Monday, 6 April 2009

Perhaps I should drop this subject

I am beginning to sound like a broken record. I keep saying it, the money supply is growing rapidly. The deflation story is a myth.

Today's exhibit is narrow money. The Bank of England produces two measures of monetary growth. The first is notes and coins; in other words, cash in your pocket. The second measure is broad money, also known as M4. Without delving into the messy details, M4 is notes and coins plus the liabilities of banks and building societies.

However, it doesn't matter which measure you pick; the story is the same. Monetary growth picked up sharply, especially after the Lehman's catastrophe. In the long run, that can mean only one thing; inflation.


Anonymous said...

when does that translate into consumer price inflation though?

it can only be when more money starts chasing the actual goods. in this case I think its like a dam holding back a flood of water. banks are hoarding, so while monatary base is expanding its not going into the economy at large.

when do they unleash? in the deepest throws of depression when they can buy things up super cheap? once they feel safe their existance is no longer in jepordy?, when they are forced by govt? Could be the same as a flood from a broken dam when they finally do let loose. Until then i expect prices to suffer.

has the makings for the perfect sheering.

Alice Cook said...

When? The conventional wisdom suggests 18-24 months.

Anonymous said...

Don't disagree with annon 17.21 at all but your response is nicely Delphic. Do you think it is 18-24 months from the US hiccup, the GB hiccup, some other important point, or as of now?

As far as your narrow money graph is concerned, I'd like to suggest that the steep rise in notes issue is due to the decimation in interest rates on bank and other deposits. People are simply drawing the cash out and doing something else with it. Why leave an electronic figure with a bank,earning next to FA when you can have crisp twenties in your pocket and deprive banks of nearly free money?

A David

aSteve said...

Alice, Codswollop. Narrow money has almost no correlation with inflation - and the structure of financial corporations make M4 similarly useless when trying to establish inflationary influence of the money supply.

It would be a more reasonable hypothesis to suggest that demand for notes and coins has risen as a collapsing economy drives more people to haggle prices on the black market... where previously they'd have paid retail prices using their plastic friends.

"There is always an easy solution to every human problem--neat,
plausible, and wrong." --
Henry Louis Mencken (1880–1956)

Anonymous said...

If you don't have a measure of money supply (and I guess none of us do) which captures the shadow banking system then you can't rule out a massive debt deflation.


Rick said...

While money supply growth can sometimes be a misleading indicator of future prices, I see no reason at the present time to doubt that the price of goods will rise spectacularly in 2010.