The Money Supply Just Became Infinite

[steve99]

Will employer's ever get their hands on this money to the extent that wage inflation could take off though?

When employees get priced out of everything, and many low to mid (the mid point of full time earners is around 22K : to inform those that believe it is around £40K) have already been or in the process of being priced out of day to day life, then we may well go back to the old days of men with balls, collectively taking on the collective (employers, law, police, government) might of their employers. ie unionising and striking, as per we haven't had for 25 years or so. Only then will we have wage rises that have an effect on the economy. The game plan of the last 29 years has been to keep a lid on wages but everything else is a free-for-all, regardless of massive inflation of the money supply and asset price increases. The concept of wage inflation being the driver of inflation has been proved as a complete nonsense over the last 20+ years. This will be a repeat of the 70's

[jackster1]

They are borrowing it from the future fruits of yours and my labour my friend. And, also, the fruits of the labour of your children and your grandchildren.

By the above, I mean literally. Not metaphorically.

Cheers

Does that mean that they are borrowing the money from somewhere immediately and we and our children and our grandchildren will be paying it back through tax?

If so where are the govt getting the money in the intrim?

[The Spaniard]

I'm not saying you're wrong since I don't quite understand the issues, but how come after pretty much all the financial institutions getting things completely wrong over the the last 6-7 years are we suddenly supposed to believe they're pricing everything correctly now?

They've wrongly priced houses, hedge funds have imploded, pretty much all investment banks have gone bust do to making loads of bad decisions, but now we know exactly what is going on because they've priced something or rather at a particular level.

What was Northern Rocks share prices a couple of years ago? Did that mean anything?

Indeed, the market might have it wrong.

I'd still like to know what they think they know, whatever it is.

Even more, I would like to know how much of the new Gilts will be bought with new money.

That question seems to be of the essence, but no-one seems to know the answer for sure.

[Blue Peter]

Velocity doesn't have anything to do with money supply.

it's the rate at which the bankers can use smoke and mirrors to fool the public into thinking that there is money behind their transactions. Each of those transactions trades on the value of how much money there actually is, not how much there is thought to be by the suckers.

1 rare gold coin, promised to 2,000,000 people who are generally in ignorance of the others, trades as a rare gold coin.

2,000,000 of the same gold coins are no longer rare.

The recording of sucker taking is called credit. The fact that the insiders of this giant confidence trick don't seem to be aware that what they are engaged in is fraud might be one of the reasons it's gone so badly wrong.

Yes, velocity differs from money supply, but velocity times money supply determines inflation or deflation. And I think that you're right in that central banks are trying to stop deflation by trying to increase the money supply such that it overcomes the decrease in velocity.

Peter.

[bootfair]

THe question is how to respond?

How do you keep what you have safe?

When will the madness end?

When will the public realise that their savings are being stolen by these monsters?

The answer I fear is never. They will sit in fear of a "financial apocalypse" which is just an opportunity for the elite to wring the last few drops of wealth from a pitifully poorly informed populace and complicit "elected" government.

[domo]

They are borrowing it from the future fruits of yours and my labour my friend. And, also, the fruits of the labour of your children and your grandchildren.

By the above, I mean literally. Not metaphorically.

Cheers

Does that mean that they are borrowing the money from somewhere immediately and we and our children and our grandchildren will be paying it back through tax?

If so where are the govt getting the money in the intrim?

Well they're borrowing against the credit of the taxpayer, but investors have to buy the bonds the gov. are issuing. So you have to imagine investors are raising the money from sales of other assets. Of course all this would be ok and inflationary in a free market driven credit expansion, but if all this borrowing goes to sit on banks balance sheets, then its only using the credit quality of the taxpayer to prop up existing institutions and their credit. It may be less deflationary than letting the free market do its work, but it will be at the expense of the free market having to raise money to buy those safe haven (for now) Gilts.

[frozen_out]

The central banks in the 30's were deliberately deflating the money supply constantly by other means.

OK. So you can deflate the money supply AND devalue the currency. Fine.

Which rather buggers up the supposed link between money supply and hyperinflation, doesn't it?

[Injin]

Yes, velocity differs from money supply, but velocity times money supply determines inflation or deflation. And I think that you're right in that central banks are trying to stop deflation by trying to increase the money supply such that it overcomes the decrease in velocity.

Peter.

There is a mistaken price signal because of smoke and mirrors, and the central banks are trying to keep the illusion by making the price signal real by using their ability to coerce.

It's insanity, like pretending to fly by flapping your arms, failing and then beating up anyone who says you failed.

[Injin]

OK. So you can deflate the money supply AND devalue the currency. Fine.

Which rather buggers up the supposed link between money supply and hyperinflation, doesn't it?

You can have inflation internally but no change in the ratio of exchange between currencies.

Right now it's called operation locksteap.

Idiot traders look at the dollar to pound, dollar/euro or whatever. They don't look at dollar/loaf/euro ratio.

[Disillusioned]

I think that ?...! will tell you that inflation has a velocity component - how many times it is spent in the given period. So, inflation/deflation is a product of two factors, the amount of money and the velocity with which it whizzes round. The money supply may be going up (but is it countered by the falling values of assets), but the velocity is going down, as banks and others hold onto it for a rainy day (or margin call). At the moment, I think that the fall of velocity is winning,

Peter.

Thanks for this. A lot of the time your posts rewrite in layman's terms what others have said. THis is much appreciated.

[Mr Jib Fingers]

Why does this all feel like being forced to give more money to the chronic gambler who has already lost all his and half of your money already in the hope that he will 'win it back' ?

Didn't someone on here in the know think that the US bailout was a good idea and was going to put an end to the crisis? Did it not work in the end? Why then are we putting more and more of our money into these institutions? When are we allowed to say enough is enough?

[Guest Steve Cook]

Cheers

Does that mean that they are borrowing the money from somewhere immediately and we and our children and our grandchildren will be paying it back through tax?

If so where are the govt getting the money in the intrim?

Basically, they have lent the money to the banks, into existence. That's right. It's come from nowhere.

However, in doing so, they have increased the amount of money in the system. Or at least, they have stopped the money supply decreasing, if you count the debt that has been defaulted by people to the banks on bad loans as "money". Either way you look at it, that defaulted debt is being monetized by what the CBs are doing. The bad debts aren't bad after all. They have all been paid off early courtesy of the CBs (or, at least some of them have).

The problem with the above is that as long as the money was locked up in debt, it could not enter the wider economy, so causing an inflation of the money supply, so causing a rise in prices because everyone is now having to exchange their goods and services for a less rare commodity. The commodity of money. In other words, if you increase the supply of something in the absence of an increase in the demand for it, its exchange value will fall. Money is no exception to this iron economic law.

Now that the money has been released one might expect inflation and price rises. However, as I have previously said, whilst lending money into existence is inflationary, paying such debt off, or defaulting on it, is deflationary. If the government removes the same amount they have lent out to the banks in the form of taxation to "repay" the loans, then the net inflationary effect is zero. In order to pull this trick off, one might surmise that the banks only release this money at a similar rate as it is being extinguished elsewhere via taxation from the populace. If the banks release it faster, the available money supply increases and we get inflation.

All of the above is predicated on an assumption of continued economic growth such that the extra taxes are obtainable. Also, if the economy grows, you don't need to apply such heavy tax to repay the money anyway. Instead, you can release the money faster into the economy than it is being paid off because the expanded economy can give the new money a legitimate home.

However, for reasons that are to do with resource constraints, I firmly believe such economic growth is not only impossible, it is likely to go into reverse. In other words, real-world economic contraction. That being the case, the level of money in the system, as it stands, is too high.

Putting more into it, is stark staring madness.

Or blind desperation in the absence of an alternative

I suspect the latter

Edited October 13, 2008 by Steve Cook

[Mini Hank]

Thank you all for your kind contribution.

You don't need to do anything, the contribution will be taken from your STR funds automatically, through inflation.

But I promise you won't lose a single penny.

[frozen_out]

You can have inflation internally but no change in the ratio of exchange between currencies.

Right now it's called operation locksteap.

Idiot traders look at the dollar to pound, dollar/euro or whatever. They don't look at dollar/loaf/euro ratio.

But that's not what happened

It says there was a deflationary spiral caused by currency devaluation. No mention of inflation, internal or otherwise anywhere.

[Injin]

But that's not what happened

It says there was a deflationary spiral caused by currency devaluation. No mention of inflation, internal or otherwise anywhere.

I didn't say it did.

I answered the question you put to me.

[frozen_out]

Saying the opposite happened to what was proposed is not answering a question. Unless I misunderstood. let me ask the question again, and you can explain it in baby steps so there's no misunderstanding.

i) How does devaluing a currency result in deflation?

ii)What implication does this have for people who believe that increasing money supply=currency devaluation=inflation?

[Injin]

Saying the opposite happened to what was proposed is not answering a question. Unless I misunderstood. let me ask the question again, and you can explain it in baby steps so there's no misunderstanding.

i) How does devaluing a currency result in deflation?

Depends entirely on politics and how it's done. For example, the japanese devalue their currency on a more or less permanent basis so they can export everywhere on earth,providing jobs and politiclastability at home. This means storing vast forex reserves. This appears deflationary because those reserves don't move anywhere. it'll continue to appear deflationary until they reflood the world. At which point the fact that this process is realyl inflationary will be noticed by the ignorant.

ii)What implication does this have for people who believe that increasing money supply=currency devaluation=inflation?

It means timing is everything.

The discovery of a new gold mine with triple the worlds' existing gold in it will effect the gold price right now, only as long as other market participants have on eye on it. if they don't know, forget or think it's unminable for some reason (politics) they will carry on as "normal."

For example - the US is deemed otbe so powerful militarily and politically that it's collpase isn't seriously entertained by a lot of people. They think that governments are immune to economic laws for some reason (justifiably so in some instances because they can always wave weapons around and demand things, not repay debst etc) but this all has consequences.

When consequences arrive, those who traded under the assumption that the US state was immune to ALL laws of econ0mcs are in for a shock.

[Extradry Martini]

My question is whether that is always the case.

Can the commercial banking system sometimes expand its collective balance sheet (which is roughly the money supply) by buying Gilts (assets) with new money (liability when deposited)?

Yes they can. Government bonds have a very small capital adequacy requirement (it used to be zero under Basle I), so are almost considered cash from a balance sheet perspective. But it isn’t the banks who are buying these, it is investors.

I'd like to ask EDM the same first question... Are new treasuries always sold for money we'd consider part of the money supply? All other things being equal, which of the M0..M4 measures would we expect to decline by £1m as a £1m treasury is issued?

The issue of treasury bonds reduces the narrow money supply (and therefore the broad money supply), and the buyback or redemption of treasuries increases it, all other things being equal.

In the context of the SLS, for example, I do not believe that the treasuries did drain the money supply - unless, of course, you consider illiquid CDOs to be a part of the money supply.

I do understand the difference between commercial lending and treasury issuance...

The issuing of treasuries always drains money. I don’t know what you mean in the next part of that sentence: The purchase of CDOs was just lending…

The government are going to be tripping over themselves to turn this into an inflation exercise and wring it for all it's worth, though it can't be in an obvious way. To average joe public whats better, seeing his £200k house drop to £100k... Or seeing his 200k house remain at 200k but the price of a loaf of bread goes up 30p... The HPC is underway and massive inflation could just hide how bad (good!) it really is...

This may happen at some point in the future if we get a deflationary bust bad enough, but right now it looks unlikely and no one is talking about, so if it does happen, it will happen some years into the future in my view.

can I just ask a simple question, (given I'm a thick Northern Monkey I struggle with some of this high finance stuff).....money supply goes infinite, but some believe we'll get deflation, is that right..?

No, don’t confuse government handouts with money supply. For every $ they give out, they issue a $ in treasury securities. The way to see the lending is like this:

Before the crisis:

Investor -----> bank -----> mortgage holder

Now:

Investor -----> government ----> bank ----> mortgage holder.

So where are the government getting the money from to inject it into the banks? -- If they are borrowing it who are they borrowing it from? or are they rasing the money by selling Gilts? I'm confused.com

They are borrowing from investors (see immediately above). The same money is there, it’s just not being directly invested in banks any more.

[Extradry Martini]

Yes, the already hugely inflated and maybe-about-to-be-inflated-lots-more money supply is stagnating at the moment.

The I-L Gilts market seems to think that it will continue to do so for a long time.

I want to know what the market knows, or at least thinks it knows.

Indeed, the market might have it wrong.

I'd still like to know what they think they know, whatever it is.

Even more, I would like to know how much of the new Gilts will be bought with new money.

That question seems to be of the essence, but no-one seems to know the answer for sure.

I do. This crisis is extremely deflationary. The reason is simple – if people are being forced to repay debt quickly and suddenly, they quickly and suddenly do not spend money on consumption. Demand disappears.

Saying the opposite happened to what was proposed is not answering a question. Unless I misunderstood. let me ask the question again, and you can explain it in baby steps so there's no misunderstanding.

i) How does devaluing a currency result in deflation?

It doesn’t, by definition.

ii)What implication does this have for people who believe that increasing money supply=currency devaluation=inflation?

Increasing the money supply would be inflationary (though right now, only increasing the narrow money supply would be), but so far central banks aren’t doing this.

I'm not saying you're wrong since I don't quite understand the issues, but how come after pretty much all the financial institutions getting things completely wrong over the the last 6-7 years are we suddenly supposed to believe they're pricing everything correctly now?

They've wrongly priced houses, hedge funds have imploded, pretty much all investment banks have gone bust do to making loads of bad decisions, but now we know exactly what is going on because they've priced something or rather at a particular level.

What was Northern Rocks share prices a couple of years ago? Did that mean anything?

You never know for certain whether it is correct or not, but to say that what is going on is most definitely and unequivocally inflationary without finding out why so many people disagree with you is not a very scientific approach…

[frozen_out]

It doesn’t, by definition.

You see this is what I'm trying to understand. The article on Wiki may be wrong, but it sepcifically says that currency devaluations resulted in a deflationary spiral. I assume there's evidence of this somewhere. Don't know where to look though.

[Injin]

You see this is what I'm trying to understand. The article on Wiki may be wrong, but it sepcifically says that currency devaluations resulted in a deflationary spiral. I assume there's evidence of this somewhere. Don't know where to look though.

Gold is your answer to that one I think.

[Minderbinder]

Even more, I would like to know how much of the new Gilts will be bought with new money.

That question seems to be of the essence, but no-one seems to know the answer for sure.

I do. This crisis is extremely deflationary. The reason is simple – if people are being forced to repay debt quickly and suddenly, they quickly and suddenly do not spend money on consumption. Demand disappears.

Increasing the money supply would be inflationary (though right now, only increasing the narrow money supply would be), but so far central banks aren’t doing this.

The source of my confusion on this matter is that I don't understand the mechanism by which the government / CB increases the money supply.

I thought they did so by selling bonds. But you say that those bonds are bought with existing money.

How does new narrow money get into the supply?

Also, does it make a difference if bonds are bought by foreign investors vs. domestic investors? If a foreign investor buys bonds are they repatriating narrow money such that it is inflationary? Whereas if a domestic investor buys they are taking narrow money out of the economy?

[Mr Nice]

The source of my confusion on this matter is that I don't understand the mechanism by which the government / CB increases the money supply.

I thought they did so by selling bonds. But you say that those bonds are bought with existing money.

How does new narrow money get into the supply?

Also, does it make a difference if bonds are bought by foreign investors vs. domestic investors? If a foreign investor buys bonds are they repatriating narrow money such that it is inflationary? Whereas if a domestic investor buys they are taking narrow money out of the economy?

I was under the impression that if they wanted to increase the money supply that they BOUGHT bonds from the banks, thereby releasing funds into the system.

the government itself can also release money into the system by having the treasury issue bonds that the central bank then buys.

the treasury then uses that money to pay government expenses.

[Extradry Martini]

The source of my confusion on this matter is that I don't understand the mechanism by which the government / CB increases the money supply.

I thought they did so by selling bonds. But you say that those bonds are bought with existing money.

How does new narrow money get into the supply?

Also, does it make a difference if bonds are bought by foreign investors vs. domestic investors? If a foreign investor buys bonds are they repatriating narrow money such that it is inflationary? Whereas if a domestic investor buys they are taking narrow money out of the economy?

Narrow money is printed either by buying government bonds (or borrowing them against cash in repo) or by simply printing it and having the government spend it on whatever it spends money on. ...

[Extradry Martini]

You see this is what I'm trying to understand. The article on Wiki may be wrong, but it sepcifically says that currency devaluations resulted in a deflationary spiral. I assume there's evidence of this somewhere. Don't know where to look though.

I don't know what you are referring to, but if you devalue your currency everything else is upwardly revalued versus it. Maybe it's a typo...