resources and potential, blessed in greater abundance the the UK in these things, 1 in 4 workers worked for the public sector.

During the 1990's a program of 'Thatcherisation' occured, privitisation etc... positive management of the economy along sustainble lines, which enabled the government to borrow and spend, as external dollar creditors bought up its now more trustworthy debt. To further encourage this the peso was pegged 1:1 with the dollar. However, to sidestep the unemployment created from such cut backs, low interest rates were set so the private sector absorbed more and more debt. Credit soon grew, and debt mounted up. To get a dollars worth of produce out of a economy with a lot of red tape and large public sector takes more than one dollar or peso, so this soon manifested itself in the money supply, which was growing - this could have been 'cured' by greater unemployment in the public and private sector, by turning the free money tap off, raising productivity, but higher interest rates would cause cripping unemployment.

People soon caught on, and were rushing to get thier peso savings out of the bank and exchange them 1:1 for dollars. The exchange crisis caused the governments dollar reserves to be wiped out, so they had to close the banks.

After the crisis brought down the government, the peso floated downwards, (my GF was spending $10 a night to stay at a $150 per night hotel at the time!)

The economy recovered as the currency dropped.

Today, Argentina has 1 in 3 workers in the public sector, the 'new peso' is declining in value as productivity reduces, which will again lead to another crisis.

Edited by brainclamp

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It is good that people are focusing on the root cause of inflation. However, the only way of stopping hyperinflation is to reduce credit in the economy.

It is interesting to look at Argentina in this respect, they did not turn off the credit tap.

In Argentina before the crisis, a land rich in resources and potential, blessed in greater abundance the the UK in these things, 1 in 4 workers worked for the public sector.

During the 1990's a program of 'Thatcherisation' occured, privitisation etc... positive management of the economy along sustainble lines, which enabled the government to borrow and spend, as external dollar creditors bought up its now more trustworthy debt. To further encourage this the peso was pegged 1:1 with the dollar. However, to sidestep the unemployment created from such cut backs, low interest rates were set so the private sector absorbed more and more debt. Credit soon grew, and debt mounted up. To get a dollars worth of produce out of a economy with a lot of red tape and large public sector takes more than one dollar or peso, so this soon manifested itself in the money supply, which was growing - this could have been 'cured' by greater unemployment in the public and private sector, by turning the free money tap off, raising productivity, but higher interest rates would cause cripping unemployment.

People soon caught on, and were rushing to get thier peso savings out of the bank and exchange them 1:1 for dollars. The exchange crisis caused the governments dollar reserves to be wiped out, so they had to close the banks.

After the crisis brought down the government, the peso floated downwards, (my GF was spending $10 a night to stay at a $150 per night hotel at the time!)

The economy recovered as the currency dropped.

Today, Argentina has 1 in 3 workers in the public sector, the 'new peso' is declining in value as productivity reduces, which will again lead to another crisis.

Right about money supply but wrong wrong wrong about Argentina. You have got so confused about this.

The debt problem in Argentina started way before the 90s (70s in fact with military government), and is overwhelmingly government debt. In fact government debt is over 100pc of GDP, no other comparable country has even 50pc. Government debt grew massively in the 90s because the currency board system under which the peso was pegged to the dollar prevented it from printing money so it had to borrow abroad. The convertibilidad was designed to constrict money supply not increase it, which is what happened.

Aside from the fact that government debt had become unmanageable, the peso peg was abandoned because the strength of the dollar versus the country's main trading partners (Brazil and Europe) was killing local industry and agriculture. Obviously as soon as people caught wind of this they would rush to get their savings out in dollars rather than pesos so the banks were closed in anticipation of a run on the banks rather than a reaction to one. The decision to de-peg had already been made. Those in the know got their money out first. The whole charade of 5 presidents in 1 week was just a smokescreen to get this to happen.

And lastly, you are wrong that the new peso is declining in value, it is being kept weak by the government to boost export competitiveness. In fact Argentina's massive trade and current account surplus means that the peso should be worth substantially more. It is actually now that there is a problem with money supply growth because the government is printing so many pesos to buy up dollars to keep the dollar strong.

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Just to point out a few parallels with the Blair.Brown 'Third way' project...

"Peronism was ... a ‘third way.’ ... It was central planning, without plans... It was higher wages, with lower real earnings"

http://www.dailyreckoning.co.uk/article/02062006.html (sound familar?)

"One facet of the problems in the public finances was the mounting differential between the wages and salaries paid by the federal government and those in the private sector. In 1994 the average federal employee was paid 25 percent more than the average private sector employee; by 1998 the differential had risen to 45 percent" http://www.imf.org/external/np/speeches/2002/071702.htm

"Judging from international comparisons, the public sector had become bloated. By the mid-to-late 1990s, public sector employment accounted for 12.5 percent of the labor force in Argentina". http://www.imf.org/external/np/speeches/2002/071702.htm

Argentinas debt was only 41% of GDP in 1998, 50% in 2000, but 130% in 2001. Most of this dollar debt burden was because of the currency peg collapsing.

Money supply: http://www.mises.org/freemarket_detail.asp?control=400 - very strong money growth right through the 1990s.

Trade (till 1999): "A classic sign of uncompetitiveness caused by an overvalued currency is declining exports. But Argentina’s exports increased every year in the past decade except 1999, when Brazil, its largest trading partner, suffered a currency crisis." http://www.cato.org/current/argentina/pubs...huler-0202.pdf) (...the peso was in trouble from then)

Dispite many positive developments, the situation today seems to be of a large increase in the state payroll...

http://news.ft.com/cms/s/28f9a002-f965-11d...00779e2340.html

If inflation picks up because of this the currency will not become strong. Italy also kept the lira weak to boost export competitveness with a large state payroll. There arer large surpluses, both trade and fiscal, but the government is imposing price controls to stop prices rising, and inflation showing through. ( The price of corned beef doubling was due to these controls as exports were stopped to raise the supply in line with domestic demand. ) it's not a great sign.

Perhaps I am wrong about the peso dropping in line with these tendancies, as productivity unlikely to grow as fast as nominal income - with price controls being a sign of fire fighting etc..., Yet you obvoiusly are closer to reality of the situation than me! So I apologise about my distorted view above.

Right about money supply but wrong wrong wrong about Argentina. You have got so confused about this.

The debt problem in Argentina started way before the 90s (70s in fact with military government), and is overwhelmingly government debt. In fact government debt is over 100pc of GDP, no other comparable country has even 50pc. Government debt grew massively in the 90s because the currency board system under which the peso was pegged to the dollar prevented it from printing money so it had to borrow abroad. The convertibilidad was designed to constrict money supply not increase it, which is what happened.

Aside from the fact that government debt had become unmanageable, the peso peg was abandoned because the strength of the dollar versus the country's main trading partners (Brazil and Europe) was killing local industry and agriculture. Obviously as soon as people caught wind of this they would rush to get their savings out in dollars rather than pesos so the banks were closed in anticipation of a run on the banks rather than a reaction to one. The decision to de-peg had already been made. Those in the know got their money out first. The whole charade of 5 presidents in 1 week was just a smokescreen to get this to happen.

And lastly, you are wrong that the new peso is declining in value, it is being kept weak by the government to boost export competitiveness. In fact Argentina's massive trade and current account surplus means that the peso should be worth substantially more. It is actually now that there is a problem with money supply growth because the government is printing so many pesos to buy up dollars to keep the dollar strong.

Edited by brainclamp

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I do not think that M4 will decrease in the near future. Borrowing only acts as a multiplier on the money supply which is put out there via central bank open market transactions. If the central bank keeps creating more money via these transactions, M4 could continue increasing even with less borrowing.

frugalista

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I do not think that M4 will decrease in the near future. Borrowing only acts as a multiplier on the money supply which is put out there via central bank open market transactions. If the central bank keeps creating more money via these transactions, M4 could continue increasing even with less borrowing.

frugalista

Are you sure about that? my understanding was that M4 includes all money in the economy - i.e. all credit that has been extended, not just from the BoE.

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Are you sure about that? my understanding was that M4 includes all money in the economy - i.e. all credit that has been extended, not just from the BoE.

I think what you say is right, my point was that if the BoE wants to increase the money supply, it can whatever is happening with borrowing.

frugalista

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Just to point out a few parallels with the Blair.Brown 'Third way' project...

"Peronism was ... a ‘third way.’ ... It was central planning, without plans... It was higher wages, with lower real earnings"

http://www.dailyreckoning.co.uk/article/02062006.html (sound familar?)

If inflation picks up because of this the currency will not become strong. Italy also kept the lira weak to boost export competitveness with a large state payroll. There arer large surpluses, both trade and fiscal, but the government is imposing price controls to stop prices rising, and inflation showing through. ( The price of corned beef doubling was due to these controls as exports were stopped to raise the supply in line with domestic demand. ) it's not a great sign.

Perhaps I am wrong about the peso dropping in line with these tendancies, as productivity unlikely to grow as fast as nominal income - with price controls being a sign of fire fighting etc..., Yet you obvoiusly are closer to reality of the situation than me! So I apologise about my distorted view above.

No need to apologise! You are absolutely right about the price controls - the price of just about every non-discretionary item has been subject of price "agreements" that the government has imposed through the use of thinly veiled threats. If producers don't comply, the president raises taxes, or in the example of beef he bans exports for a period. This wil ultimately lead to underinvestment and shortages. For example Argentina will soon become a net ol importer for the first time in its history. What should happen is the peso should rise to somewhere near to parity with the Brazilian real. Economic growth would slow but so would inflation. The economy is basically on steroids at the moment. As with all governments in Argentina's history it is all short-term thinking and no long term. Little effort to harness all the well-educated brains, so they go abroad :P

As for Peronism, I would not make a parallel with NuLab. What Peronism did was bring into politics a large section of the poor that had never before participated, through populist policies...I still see Blair's key support as the middle class. A modern day parallel is Hugo Chavez, in fact the similarities are frightening.

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  • 302 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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