Money

by craig on June 14, 2011 3:51 pm in Uncategorized

Inflation as measured by the retail price index remains stubbornly at 5.2%, despite all the obvious deflationary pressures on the economy and continuing weak consumer demand. Strangely, the attempts to explain this being offered by media pundits all miss out quantitive easing, or to use a more old-fashioned term, printing money.

It is deeply unfashionable to hold to the view that simply to create more money reduces the value of the money already in circulation in relation to the supply of available goods; but that is what all history tells us (the benchmark example being the rampant inflation after Spanish opening up of the New World greatly increased the amount of gold coinage in circulation). Common sense tells us that too. Otherwise we could simply solve many of our problems by printing another couple of trillion pounds.

A couple of years ago, I suggested “Enough quantitive easing and we can eventually get back to stagflation”. We are just about there. Why have none of the experts noticed?

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30 Comments

  1. “It is deeply unfashionable to hold to the view that simply to create more money reduces the value of the money already in circulation in relation to the supply of available goods…”

    It’s also not necessarily correct.

    See the Paul Krugman post below and the linked Adam Posen paper for the evidence of how Japan’s various QE programs stubbornly failed to produce inflation.

    http://krugman.blogs.nytimes.com/2010/05/25/inflation-deflation-japan/

    Not saying any of the experts you’ve been watching are making sense, but Posen really is an expert in this area, and has promised to vacate his job on the MPC if he is wrong about his predictions of the likely inflation path. Core inflation and inflation expectations are the key drivers of the type of inflation that can become a problem. And wage data shows no evidence of either.

    In any event, somewhat higher inflation would have the effect of reducing the real value of private sector debt that is currently a very significant drag on the economy. So overall, if QE ends up producing higher inflation, it’s not necessarily a bad result. But the timing of the headline spike – the main causes of which are the VAT hike, commodity price rises, and a weaker sterling – and the QE program is probably coincidental.

  2. Andrew Dickson White gave us the classic text a few years ago, Fiat Money Inflation in France by Andrew Dickson White

  3. Eddie-G is right on all counts. It’s far from obvious that inflation a couple of percent above the Bank of England’s target is either a) anything to do with quantitative easing, or b) doing more harm than good.

    And I’m not sure that it is “unfashionable to hold to the view that simply to create more money reduces the value of the money already in circulation in relation to the supply of available goods…”. That view seems to be everywhere, dressed up as common sense. But just because it’s common (in either sense) doesn’t mean it’s right…

  4. “…higher inflation would have the effect of reducing the real value of private sector debt that is currently a very significant drag on the economy”.

    As well as reducing the value of all the money some people have saved through their hard work over years or even decades.

    Ethically, it’s disgraceful for a government – one of whose prime duties is to safeguard property – to preside over the systematic devaluation of property.

    Practically, it doesn’t hold out much of an incentive to those people whom the government hopes to encourage to work hard for the coming years and decades.

    Just for fun, who was it who said, “The way to crush the bourgeoisie is to grind them between the millstones of taxation and inflation”?

    Actually, it was Lenin – who would be laughing like a drain if he could see successive prime ministers of the (supposedly capitalist) UK doing just that in the 21st century.

  5. The experts have noticed! But the mainstream media make a point of ignoring them, interviewing endless successions MBA graduates and hedge fund manager instead. Just like plenty of real experts warned about the financial crisis years before it happened.

    Max Keiser has the best (and most amusing) discussions on the inflation/deflation debate. Time to join the global insurrection against bankster occupation…

  6. Inflation is a monetary phenomenon. But money printing, does not necessarily determine the rate of inflation since private institutions also create money by making loans.

    If there are deflationary pressures now, these are largely due to debt reduction, which reduces outstanding credit and hence the quantity of privately created money.

    Prices may nevertheless rise during a period of deflation due to various factors, including a fall in the exchange value of the currency. Confidence in the pound isn’t what is once was, and the competitiveness of British industry isn’t what it once was either.

    And the price of oil and energy-related products such as food is high because of rising global demand and limited production growth. This means rising prices due to increasing scarcity — but it ain’t inflation.

  7. Technical detail: there’s something wrong with the dates on your RSS feed items…

  8. You also pointed out Craig, a couple of years ago, that the QE was going to be injected into financial institutions rather than High Street. Real money has been stolen by the banks and invested in other things. QE cash has replaced the money stolen so that the books balance and the rate of inflation does not change.

    Defence costs are loaded onto UK plc, which increases its need to borrow QE cash from the financial institutions. This in turn will be repaid with real cash from the taxpayer. Why bother to recycle money Keanseially through personal income tax, when you can recycle money ethnic-cleanseially through public borrowing for wars against the Muslims?

    Talking of which, the new mosque behind my back garden asked Liam Byrne M.P. to bless their foundation stone. Bill and Ben, alias Blair and Brown, have gone back into their flower pots, but I think a little weed knows something about it, don’t you? Bobop, little weed. Bobop, Craig.

  9. It makes far more sense for the Government to create money out of nothing – by typing in a number in a computer register – or getting the Bank of England to do it – than borrowing it off some other bugger at interest.

    The reason for this – is that the other bugger is not going to spend it. He isn’t going to do anything with it – except perhaps play games with it in an effectively self contained casino.

    The other bugger isn’t interested in investing it in people who might actually produce useful products and services. He is just going to accumulate it in a bank register with his name on it – so that when he finally kicks the bucket, his last thoughts are – well I am nearly the richest man in the world.

    So QE doesn’t necessarily cause inflation, and if it did, it wouldn’t necessarily matter that much. Think of money as rain. Sure too much rain isn’t too good, cos everything gets flooded – but at the moment real people in the real world are going hungry – because there is a worldwide drought of money – because the greedy buggers are taking the lot.

    Don’t worry – I’m just testing my laptop after the kids had buggerred it up.

    Tony

  10. Wonderful, keep it up thanks.

  11. ‘Why have none of the experts noticed?’
    Same reasons they did not see the crash of 2008 coming.

    I am a retired nurse with a computer – Back in 2006 I began reading the indepedent economic and financial commentators, where I learned about the coming global financial train crash, and more importantly, explanations as to why it would occur It has been a steep learning curve but I now understand how we are being ripped off.
    As to ‘Why have none of the experts noticed’?…..Some making hay while the sun shone and others fearful of losing their jobs if they stuck their heads above the parapet.

  12. “Ethically, it’s disgraceful for a government – one of whose prime duties is to safeguard property – to preside over the systematic devaluation of property.”

    Higher inflation is not without costs. The value of cash holdings and some debt instruments diminishes, but many asset classes tend to hold up okay. The stock market in particular tends to stay ahead of nominal inflation, so the concern that “property” in the broader sense will devalue is not necessarily going to play out.

    The essential ethical question is whether our policy elites should be prepared to preside over a period of prolonged economic stagnation while stubbornly prioritising deficit reduction and price stability. I think it’s wrong (and often self-defeating), mainly because it is more difficult in the longer run to make up lost output (as well as the wider social costs) than lost investment returns.

  13. There are worse kinds of stealing than inflation. For example the stagnation/unemployment that has pestered the global economy since about 1980. It has made us all (well, except the richest 1% of course) poorer through reducing our production capacity.

  14. stagflation – which deserves a word on its own. In the 1970s, conventional economics had considerable problems with stagflation, on the grounds that it ought to be impossible.

    If unemployment was up, inflation must be down and vice versa, like the two ends of a seesaw. If both were up at the same time, that meant the seesaw was broken, which made no sense.

    But as the brilliant American non-economist Jane Jacobs pointed out, stagflation was in fact the norm in poor backward countries, or in poor backward parts of rich ones. The effect had been described in the late 18th century by Adam Smith, who remarked that while unemployment in his native Scotland was high, so were prices, which were set by Scotland’s richer neighbour England.

    http://www.ft.com/intl/cms/s/0/9a92c0f0-4093-11dd-bd48-0000779fd2ac.html#axzz1PLHauvP9

    Stagflation is economic collapse.

  15. “The stock market in particular tends to stay ahead of nominal inflation, so the concern that “property” in the broader sense will devalue is not necessarily going to play out”.

    OK, Eddie-G; the FTSE 100 index was 6930 on 31st December 1999, and it’s currently 5793. That’s a fall of over 16%. Meanwhile, the value of the pound has fallen by almost exactly 30%. To compensate (and no more) for that monetary inflation, the FTSE 100 index would have to be over 9000 today. If you had been relying on the London stock market to hedge against inflation since 1999, you would have lost a cool 36% of your savings. Whereas if you had kept it in cash, you would now be only 30% out of pocket.

    That certainly does encourage people to save for the future.

  16. So Adam Smith saw the flaw in his own arguments, but ignored it. The present economic problems are created by having two economies in the same basket: one the banking economy that takes hard cash, and increases the availability of money in order to charge profit on loans. Two, the real economy that tries to live within its means and pay the real value. Interest is constantly swamping the frugality of honest people, and it is also spent by the bankers in telling governments where to target their bombs.

    Stagflation is caused by interest, and so are aggressive, illegal wars and the accompanying crimes against humanity. As usual, only Islam comes near to having a solution because the other idiots lack any grain of intellectual integrity.

  17. If, as Craig tells us, inflation is about 5% per year, the “70″ rule tells us that a given sum of money will halve in value in 70/5 = 14 years. And again in the next 14 years, and so on. Actually, I strongly suspect the government figures of being drastically minimised, so in fact it might take your savings a lot less than 14 years to halve in value.

    How do you think this affects the retired who are living on fixed pensions, perhaps backed up by savings that might once have looked adequate but soon will buy them a cup of coffee?

    How do you think it affects the plans of intelligent young people when the government begs them to save for their retirement, so they don’t become a burden on the state?

  18. “Ethically, it’s disgraceful for a government – one of whose prime duties is to safeguard property – to preside over the systematic devaluation of property.”

    It’s more disgraceful to leave a lot of people out of work because you’ve decided that lowering the deficit comes before stimulus spending.

  19. Or, come to think of it, to put a lot of extra people out of work for that reason. Osborne is having a good shot at destroying the economy by imposing austerity measures like those in Ireland or Denmark (which has just gone back into recession as a result of its austerity drive).

    Far better that we keep our public services, and get people back into work by focussing on growth/staying out of recession. That would normally mean lowering interest rates, but they are essentially at zero percent, so the alternative is quantitative easing and stimulus spending.

  20. You’ve got great insights about money, keep up the good work!

  21. Could be, or it could be due to rising fuel prices caused by increasing demand along with wars in the Middle East, the fear of them and the Arab revolutions. The original stagflation began after the 1973 oil price rises. Rising fuel prices increase the cost of transport and so of most commodities, so will push inflation up.

    Printing money is not an ideal solution to anything, but might be better than deflation and a spiral of falling demand and rising unemployment.

  22. sorry meant to say increasing demand for oil in growing developing economies (e.g China, Indian, Brazil)

  23. Maybe all ‘the experts’ have joined the Zeitgeist movement, certainly Google is in there; now we have the Google Zeitgeist movement.
    -
    http://www.zeitgeistminds.com/videos/choosing-your-world-highlights

  24. We bailed it out and now Gideon is flogging it off. No plebs need apply. Only his friends are eligible to make offers. Rock on!
    .
    ‘On the method for privatising the Rock, Mr Osborne has decided to offer the whole of the Rock for sale, rather than floating it on the stock market or responding to pressure from some MPs for it to be mutualised and turned into a building society.
    /
    He is following the recommendation of UK Financial Investments, which manages the Treasury’s stakes in banks, and also of UKFI’s adviser Deutsche Bank, of what is best for taxpayers.
    /
    That said, the Treasury believes that the Rock could become part of another building society, because it expects to receive bids from Yorkshire Building Society and from Coventry Building Society.
    /
    Other possible bidders include Sir Richard Branson’s Virgin Money and NBNK, the company set up last year to buy banks – although both Virgin and NBNK are more interested in buying Verde, the much bigger banking business that Lloyds is being forced to sell.
    /
    The Treasury plans to move rapidly to a disposal, with the hope that the new owner could be known before the end of the year.’
    /
    http://www.bbc.co.uk/news/business-13783765
    Chancellor set to announce Northern Rock privatisation

  25. Presumably you all knew about involvement of the one with the tombstone teeth in the private health industry.

    http://thoughcowardsflinch.com/2011/06/08/the-bransonal-health-service/

  26. Arnold Bocklin

    16 Jun, 2011 - 5:41 am

    Isn’t that the whole point, though? The big danger (see Japan) is that we’ll fall into deflation. By increasing inflation, QE makes sure that the index can’t fall below zero.

  27. You’ve got great insights about money, keep up the good work!

  28. This information is useful to us.That is very kind of you to write this share for us, thanks a lot.

  29. I think the mainstream economists are capitalist analogues of the Marxist ideologues of the Soviet Union. Economists such as Michael Hudson or William Black refer to these people as quacks.

  30. “As usual, only Islam comes near to having a solution because the other idiots lack any grain of intellectual integrity.” – Anno
    .
    As usual, wrong. Are you intentionally trying to be offensive? Who are these ‘other idiots’ that are collectively so inferior to you, in your not so humble opinion?
    .
    It is plain obvious from opinion poll evidence that majorities everywhere are for peace and against exploitation, and that religion is not a factor in this. What the people lack is a way to control their own governments – they lack democracy. This is true to a much lesser extent in Switzerland and the result speaks for itself. Would you care to offer an alternative explanation why the people of Switzerland refuse to get involved in aggressive wars – perhaps they have been secretly reading the Quran :)

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