Deflation

[Knut]

Reading about the predicament of Japan suffering its continued deflation prompted me to ask a question of the economists here that’s been on my mind for a while.

I'm aware of the M3 rate of money printing that's been going on in the UK and yet the country's, perhaps dubious, measure of inflation has remained low until relatively recently. What does this suggest about the use of the inflationary effects of printing money to offset what would otherwise be the UK's own deflationary phase?

[domo]

M3 measures credit, its credit thats been expanding rather than the running of the printing presses. Credit can deflate, some theorize running the presses would combat deflation but since printing amounts to a government default, govt bonds would collapse in value thus resulting in more deflation

[Knut]

Succinctly put domo, thanks for that response. I will think on this.

[Deaneybear]

Personally i think that every loand the CB makes more deflations come

[A.steve]

M3 measures credit, its credit thats been expanding rather than the running of the printing presses. Credit can deflate, some theorize running the presses would combat deflation but since printing amounts to a government default, govt bonds would collapse in value thus resulting in more deflation

I presume you mean M4 (M3 is the measure for credit-like-stuff in the USA ; only M0 and M4 are published in the UK.)

I am interested in your idea that printing cash (like Mugabe has done recently) will cause more deflation... because I don't think it would... plus I don't think we would print money literally... how would you distribute it - helicopter drops aren't all that efficient.

Correct me when I say something dumb, please?

M0 is (pretty much) HM treasury bills and physical cash?

M4 is this plus positive balances in current and savings accounts?

Isn't M4 being underwritten by the government equivalent to expanding M0 (what we call, in slang, printing money)? Isn't this exactly what is being done by extending the government guarantee on savings from 90% of £2K->£35K? Isn't this underwriting the act of limiting deflation?

Here's another question... if M4 only covers positive account balances, what measure includes unused credit on store and other credit cards? This isn't money, but it acts just the same for a short while. Are authorised credit card limits included in M4, or only when money is spent and it is paid into the vendors account by the acquirer (i.e. payment processor?)

[Guest mSparks]

Quite a nice post really.

'Inflation' has many faces, but in broad terms it is a measure of how much the entire population of a country has to pay for the goods it consumes.

The arguments for leaving food/fuel/HPI out of the numbers is that they are so unstable that they don't give anything meaningful by which to set policy - A bit like deciding if your going round a corner to fast by watching a glass of water on your dashboard, when the road is bumpy you make the wrong moves, and make things worse.

I've been trying to tackle recently how come there is so much money growth and so little inflation (after all we don't really need paper notes these days, when was the last time you paid for a car/weeks shopping/house/energy bill etc with a briefcase full of money?

The only conclusion I can come to atm is the same thing is happening here that was/is happening in Japan. The money is NOT going into consumption of British goods, it is disappearing into the global market faster than they can print/lend it.

So from this respect UK inflation/deflation is now controlled by production in the global market, but if those £'s start flowing back into the UK markets, boy are we in for a bumpy ride.

[Knut]

I am interested in your idea that printing cash (like Mugabe has done recently) will cause more deflation... because I don't think it would... plus I don't think we would print money literally... how would you distribute it - helicopter drops aren't all that efficient.

That's another thing that I don't know (to add to the list!). How is new money introduced into the economy after it's been printed? If it's a loan it's got to be be returning interest, no? Is ALL new money a loan from the BoE? What was the 'helicopter' analogy about, how would that work? Does the goverment just use that new money to pay its own costs; welfare etc?

Hey Steve, I am also in Bristol at the moment, nice place but it rains a lot.

[Sour Mash]

I've been trying to tackle recently how come there is so much money growth and so little inflation (after all we don't really need paper notes these days, when was the last time you paid for a car/weeks shopping/house/energy bill etc with a briefcase full of money?

The only conclusion I can come to atm is the same thing is happening here that was/is happening in Japan. The money is NOT going into consumption of British goods, it is disappearing into the global market faster than they can print/lend it.

So from this respect UK inflation/deflation is now controlled by production in the global market, but if those £'s start flowing back into the UK markets, boy are we in for a bumpy ride.

Just because CPI hasn't gone up, doesn't mean that we haven't seen strong inflation:

House prices have inflated massively.

Equities have inflated considerably.

The cost of services has inflated considerably.

The cost of Utilities have inflated considerably.

Just because some things went down in price doesn't mean that others can't have gone up by a lot.

I think it's possible that we'll now see inflation in food and fuel prices plus rising costs of goods from China whereas house prices will deflate and the stock market may well take a tumble too.

[Griptool]

That's another thing that I don't know (to add to the list!). How is new money introduced into the economy after it's been printed? If it's a loan it's got to be be returning interest, no? Is ALL new money a loan from the BoE? What was the 'helicopter' analogy about, how would that work? Does the goverment just use that new money to pay its own costs; welfare etc?

Hey Steve, I am also in Bristol at the moment, nice place but it rains a lot.

New money is created electronically as borrowing, as the loan is repaid the money is uncreated (written of the books of the lending institution) leaving only the interest paid as a real money (profit to the lender).

This is a vast oversimplification but if you look back over the last few years of monetary expansion which has been 12% -14% for the last few years ask yourself where has all this new borrowed money gone?

Business investment....No

Increasing productivity...No

Improving our manufacturing export abilities....No

Consumer spending on imported goods...yes

Unproductive investment (BTL).....yes

Asset inflation....yes

The City playing cleaver buggers with other peoples money....yes

Now ask yourself now rosy is our future?

Edited October 1, 2007 by Griptool

[Crash Buyer]

An increase in the money supply causes inflation if you agree with the Monetarist school of economics.

Alternative explanations for inflation include -

1. Demand pull inflation - When the economy reaches full capacity, increased demand simply leads to higher prices to ration the avaiable resources. This is the cause of inflation according to Keynesians.

2. Cost push inflation - the prices of inputs rises e.g. oil.

There are variations on these theories, but that's it in basic terms.

[carseller]

We might see that everything deflate in terms of gold, while asset prices deflate in terms of paper money, and food, and energy prices inflate in paper money terms. But I am not sure, how it will play out, if Gold or Debt money will be the cash in the coming crisis.

At the end of the seventies a TV was more expensive in nominal terms than today, but in gold the price have been pretty stable.

Edited October 1, 2007 by carseller

[Crash Buyer]

In a recession, we should expect a commodities bust. This is the historical pattern. The gold price fell following the booms that peaked in 1973, 1979 and 1989, along with copper, oil etc.

[domo]

I presume you mean M4 (M3 is the measure for credit-like-stuff in the USA ; only M0 and M4 are published in the UK.)

yeah

I am interested in your idea that printing cash (like Mugabe has done recently) will cause more deflation... because I don't think it would... plus I don't think we would print money literally... how would you distribute it - helicopter drops aren't all that efficient.

Cos we have tonnes and tonnes of credit not money. The usual course for hyperinflation is that govt needs money fast, so it just prints it. Today that would mean tax reciepts collapse/no one wants govt bonds any more or possibly war. Now for people to not want govt bonds their value would go down/yields rise so this puts more strain on govt coffers because they cant borrow any more or because meating interest payments.

So what happens if the yields on bonds skyrocket? Their value has plummeted - thats deflation, exactly as been happening in the financial markets.

[oracle]

In a recession, we should expect a commodities bust. This is the historical pattern. The gold price fell following the booms that peaked in 1973, 1979 and 1989, along with copper, oil etc.

depends on the severity of the recession.

last time around we had the vast majority of asia and europe going south at precisely the same time.

the good old anglosaxon stepped up the spending to keep the global economy sort of ticking.

however we were talking 500million high-end consumers,versus about 1 billion EU/asians in crash mode.Hence the commodity price was low.

the boot is on the other foot now,we have 500million spent-up anglosaxons,versus the best part of 3 Billion new consumers...china,india...a reviving EU,most of asia...that looks pretty inflationary to me.

once china decide to export their inflation by revaluing the yuan,it's game over for uncle sam and ourselves.

[Crash Buyer]

depends on the severity of the recession.

I agree but primary commodity prices have proven to be volatile historically, so I am expecting a significant correction.

The China/India effect is a red herring IMO, as there is not a linear relationship between economic wealth and commodity prices. Otherwise, commodity prices would have risen steadily over the past 200 years in line with average living standards.

[OnlyMe]

I agree but primary commodity prices have proven to be volatile historically, so I am expecting a significant correction.

The China/India effect is a red herring IMO, as there is not a linear relationship between economic wealth and commodity prices. Otherwise, commodity prices would have risen steadily over the past 200 years in line with average living standards.

The 200 year commodity chart has almost everything to do with productivity and efficiency. Two men, one with an electric scoop and one with a truck can shift open cast materials equivalent to 100's if not 1'000's of man effort.

It is debateable that now econmies of scale have reacched a level that will not be significantly improved upon, in fact possibly the reverse as the big load-bearing areas get stripped and smaller areas have to mined.

Same goes for farming - economies of scale reducing cost in the face of inflation.

Same with oil.

[Crash Buyer]

The 200 year commodity chart has almost everything to do with productivity and efficiency. Two men, one with an electric scoop and one with a truck can shift open cast materials equivalent to 100's if not 1'000's of man effort.

It is debateable that now econmies of scale have reacched a level that will not be significantly improved upon, in fact possibly the reverse as the big load-bearing areas get stripped and smaller areas have to mined.

Same goes for farming - economies of scale reducing cost in the face of inflation.

Same with oil.

OnlyMe, I was making a different point - let me clarify.

There are many people who claim that we are heading for an era of high commodity prices simply because of the re-industrialisation of China and India (that's re-industrialisation following imperialist-sponsored de-industrialisation). This ignores the fact that we are in a cyclical commodity boom.

Short term movements in commodity prices cannot be explained by this argument - it is speculation.

[OnlyMe]

OnlyMe, I was making a different point - let me clarify.

There are many people who claim that we are heading for an era of high commodity prices simply because of the re-industrialisation of China and India (that's re-industrialisation following imperialist-sponsored de-industrialisation). This ignores the fact that we are in a cyclical commodity boom.

Short term movements in commodity prices cannot be explained by this argument - it is speculation.

OK, merely pointing out that the 200 previous years may have been the abberation and that in the future increased demand and dwindling resources will affect the price very heavily indeed, growth in China and India certainly do not help in that regard, this move may not be cyclical it may be the start of a whole new trend.