Monday, 20 October 2008

UK monetary growth - still increasing rapidly

The Bank of England has just published the latest money supply numbers for September. Again, it was another month of double digit growth.

Credit growth is also astonishingly rapid. Last month, M4 lending increased by over £31 billion; up over 12.6 percent compared to 12 months ago.

These numbers are very perplexing. If lending is growing so rapidly, then where is the credit crunch?

11 comments:

Anonymous said...

You are starting to win me over with your inflationary arguments. Your monetary growth chart shouldn't exist. I wish you knew where this extra borrowing is coming from, because I don't. I certainly hope it isn't rolled over borrowing to delay the write-down of a default because if that is the case then we are still approaching the real crunch.

aSteve said...

I used to find M4 (and M3) perplexing too, until I thought about them in fundamental terms.

A gedenkenexperiment:

Assume two players, neither of whom spend any money in the real economy. A first lends £1m to B, who subsequently lends £1m to A on trivially different terms. Repeat arbitrarily many times - watch M4.

As soon as you move beyond demand deposits, money supply works rather differently to how you imagine. If you want to consider money supply growth with respect to how it affects inflation, you could do worse than looking at M1

Alice Cook said...

asteve,

So how would you explainn M4 lending growth rates to the non-financial corporations?

Alice

Nick von Mises said...

Non-financial corps tapping their credit lines to the max while they are still available and banking the cash until they need it.

josh said...

Those numbers look real strange, where is all this money?

CWS said...

nick von mises, so you think that the lending will continue until the credit lines run out and then everything grinds to a halt?

Could be......

aSteve said...

Alice: "So how would you explain M4 lending growth rates to the non-financial corporations?"

I wasn't intending to 'explain' but rather to highlight a commonly accepted flawed assumption. Once I'd seen the abstract structure by which M3 and M4 are not proportional to spending power in the real economy, a lot of stuff 'slotted into place.'

In the context of non-financial companies, there remain assets and liabilities... and these, while of equal value, cancel each other out. All we can be sure about in this context is that the burden of debt is greater... not that there is any greater wealth. Consider two companies A and B - A produces widgets, B consumes. A borrows to produce widgets, but B has decided to delay buying widgets. This means that A has a debt and unsaleable inventory; B has a cash surplus but no operational income. As A continues to expand inventory without selling, the debt (M4) is higher than it would otherwise be - but no new consumer spending is facilitated and no wealth is created. (Widgets rot in the warehouse...)

The crux of the matter is that much of M4 can't be spent at will... and that an expanding M4 might as easily reflect a collapsing economy as a booming one; a deflationary environment as an inflationary one.

In order to analyse the effect of M4 growth, you need to do it in the context of velocity. As the velocity of money slows, monetary expansion is all but inevitable...

Anonymous said...

A very good explanation, asteve, ,may I ask if you believe that the UK will have deflation ?

aSteve said...

Anonymous, thanks... (I'm not sure that the explanation is especially lucid... but it's the best I can manage off the top of my head.)

I believe that we are already seeing "deflation"... but, of course, a lot depends upon definition of terms. I think that what matters today is the spending power of consumers... and that has been devastated. It is already showing up in some metrics... but, because none of the metrics directly address 'spending power' a lot of debate is generated.

In due course, I expect (wage and consumer price) inflation to re-emerge... perhaps to 1970s levels... but that is, probably, several years away... none of the prerequisites are yet in place. Asset price inflation (which concerns me more - for selfish reasons) I see as remaining suppressed for considerably longer... with 2007 prices unlikely to recur for a decade or longer.

I can only see an increase in credit fuelled spending in Britain once the current excesses have been resolved. While assets are swapped with the BoE using the SLS, for example, there is nothing to motivate lenders... there are easier (more profitable) pickings among existing debtors who are in no position to negotiate advantageous terms. In Europe, I anticipate that we should look to France for the earliest recovery.

Demographically, I significant event will be when baby boomers turn 65 and retire en-masse. I suspect this will be the trigger for inflation... so, 2011/2012 seem plausible dates for our troubles to change in nature. (N.B. I don't see it as a fix - merely a change... an inflationary environment in a few years will likely prove even more painful for the majority than a deflationary one now. What we're seeing today is not a blip, it is a fundamental change arising in economies worldwide.

Anonymous said...

monetary growth statistics were all the rage....about thirty years ago...

aSteve said...

And... M3 worked from 1979 until, erm about 1984-1985. The problem was that M3 only coincided with spending power by fluke. As soon as it was used for monetary policy, as Goodhart's law explains, it became utterly useless. M4 was the sticking-plaster, but it still had many of the faults of M3... and both remain (mostly) a curiosity rather than useful economic metrics today.