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Money Supply / Inflation Correlation - The Truth About Inflation

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Funny how the BOE hardly ever mention money supply figures in their inflation targeting missives.

Next time they are trundled out you'll know what figures to really look at and how much horse they are spouting when the measure their success against the cpi.

http://www.dailyreckoning.com/Writers/Moga...s/MG022508.html

And how to do that, anyway? She doesn't say, but she did supply a metaphor that was as clueless as her economics; she thinks the job of the Fed is to create a "fire wall" of some kind, so that the, "fire doesn't hurt innocent bystanders". What? Huh? What? Hahaha! This is the kind of people given control of the money, the banks, and the economy! Hahaha! And yikes!

And doubly "yikes" if you contrast this economic gibberish with Mr. Ash quoting Mervyn King, now governor at the Bank of England, as profoundly saying that, "Few empirical regularities in economics are so well documented as the co-movement of money [supply] and inflation."

In fact, Mr. King himself quoted the statistics that, "Over the 30 year horizon 1968-98, the correlation coefficient between the growth rates of both narrow and broad money, on the one hand, and inflation, on the other, was 0.99."

Mr. Ash graciously acknowledges that many of us took a statistics course many years ago, and we didn't really understand it then, and so this "0.99 correlation coefficient" thing is pretty meaningless to us, and it looks like we are wasting our time here if he is going to converse with the math eggheads in the crowd about things we don't understand, and since it is almost lunchtime, then I am outta here!

So he politely explains that, "0.99 is as near perfect as you'll find in any pair of data. An absolute 1.00 only ever exists for the very same thing measured against itself - say, the cost of living mapped onto the cost of living, or gold prices correlated with gold prices, for example."

So we out here in the audience nod our heads to signify that we understand the concept of "virtually guaranteed", but we are soon sorry that we did, as our blood thickens in our veins at the sheer economic horror revealed as he goes on, "But ignoring the flood of money - first created as credit and now stacked up in Treasury bonds across the emerging economies - would mean ignoring the connection between growth in the money supply and inflation in prices", like China registering an 18% plus growth in money, India 22.4% a year growth, Singapore 14%, Britain up by 12.3%, Western Europe 11.5%, Australia16%, Canada 13%, and Saudi Arabia 22%!

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It has been clear for years that Browns limitation of the BofEs remit to targeting CPI inflation was a tacit instruction to allow the money supply to inflate. Had RPI, or indeed money supply growth, been targeted interest rates would have been much higher and the HPI boom would have been curtailed. In previous decades supply side rigidities would have led to the increased money supply inflating retail prices almost immediatly. In a globalised economy that increase has inflated asset prices instead and is only now after sevral years starting to inflate retail prices. This has been done quite deliberately to create the ''feelgood factor '' which wins elections. Of course it can't go on forever but it has lasted long enough to assure the future prosperity of many labour politicians. We are led by deeply cynical and dishonest people and the harm they have done will impoverish many of us in the years to come.

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In conclusion, I think it is fair to say, these guys do know their eggs and do understand there is a link between money supply and inflation. But they think the link between money supply and inflation (of prices) in the near term is too weak for it to be useful to them.

Maybe they should have used a jump diffusion process in their models. ;)

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The BoE publishes lots of papers available on their website that gives a good understanding of their thinking.

Certain papers discuss the role of money supply and inflation targeting - one even by our esteemed Governor. Worth a read if it concerns you as it does me. Their conclusion...whilst there is a correlation in the longer term, it is useless for short term policy instruments i.e. setting interest rates.

http://www.bankofengland.co.uk/publication...in/qb020305.pdf

There was also a Quarterly Bulletin paper in Summer 2002 by Mervyn King entitled "No money, no inflation" but apparently this is now only available on request.

http://www.bankofengland.co.uk/publication...ws/2002/071.htm

Elsewhere, Paul Tucker admits they do not really know how much credit is being created and that they really must look at possibly measuring it.

http://www.bankofengland.co.uk/publication...7/speech331.pdf

In conclusion, I think it is fair to say, these guys do know their eggs and do understand there is a link between money supply and inflation. But they think the link between money supply and inflation (of prices) in the near term is too weak for it to be useful to them.

I have to admit that if it's a choice between doing what I know to be the right thing and risking a well paid job, I know which I'd pick. There are some smart members on the MPC who would rather keep their jobs by taking the path of least resistance to inflationville - and then there's Blanchflower!

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Maybe they should have used a jump diffusion process in their models. ;)

''Jump diffusion process'' is filed in my mind under Voodoo Economics-Here There be Snake Oil.

Should I have paid more attention and tried to understand it?

Edited by Freeholder

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  • 293 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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