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Ash4781

Money Supply (april)

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http://www.bankofengland.co.uk/publication...007/mpc0706.pdf

14 Broad money and credit continued to expand rapidly. M4 and M4 lending (excluding the effects of securitisation) had grown by just over 13% in the year to April. The Committee discussed the possible implications for the wider economy. It was important to understand what lay behind these increases in order to assess the consequences for spending and inflation. Monetary developments could reflect two different causes: changes in the demand for money; and changes in the supply. Movements in the demand for broad money relative to spending in the economy, perhaps reflecting shifts in portfolio preferences, need have few implications for spending or the path of inflation. Increases in the supply of broad money, however, could lead to an imbalance in the relationship between money and prices. This could have implications for higher asset prices, money spending and the general price level, to which monetary policy would have to respond. It was also possible that inflated asset prices might fall back, producing a contraction in the supply of money and credit.

EDit: finally got around to reading the minutes

I'm a little confused are there some on the committee who think a housing crash and credit crunch is looming ?

Now asset prices are suddenly inflated.

Is that not a bubble ?

Edited by Ash4781

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I wonder if we can expect a drop like the one shown in this graph - See M4 1989-1990.

Would be interesting to know what caused that comparitively "overnight" plunge.

i.e. was it simply the 12-15% IR rise for a couple of hours? The IRs went down quite swiftly after that to no avail. <_<

Edited by DabHand

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Would be interesting to know what caused that comparitively "overnight" plunge.

i.e. was it simply the 12-15% IR rise for a couple of hours? The IRs went down quite swiftly after that to no avail. <_<

that rise (which was never actually implemented) was in late 92.

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Would be interesting to know what caused that comparitively "overnight" plunge.

i.e. was it simply the 12-15% IR rise for a couple of hours? The IRs went down quite swiftly after that to no avail. <_<

Was it just people stopping to buy house -> credit expansion slows down massively?

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Was it just people stopping to buy house -> credit expansion slows down massively?

So only we can start a true credit crunch by simply not being able to borrow anymore, regardless of IRs?

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So only we can start a true credit crunch by simply not being able to borrow anymore, regardless of IRs?

Not wanting anymore and not being able anymore. But of course other things come along with it. See the

Barclays/CDO-thread. As mortgages show up in funds as leveraged investments, also there the willingness

or ability to take out loans will vanish.

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That graph of M4 and nominal GDP is wrong.

The correct graph would show that there has NEVER been a situation where M4 money supply is greater than nominal GDP before 2003.

To be clear, this is saying the very large increases in money - which are ALWAYS expressed in prices in the economy - have been growing far faster than peoples income and wages - all economic activity.

This is saying very clearly that wages are not compensating for massive real prices rises in the economy.

This is a massive change, as if wages and incomes (GDP) do not grow, this means real inflation, as the money has to go somewhere (houses).

(obvoiusly House price inflation is still real inflation, especially if wages do not match)

To be clear - under Thatcher, Heath, Macmillan, Churchill the money supply has always been well under the level of nominal GDP. i.e. wages have aways been above the real money supply - the real level of price increases in the economy

This is showing increasingly negative real economic growth, where peoples incomes are not matching the levels of real prices in the economy.

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chinagdp_edit_2.jpg

Chinas Money supply to GDP. Nominal GDP - Real wages and incomes are growing faster than the money supply increases (real prices of assets and consumer goods in the economy)

The falling money supply would typically mean falling inflation, but faster rising real wages.

Edited by brainclamp

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chinagdp_edit_2.jpg

Chinas Money supply to GDP. Nominal GDP - Real wages and incomes are growing faster than the money supply increases (real prices of assets and consumer goods in the economy)

The falling money supply would typically mean falling inflation, but faster rising real wages.

I guess it's similar to what happened in the UK an US in the 1870s when the money supply couldn't keep up with real growth so we ended up with a sustained period of deflation, but the general population ended up better off.

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chinagdp_edit_2.jpg

Chinas Money supply to GDP. Nominal GDP - Real wages and incomes are growing faster than the money supply increases (real prices of assets and consumer goods in the economy)

The falling money supply would typically mean falling inflation, but faster rising real wages.

Just thinking about the graph it actually shows something quite significant. With the exception of an extremely brief period mid-2003, from 2001 growth remained above the money supply. This should cause the price of goods to fall - this is what we have seen in the West with all the cheap Chinese crap we have been importing. At the same time (since 2001) Western nations started to increase their money supply massively, this is inflationary - especially asset prices i.e. why house prices suddenly shot up in this period.

The graph explains why so many Chinese were investing in UK and UK bonds in his period. My guess is that shortly after that graph ends in 2005, the Chinese money supply grew- that would explain why China has seen asset prices inflating, and why they are keen to withdraw from western bond markets.

What does all this mean? Massive inflation, much higher interest rates!

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From today's Times:

STRONG growth in the money supply, M4, reinforced the case for an early increase in Bank rate. Figures from the Bank of England showed that M4 rose by £18.1 billion last month, on a seasonally adjusted basis, above its average of £14.8 billion for the previous six months. The 12-month growth rate rose to 13.8% from 13.3% in April, and was at its highest since October.

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