Money Supply In The Economy!

[Zzzzzzzzzzzzzzzzzzzzzzzzzz]

One of the principal jobs of central banks (such as the Federal Reserve, the Bank of England and the European Central Bank) is to keep money supply growth in line with real GDP growth, so surely the BoE have lost control?

[SarahBell]

Well working lunch were on about BTL - and it being a good time to start being one - they're doing a BTL special next Friday - so I suspect the world has indeed gone completely mad.

[Xurbia]

Well working lunch were on about BTL - and it being a good time to start being one - they're doing a BTL special next Friday - so I suspect the world has indeed gone completely mad.

Yeah best to go into BTL as we go into a global recession. Good advice. Then again I used to ignore all the know-it-all IFAs that used to try and get me to buy a crappy pension. Independent thinking seems to be a thing of the past.

[Smell the Fear]

The credit problem is global - I think all the major economies will allow inflation to rip to erode the debt. Hence their currencies will not rise or fall much against each other. Although the Yuan may appreciate against them all.

I believe this is how the global levelling will come about. We will become poorer, but our house prices won't fall. Our wages will go up, but we won't be able to buy much with it.

[Zzzzzzzzzzzzzzzzzzzzzzzzzz]

http://www.forbes.com/markets/feeds/afx/20...afx2981829.html

"Increasingly concerned"????????????????? or just saying that to maintain its credibility?

[Della]

M4 is not money coming out of the BoE, they control notes and coins, bank reserves and interest rates, they have not increased that money supply much.

M4 they call the "money multiplier", the money the BoE gives out goes round and round the system multiple times through being loaned out, spent, and put into banks again, the totality of this movement plus the money originally given out, as I understand it is M4.

The effect at the moment is it is as if people had bought things using post-dated cheques, the problem is that there are probably too many postdated cheques to cash.

EDIT:

This shows the operational deposits and notes and coin, you can see the bank hasn't gone mad creating money:

http://www.bankofengland.co.uk/publication...in/qb050304.pdf

Edited September 2, 2006 by Della

[DabHand]

Hmm l suppose once all money in existence at this time has been claimed by the banks, the only money left to fight over is money yet to be earned. i.e. debt. Does M4 therefore measure how much of the populations future money banks have effectively claimed?

Which leads me to this:

Does M4 growth % = debt inc% + growth% + inflation%

Note debt increased by 10.5% in last 12 months.

[OnlyMe]

http://en.wikipedia.org/wiki/Money_supply

United Kingdom

There are just two official UK measures. M0 is referred to as the "wide monetary base" or "narrow money" and M4 is referred to as "broad money" or simply "the money supply".

M0: Cash outside Bank of England + Banks' operational deposits with Bank of England.

M4: Cash outside banks (ie. in circulation with the public and non-bank firms) + private-sector retail bank and building society deposits + Private-sector wholesale bank and building society deposits and CDs.v

[Della]

http://en.wikipedia.org/wiki/Money_supply

United Kingdom

There are just two official UK measures. M0 is referred to as the "wide monetary base" or "narrow money" and M4 is referred to as "broad money" or simply "the money supply".

M0: Cash outside Bank of England + Banks' operational deposits with Bank of England.

M4: Cash outside banks (ie. in circulation with the public and non-bank firms) + private-sector retail bank and building society deposits + Private-sector wholesale bank and building society deposits and CDs.v

Look at this, the official money supply figures:

http://www.bankofengland.co.uk/statistics/.../jun/provm4.pdf

If you look at "Table B: MFIs' balance sheet counterparts to changes in, and components of M4" you will see that the reason M4 is growing is the increase in "M4 lending" which is Sterling loans to UK residents, for example mortgages and personal credit. So basicly it is accurate to say it is as if people were buying things with postdated cheques (I don't mean that is literally what they are doing).

If I took out a 1 billion pound loan that I promised to pay back next month, which I had no hope of paying back it looks to me like I would increase M4 by 1 billion.

Edited September 2, 2006 by Della

[Jason]

If I took out a 1 billion pound loan that I promised to pay back next month, which I had no hope of paying back it looks to me like I would increase M4 by 1 billion.

Yes it would, as that billion pounds would be sitting in your bank account at the very least (I guess you would spend it on something like a house).

This is why I have a bit of beef with these M4 figures. The ECB say that the money supply should be 4.5% for non inflationary economic growth. I assume this is concluded as inflation would be 2% and the economy should grow by 2.5%, hence 4.5% is the target.

I disagree with those who say it doesn't matter what the money supply is, as it doesn't always lead to inflation. E.g. if you had but that billion pounds in the bank, it wouldn't be spent in the economy hence would not push up inflation. But that money is still available, and either you pay it back (hence M4 reduces by that amount) or you spend it, which eventually pushes up inflation.

Apparantly the BoE say 9% is normal, but that would mean inflation is 9% minus 2.5% economic growth (hence 6.5% inflation). But inflation should be 2%. I know it takes a very long time for the money to work through the system, but the figures above would be the case over the long term.

So I conclude either (over the long term) inflation is a joke at 2%, or the economy is growing at 11%. If the economy was growing at 11%, Gordon Brown would love it. So, it's more likely inflation is at 10.5%, but that money is not going into consumer prices, but into houses, and companies. There will be a point when that cash spills into the wider economy...

[Della]

Hmm l suppose once all money in existence at this time has been claimed by the banks, the only money left to fight over is money yet to be earned. i.e. debt. Does M4 therefore measure how much of the populations future money banks have effectively claimed?

Which leads me to this:

Does M4 growth % = debt inc% + growth% + inflation%

Note debt increased by 10.5% in last 12 months.

It contains what people have promised to pay in the future in the form of loans to for example Banks. Basicly people have borrowed to much, this is how it might pan out:

- Whilst people still borrow more and more there will be inflation as real money and money loaned with promises compete for assets.

- Eventually there will be a liquidty crisis amoung borrowers because they have promised to pay back more money than is being created.

- The lenders will clamp down on new lending

- There will be a deflation in the assets whose prices have been inflated, such as houses.

- Some of the financial institutions will go bust.

Conclusion:

Cash is King.

People who own assets, even gold, will find them worth a lot less in future.

A lot of people are going to go bust.

[jonewer]

Is there somewhere I can find monthly M4 rates going back at least 5 years?

Edited September 2, 2006 by jonewer

[Della]

Yes it would, as that billion pounds would be sitting in your bank account at the very least (I guess you would spend it on something like a house).

I plan to build an exact repica of the Titanic to use as a luxury icebraker.

So I conclude either (over the long term) inflation is a joke at 2%, or the economy is growing at 11%. If the economy was growing at 11%, Gordon Brown would love it. So, it's more likely inflation is at 10.5%, but that money is not going into consumer prices, but into houses, and companies. There will be a point when that cash spills into the wider economy...

The ECB target is for M3 which is different, but you've got a point. The M4 cash will spill out into the regular economy this will increase inflation (e.g HPI), raising costs for everything, that will ultimately cause a liquidity crisis amoungst borrowers, then they'll be defaults and vicious deflation amoungst the most inflated items (e.g. House Price Crash)

Is there somewhere I can find monthly M4 rates going back at least 5 years?

http://www.bankofengland.co.uk/statistics/m4/2006.htm

Edited September 2, 2006 by Della

[ImA20SomethingGetMeOutOfHere]

Is there somewhere I can find monthly M4 rates going back at least 5 years?

Here you go. Go to 'economic trends' then 'counterparts to changes in money stock'. There's some quite interesting stuff in here actually if you're willing to hunt around.

[DabHand]

It contains what people have promised to pay in the future in the form of loans to for example Banks. Basicly people have borrowed to much, this is how it might pan out:

- Whilst people still borrow more and more there will be inflation as real money and money loaned with promises compete for assets.

- Eventually there will be a liquidty crisis amoung borrowers because they have promised to pay back more money than is being created.

- The lenders will clamp down on new lending

- There will be a deflation in the assets whose prices have been inflated, such as houses.

- Some of the financial institutions will go bust.

Conclusion:

Cash is King.

People who own assets, even gold, will find them worth a lot less in future.

A lot of people are going to go bust.

Very interesting reply!

I did wonder what would happen when people have a burden to pay an amount that is overall larger than the supply of money available. This would make cash more valuable and as you say deflate assets.

We cannot increasingly borrow our way out of the current situation as even at 1% IR, there is a point where just interest payments become impossible.

I therefore agree that cash will be king logically, however l am concerned about the possibility of hyperinflation as an alternative scenario...or something less severe but in the same vein. My first instinct is this would be mutually assured destruction. This must go hand in hand with wage inflation otherwise all assets would simply become worthless, (as would any savings and debts), mainly because no-one would be able to afford anything. Are we heading in this direction already, minus the wage inflation suppressed by artificial inflation measures?

Wage inflation would mean high IR's which would itself destroy all leveraged assets values. These days this would also mean the stock market inc gold as it seems all investments are heavily leveraged. I'm not too clear on the process the inflation route would take so sorry if lm not being clear.

Would someone here like to outline better how they would see this route pan out.

[Zzzzzzzzzzzzzzzzzzzzzzzzzz]

Very interesting reply!

I did wonder what would happen when people have a burden to pay an amount that is overall larger than the supply of money available. This would make cash more valuable and as you say deflate assets.

We cannot increasingly borrow our way out of the current situation as even at 1% IR, there is a point where just interest payments become impossible.

I therefore agree that cash will be king logically, however l am concerned about the possibility of hyperinflation as an alternative scenario...or something less severe but in the same vein. My first instinct is this would be mutually assured destruction. This must go hand in hand with wage inflation otherwise all assets would simply become worthless, (as would any savings and debts), mainly because no-one would be able to afford anything. Are we heading in this direction already, minus the wage inflation suppressed by artificial inflation measures?

Wage inflation would mean high IR's which would itself destroy all leveraged assets values. These days this would also mean the stock market inc gold as it seems all investments are heavily leveraged. I'm not too clear on the process the inflation route would take so sorry if lm not being clear.

Would someone here like to outline better how they would see this route pan out.

Surely hyperinflation, as happened in Germany, is a real risk?

[DabHand]

Surely hyperinflation, as happened in Germany, is a real risk?

Yes, its a risk so l am concerned. But in order to understand how likely it is, l need to understand more how it would work. I am trying to understand the triggers, l dont think the banks are going to screw the value of whats owed to them.

[Zzzzzzzzzzzzzzzzzzzzzzzzzz]

Patrick Minford, a professor at the Cardiff Business School, said: “UK inflation is entirely under control. This is the case in spite of the rise in oil and commodity prices; hence not only is there no ‘spiral’, [but also] other prices are actually compensating by rising more slowly. Furthermore, wage settlements have not flickered from around the 4% region.

“Like Don Quixote, the community of money watchers are convinced these windmills are really sinister inflationary battalions lined up to invade us,” Minford maintains.

“When will they admit the evidence of their senses: that this is inflation in line with the 2% target and the 1% range appointed around it?”

[DabHand]

I assume you think Patrick Minford is a myopic imbecile?

[Della]

Very interesting reply!

I did wonder what would happen when people have a burden to pay an amount that is overall larger than the supply of money available. This would make cash more valuable and as you say deflate assets.

The assets deflate not because cash becomes more valuable but because no-one is over borrowing to buy them any more, things that wern't directly speculated upon and weren't indirectly speculated upon, such as washing up liquid would stay pretty much the same price. Cash has never really changed what it is, all the asset "wealth" is an illusion.

We cannot increasingly borrow our way out of the current situation as even at 1% IR, there is a point where just interest payments become impossible.

It's not really a question of the payments becoming impossible, the prices are increasingly a house of cards, if anything happens, even if enough people get bored of the speculating or repayments the cards fall.

I therefore agree that cash will be king logically, however l am concerned about the possibility of hyperinflation as an alternative scenario...or something less severe but in the same vein. My first instinct is this would be mutually assured destruction. This must go hand in hand with wage inflation otherwise all assets would simply become worthless, (as would any savings and debts), mainly because no-one would be able to afford anything. Are we heading in this direction already, minus the wage inflation suppressed by artificial inflation measures?

To have true hyperinflation you literally have to run the printing presses non stop creating new physical money or give banks free money, I don't think that'll happen, it just looks bad and it's obviously a bad idea. We've already had a kind of asset hyperinflation, this overborrowing could go on for a while, and whilst it goes on there will be inflation as the loans compete with the cash. A lot of the inflationary effect that the extra money could have had on the general economy has been neutralised though by people using bubble profits to invest in bubble sectors (BTLers)

Wage inflation would mean high IR's which would itself destroy all leveraged assets values. These days this would also mean the stock market inc gold as it seems all investments are heavily leveraged. I'm not too clear on the process the inflation route would take so sorry if lm not being clear.

I don't think wage inflation can go up, we've already got a problem with jobs going overseas and importing too much stuff. A hundred million+ unemployed Chinese make wage inflation seem unlikley and unworkable.

EDIT:

Although it is likley that our GDP figure is inaccurate since it counts bubble activity and there is likley to be a lot of missinvestment related to the bubble like my example of recreating the Titanic as a luxury icebreaker. It is pretty easy to throw away money like that where people come into a windfall of money and just blow it on something that'll never make a return. When that all comes out our currency could go down.

Edited September 2, 2006 by Della

[Della]

Surely hyperinflation, as happened in Germany, is a real risk?

There is a danger of hyperinflation in the US I suppose since the US government has a reason to do it because the US government has a vast and balooning pile of dollar denominated debt that they're not going to be able to repay, and they've made too many other promises.

That is an quite different issue from our overborrowing. This country is not in the same dire situation. The British government doesn't have that reason the US has to inflate, and if we don't inflate we win relative to them.

[SeenItAllBefore]

A lot of the inflationary effect that the extra money could have had on the general economy has been neutralised though by people using bubble profits to invest in bubble sectors (BTLers)

A great insight in one sentence! Some of the money made from all the debt and concomitant HPI might have leaked into what people are prepared for services in the UK but, in the main, it does seem to have been used to further leverage the beneficiaries back into the housing market thus pushing prices up even further.

The people I know who have made money from multiple property ownership in the last few years currently have two things in common: a lack of financial sophistication and a hell of a lot more debt than they had when they started.

Financial illiteracy meets indiscriminate lending is what has driven the economy since 2000 and it will, I'm sure, provide to be its eventual undoing.

[Zzzzzzzzzzzzzzzzzzzzzzzzzz]

The assets deflate not because cash becomes more valuable but because no-one is over borrowing to buy them any more, things that wern't directly speculated upon and weren't indirectly speculated upon, such as washing up liquid would stay pretty much the same price. Cash has never really changed what it is, all the asset "wealth" is an illusion.

It's not really a question of the payments becoming impossible, the prices are increasingly a house of cards, if anything happens, even if enough people get bored of the speculating or repayments the cards fall.

To have true hyperinflation you literally have to run the printing presses non stop creating new physical money or give banks free money, I don't think that'll happen, it just looks bad and it's obviously a bad idea. We've already had a kind of asset hyperinflation, this overborrowing could go on for a while, and whilst it goes on there will be inflation as the loans compete with the cash. A lot of the inflationary effect that the extra money could have had on the general economy has been neutralised though by people using bubble profits to invest in bubble sectors (BTLers)

I don't think wage inflation can go up, we've already got a problem with jobs going overseas and importing too much stuff. A hundred million+ unemployed Chinese make wage inflation seem unlikley and unworkable.

EDIT:

Although it is likley that our GDP figure is inaccurate since it counts bubble activity and there is likley to be a lot of missinvestment related to the bubble like my example of recreating the Titanic as a luxury icebreaker. It is pretty easy to throw away money like that where people come into a windfall of money and just blow it on something that'll never make a return. When that all comes out our currency could go down.

Hasn't wage inflation been booming ahead in Spain and Italy though - same pressures, little impact on wage inflation?.............

[CrashConnoisseur]

Is there somewhere I can find monthly M4 rates going back at least 5 years? [jonewer]

Here's a graph showing Brown's Bubble and Lawson's Boom...