Deflation Part III

Really2

smartn wrote: »

I'm still trying to see where long term inflationary pressures will come from. OK, so the change in VAT will add a bit but where else is inflation likely to come from?

I can only see fuel and food. The two things that we can not do without.

lemonjelly

Stealing perspectives from other threads etc, the BoE has pumped in £225 billion into the economy. Initially they were going to pump in £75 billion. So their pumping has trebled.

This money has to filter through the economy.

Will this not create inflationary pressures? Especially if they don't stop the QE soon enough?

chucky

lemonjelly wrote: »

Stealing perspectives from other threads etc, the BoE has pumped in £225 billion into the economy. Initially they were going to pump in £75 billion. So their pumping has trebled.

This money has to filter through the economy.

Will this not create inflationary pressures? Especially if they don't stop the QE soon enough?

it's swapping holes of debt from one asset class to another - it shouldn't be inflationary.
it's not really 'pumping' money into the economy.

inflation if it comes will happen when they try to destroy this money that has been created.

Generali

lemonjelly wrote: »

Stealing perspectives from other threads etc, the BoE has pumped in £225 billion into the economy. Initially they were going to pump in £75 billion. So their pumping has trebled.

This money has to filter through the economy.

It hasn't so far - you can see that by the disconnect between M0 and M4. M0 is rising as bank reserves rise, M4 is rising very gently showing that these funds aren't being lent out.

If the BoE keeps on shovelling money at the banks then presumably at some point, that will be inflationary. Whether that is what will happen is complicated by the Government running a huge deficit - the BoE can't spook the bond market as if they do that, the Government won't be able to borrow what the require. Having to unwind a deficit of £180,000,000,000 in a year or so would be very difficult and no fun whatsoever for the UK citizenry.

smartn

lemonjelly wrote: »

Stealing perspectives from other threads etc, the BoE has pumped in £225 billion into the economy. Initially they were going to pump in £75 billion. So their pumping has trebled.

This money has to filter through the economy.

Will this not create inflationary pressures? Especially if they don't stop the QE soon enough?

This is something I'm not sure of, not much evidence of it yet, when are we to expect this to take effect. Is it not the case that this is just countering the deflationary pressures?

Really2

lemonjelly wrote: »

Stealing perspectives from other threads etc, the BoE has pumped in £225 billion into the economy. Initially they were going to pump in £75 billion. So their pumping has trebled.

This money has to filter through the economy.

Will this not create inflationary pressures? Especially if they don't stop the QE soon enough?

It does not have to filter through.

If you purchased a car on HP for £10K and sold it the next day for £8K where would the money come from to pay of the outstanding HP.

So the assets devalued overnight to get back to being even you have got to find £2K to be back where you were.

That is basically how I see it that QE is filling the gaps left by the banks deflated assets on there balance sheets.
Until they are restored not even normal activity will get back to normal, let alone what was happening in 2006.

So until your balance sheet is restored you are just going to be plugging the hole, not lending like a mad man.

chucky

Generali wrote: »

If the BoE keeps on shovelling money at the banks then presumably at some point, that will be inflationary.

why would the BoE continue to need to throw more QE at the issue?

surely the economy seems to be gathering some momentum that will allow this to stop.
the pound seems to think this from today's reaction?

lemonjelly

Generali wrote: »

It hasn't so far - you can see that by the disconnect between M0 and M4. M0 is rising as bank reserves rise, M4 is rising very gently showing that these funds aren't being lent out.

If the BoE keeps on shovelling money at the banks then presumably at some point, that will be inflationary. Whether that is what will happen is complicated by the Government running a huge deficit - the BoE can't spook the bond market as if they do that, the Government won't be able to borrow what the require. Having to unwind a deficit of £180,000,000,000 in a year or so would be very difficult and no fun whatsoever for the UK citizenry.

I think this is close to the point I am trying (very badly) to make.
I agree the money hasn't filtered through to the economy yet. But that is what it is supposed to do, & surely will do. I worry that because it isn't filtering through, the BoE are doing more QE under the assumption that the QE already done isn't sufficient - whereas it might be, if it actually filtered through. The key is in where to turn the tap off.

chucky wrote: »

why would the BoE continue to need to throw more QE at the issue?

surely the economy seems to be gathering some momentum that will allow this to stop.
the pound seems to think this from today's reaction?

Is it? I'm not so sure. Unemployment will continue rising, and services appear to be stretched.

chucky

lemonjelly wrote: »

Is it? I'm not so sure. Unemployment will continue rising, and services appear to be stretched.

the economy can still have growth with unemployment rising (within reason of course)

lemonjelly

chucky wrote: »

the economy can still have growth with unemployment rising (within reason of course)

I tenatatively agree. My concern is that the growth is not necessarily sustainable. I think part of this is down to a public perception of back to growth pre-crunch.

Personally I feel there is the real possibility of more than a year of stagnation, with the real likelihood of falls once QE stops.

I do think that VAT rising, & ongoing rises in oil prices will have an adverse impact on the economy.

To me, essentials such as food, fuel, petrol seem to almost be spiralling upwards (a little melodramatic I'll accept), but they're climbing, & I'm not in a position to be really hurt by it. But there are many around me, friends, family etc who do appear to be having a real struggle.

As such, when the QE money comes into the general economy, money supply goes up, together with VAT and the rest, I feel there will be inflation.