There is something I just don't understand; if there is a credit crunch, why is the money supply growing so rapidly?
To be fair to the Bank of England, it did address this issue in the most recent inflation report:
"Although headline measures of money and credit growth have remained broadly unchanged over the past year, that conceals a much weaker picture once particular borrowing transactions, undertaken by financial companies specialising in intermediating between banks, are excluded."
However, I don't find this answer very reassuring. What do they mean by "particular borrowing transactions, undertaken by financial companies specialising in intermediating between banks"? Are they saying that this money creation isn't really money. If so, why not?
The issue becomes even more mysterious when one considers that these "particular borrowing transactions" have to be really huge in order to create 15 percent monetary growth, while co-existing with a credit crunch.
Ultimately, this 15 percent monetary growth leads to one of two really unpleasant conclusions. Either we are heading for an upsurge in inflation because "there is too much money chasing too few goods". Alternatively, there is something really nasty and untransparent lurking in our financial system. We don't know what it is, but we know what it does. It creates huge amounts of loans between banks, appears in the monetary numbers, and yet does nothing to affect the real sector.
If I had a choice, I think would prefer to have more inflation than another ugly surprise jumping out of the financial system.