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Credit Crunch And Broad Money (m4)

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This is something I thought I had understood last year, but it appears not, and I'm looking for some help from more knowledgable people to understand what is going on.

In a credit crunch, the logical thing to happen would be for M4 to decrease. That is, if credit can't be extended to people, then broad money would gradudally disappear. M4 stuttered in November last year, increasing by merely 0.4%. But it still increased. It has stuttered again in february, increasing by 0.3%. But it still increased.

This implies that banks and building societies are still able to lend just fine. They are still able to expand the money supply at a rate above the Governments preferred level of inflation. It would imply that there is no systemic risk at all, merely risks that certain banks are struggling to borrow.

So what is going on? Where is this extra money being created ? Where is it going? Why are we blathering on about financial armageddon? ArmaNOTgeddin it...

EDIT : And how does this impact house prices...

Edited by dazednconfused

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I am extremely interested in this question.

I settled on the opinion that, likely, the new M4 is due to lending to investment banks and/or hedge funds in order to buy-up illiquid assets which are being sold-off at below their face value by worried investors.

My reasoning is that retail lending is known to be well down - but we know that bank balances are up. I hypothesise that this is due to pension funds assigning to cash and the sale of bonds... which have to be bought by someone... a someone who likely doesn't have cleared funds currently contributing to M4 to use to pay with.

If you can see holes in this argument, please pick at them. If you've evidence I might be right - I'd like to see that too.

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Broad money has, I believe, been increasing due to "liquidity" injections, essentially providing additional term M0 money* to the banks for them to lend more on a "temporary" basis. It has also stopped a lot of banks simply going insolvent, which would have caused the decrease in M4 you expect. This is the heart of the hyperinflation vs. deflation debate, whether central banks will continue to do this or stop and let the market crash.

*"Temporary" M0 is a very very strange way of putting it. These "liquidity" injections are used as deposits in the central bank like normal M0, but, correct me if I'm wrong, notice how they aren't listed in the Bank Of England's M0 data. Their reasoning is, again correct me if I'm wrong**, because this M0 is being issued as debt, which obviously cancels out the credit, so they simply aren't writing it down in their statistical releases....a little dubious if you ask me, as the money can definitely still be lent out upon; while these loans are "temporary" they are constantly being rolled over by every central bank that has provided them so far (c.f. The Fed's TAFs), allowing them to function more or less as "normal" M0 + banks owing money to the central bank each month. The overall effect would actually be, as I'm sure you know, deflationary to the M0 figure in the long run, but only when the liquidity-injection debt is eventually called in will this effect be realised.

**No not you davidhpc, I've blocked you anyway.

Edited by agb41

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http://www.bankofengland.co.uk/statistics/...Feb/taba4.1.xls

From here (only goes to Jan) it looks like by far the biggest destination for this money is "other financial corporations". This isn't totally clear as the secotral breakdown only goes up to Jan, whereas I was looking at Februarys figures.

Other financial corporations

Other financial corporations (OFCs) are private financial corporations other than monetary and financial institutions engaged primarily in the provision of financial services, such as financial intermediation, insurance companies and pension funds and activities auxiliary to financial intermediation (such as fund management). OFCs’ holdings of M4 include 95% of the sterling domestic inter-MFI difference following a review of its causes (see page 101 of the June 1992 Economic Trends).

(I would guess that this includes hedge funds and the various other companies involved in financial tomfoolery and kleptomania.)

So this begs the question... do the banks have plenty of liquidity afterall, but they are simply slashing consumer lending and diverting all the liquidity to more deserving destinations, such as their speculating bum-chums in the City? Is this how the commodities boom is being funded? Do we need to start a civil war? Or am I just getting carried away, and there's a less nefarious explanation for it.

agb41 - I don't the liqiuidity injections are base money, temporary or otherwise. Do you have any references to back that up?

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agb41 - I don't the liqiuidity injections are base money, temporary or otherwise. Do you have any references to back that up?

Your totally right, they aren't counted as M0. I'm sure you agree that any money in an account held in the Bank Of England can be used exactly like regular M0 (i.e. cash), on the grounds that the Bank Of England can always produce enough cash to match every depositor coming in for a withdrawal. I am arguing any loan facility at the Bank Of England is equivalent to this, as the Bank Of England has a 100% probability of providing cash when asked up to the limit of that term facility, to everyone who has such a facility. At the end of the loan, more cash is taken out of the system then is put in, but as these loans aren't being terminated but are "rolled over",this will not matter much until they eventually are (supposedly at a time past the credit crisis) and thus the amount of money up to that loan facility can function as M0 until the termination point.

Edited by agb41

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Broad money has, I believe, been increasing due to "liquidity" injections, essentially providing additional term M0 money* to the banks for them to lend more on a "temporary" basis. It has also stopped a lot of banks simply going insolvent, which would have caused the decrease in M4 you expect. This is the heart of the hyperinflation vs. deflation debate, whether central banks will continue to do this or stop and let the market crash.

*"Temporary" M0 is a very very strange way of putting it. These "liquidity" injections are used as deposits in the central bank like normal M0, but, correct me if I'm wrong, notice how they aren't listed in the Bank Of England's M0 data. Their reasoning is, again correct me if I'm wrong**, because this M0 is being issued as debt, which obviously cancels out the credit, so they simply aren't writing it down in their statistical releases....a little dubious if you ask me, as the money can definitely still be lent out upon; while these loans are "temporary" they are constantly being rolled over by every central bank that has provided them so far (c.f. The Fed's TAFs), allowing them to function more or less as "normal" M0 + banks owing money to the central bank each month. The overall effect would actually be, as I'm sure you know, deflationary to the M0 figure in the long run, but only when the liquidity-injection debt is eventually called in will this effect be realised.

**No not you davidhpc, I've blocked you anyway.

that's great.

for everyone else, I would ask someone else like ExtradryMartini for an explanation, as this idiot has no clue what he is talking about.

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This is something I thought I had understood last year, but it appears not, and I'm looking for some help from more knowledgable people to understand what is going on.

In a credit crunch, the logical thing to happen would be for M4 to decrease. That is, if credit can't be extended to people, then broad money would gradudally disappear. M4 stuttered in November last year, increasing by merely 0.4%. But it still increased. It has stuttered again in february, increasing by 0.3%. But it still increased.

This implies that banks and building societies are still able to lend just fine. They are still able to expand the money supply at a rate above the Governments preferred level of inflation. It would imply that there is no systemic risk at all, merely risks that certain banks are struggling to borrow.

So what is going on? Where is this extra money being created ? Where is it going? Why are we blathering on about financial armageddon? ArmaNOTgeddin it...

EDIT : And how does this impact house prices...

the central banks are creating the new money. theyve been flooding the market with money to keep things going as the market has come to a standstill.

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... this idiot has no clue what he is talking about.

Now, now... while I agree that there may well have been more wrong than right with that appraisal... not least a confusion of M0 and M4 - but, IMHO, this is a confusing subject where clear expositions are few and far between.

While I'd love to hear the ideas of those with EDM's professional exposure, I think that anyone who has researched this may have something helpful to bring to the discussion.

the central banks are creating the new money. theyve been flooding the market with money to keep things going as the market has come to a standstill.

What we're trying to discover is whom has been borrowing, and for what purpose... and who has been paid (i.e. whose bank accounts are now budging - and what are their likely behaviours.)

We know it isn't people disposing/flipping real-estate now sitting on fortunes... so who and how have they come by spectacular positive deposits?

Edited by A.steve

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What happens to M4 money in the case of imports?

Does the trade deficit REDUCE the money supply. It SHOULD it appears.

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Ah sorry I misread a bit of the first post. I was trying explain why it stopped stuttering in December/January(!), not why it could still increase in Oct/Nov despite tight conditions, which was your question; sorry again.

Edited by agb41

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Now, now... while I agree that there may well have been more wrong than right with that appraisal... not least a confusion of M0 and M4 - but, IMHO, this is a confusing subject where clear expositions are few and far between.

While I'd love to hear the ideas of those with EDM's professional exposure, I think that anyone who has researched this may have something helpful to bring to the discussion.

Perhaps Merv could post- he should know.

Then again, reported b4 I left for the city this morning on Gloomberg that Merv sees the housing market as broadly flat in the comin months.

What has this oracle foreseen that logic says is b0llocks?

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In a credit crunch, the logical thing to happen would be for M4 to decrease. That is, if credit can't be extended to people, then broad money would gradudally disappear. M4 stuttered in November last year, increasing by merely 0.4%. But it still increased. It has stuttered again in february, increasing by 0.3%. But it still increased.

If the market was allowed to correct itself then this would be true, but Gov'ts/CBs are intervening at unprecedented levels.

This implies that banks and building societies are still able to lend just fine. They are still able to expand the money supply at a rate above the Governments preferred level of inflation. It would imply that there is no systemic risk at all, merely risks that certain banks are struggling to borrow.

Well there isn't when the Gov't starts nationalising banks, and the CBs start bailing them out. All the costs of the 'systematic risk' are socialised (foot by the tax payers/ the cash holders)

EDIT : And how does this impact house prices...

Rather than looking at M4, you might be better off looking at total mortgage lending data from the Council of Mortgage Lenders. It shows that mortage lending in the most recent month was 52% lower than the peak back in August

http://www.cml.org.uk/cml/statistics

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that's great.

for everyone else, I would ask someone else like ExtradryMartini for an explanation, as this idiot has no clue what he is talking about.

This kind of censorship based on your personal adoration of ExtradryMartini is unhelpful.

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If the market was allowed to correct itself then this would be true, but Gov'ts/CBs are intervening at unprecedented levels.

Well there isn't when the Gov't starts nationalising banks, and the CBs start bailing them out. All the costs of the 'systematic risk' are socialised (foot by the tax payers/ the cash holders)

Rather than looking at M4, you might be better off looking at total mortgage lending data from the Council of Mortgage Lenders. It shows that mortage lending in the most recent month was 52% lower than the peak back in August

http://www.cml.org.uk/cml/statistics

My whole point though is that there wasn't really a problem, other than banks didn't want to lend for house purchases, or lend to banks who specialised in house purchase. The money supply has continued increasing at around 12% pa, despite the fact that mortgage lending has dropped off dramatically. The banks are lending to somebody. They are still tapping the central banks up for liquidity, but they are not putting this into the mortgage markets, which is surely the whole justification for central banks intervention... the get consumer lending back on track.

What I beleive I am seeing (I am happy to be wrong) is that this money is ending up in the non-bank financial sector. If this is the case, then this is truly utterly morally repugnant. The financial services industry as a whole seems to be getting plenty of liquidity. The man on the street is being shafted by them.

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Rather than looking at M4, you might be better off looking at total mortgage lending data from the Council of Mortgage Lenders.

No... I'm trying to establish if some demographic has just become very, very wealthy and can now afford our overpriced homes.

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What I beleive I am seeing (I am happy to be wrong) is that this money is ending up in the non-bank financial sector. If this is the case, then this is truly utterly morally repugnant. The financial services industry as a whole seems to be getting plenty of liquidity. The man on the street is being shafted by them.

Well, that depends... the non-bank financial sector wouldn't contribute to M4 with the money they borrowed... the money would have to be paid to someone (in exchange for an asset.) If I were to sell a bond that represented savings for retirement (to be spent in say a decade's time) because I feel it is now too risky... and now held that cash in a savings account... and the bond is held leveraged by a hedge fund... is this immoral? Either I'm right and the bond will fall - and hedge funders will loose - or I'm wrong and the hedge fund will profit at my expense - by taking on the risk whilst I am risk adverse. Providing I still considered this wealth to be my pension savings, the economy will not benefit from this M4 expansion - since the funds would not be in circulation... just sitting waiting for my confidence to return - or for a rainy day in the distant future.

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No.

You appear to be saying that money that leaves our realm is still counted. Is that right?

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My whole point though is that there wasn't really a problem, other than banks didn't want to lend for house purchases, or lend to banks who specialised in house purchase. The money supply has continued increasing at around 12% pa, despite the fact that mortgage lending has dropped off dramatically. The banks are lending to somebody. They are still tapping the central banks up for liquidity, but they are not putting this into the mortgage markets, which is surely the whole justification for central banks intervention... the get consumer lending back on track.

What I beleive I am seeing (I am happy to be wrong) is that this money is ending up in the non-bank financial sector. If this is the case, then this is truly utterly morally repugnant. The financial services industry as a whole seems to be getting plenty of liquidity. The man on the street is being shafted by them.

I would hazard a guess that a good chunk of the banks' money these days is being channeled into soft commodities and precious metals. The CBs are throwing money at the IBs and the IBs can't afford to invest that money in anything too risky.

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This is something I thought I had understood last year, but it appears not, and I'm looking for some help from more knowledgable people to understand what is going on.

In a credit crunch, the logical thing to happen would be for M4 to decrease. That is, if credit can't be extended to people, then broad money would gradudally disappear. M4 stuttered in November last year, increasing by merely 0.4%. But it still increased. It has stuttered again in february, increasing by 0.3%. But it still increased.

This implies that banks and building societies are still able to lend just fine. They are still able to expand the money supply at a rate above the Governments preferred level of inflation. It would imply that there is no systemic risk at all, merely risks that certain banks are struggling to borrow.

So what is going on? Where is this extra money being created ? Where is it going? Why are we blathering on about financial armageddon? ArmaNOTgeddin it...

EDIT : And how does this impact house prices...

Ask the Gold Haters to reply to this, don't you know it's DEFLATION, ROFLMAO!!

:lol::lol:;)

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Importers and exporters cannot create/destroy money (only banks can do that) and so do not change the money supply.

No, but foreign banks can handle GBP without the BoE knowing much about it so the statistics can only ever be an estimate. E.g. you could have a GBP account at, say, Bank of New York into which you placed 1M. If it then lent some of that money on to a domestic customer, M4 would have increased by some amount and the BoE stats wouldn't reflect that. I assume they make some estimate for that component but it will never be very exact.

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This is something I thought I had understood last year, but it appears not, and I'm looking for some help from more knowledgable people to understand what is going on.

In a credit crunch, the logical thing to happen would be for M4 to decrease. That is, if credit can't be extended to people, then broad money would gradudally disappear. M4 stuttered in November last year, increasing by merely 0.4%. But it still increased. It has stuttered again in february, increasing by 0.3%. But it still increased.

This implies that banks and building societies are still able to lend just fine. They are still able to expand the money supply at a rate above the Governments preferred level of inflation. It would imply that there is no systemic risk at all, merely risks that certain banks are struggling to borrow.

So what is going on? Where is this extra money being created ? Where is it going? Why are we blathering on about financial armageddon? ArmaNOTgeddin it...

EDIT : And how does this impact house prices...

Good question, I'm looking forward to seeing some more posts. I know nothing about this, and would like to be educated. Would also like to see some posts on M0 and M4 as general explanation.

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A trade deficit doesn't reduce the money supply, unless its tackled with higher interest rates or tight credit to stop lending and start people saving.

A trade deficit is a sign that money is too loose, or more likely, productivity too low taking all the workforce into account, and people can find goods and services cheaper by importing them.

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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% +
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      • Even
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      • up 5%



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