U.K. M4 Money Supply Unexpectedly Drops In December

Sir_Humphrey

The statistical correllation between money supply and inflation is poor (except for a period in the late 1970s). The money supply figures are poor, yet inflation including core inflation is increasing (I do not dispute the rise is exaggerated by factors such as VAT etc). If the facts do not meet a theory, then the theory (in this case that of monetarism) is likely to be incorrect or very incomplete.

Low interest rates do not force investment or spending. Neither do tax cuts. Since the Tories state (for instance on Newsnight last night) that they want to cut public spending to keep interest rates low, investment demand may well decline further after the election.

The BoE are targetting inflation, not money supply.

Making informed financial decisions right now seems just about impossible.

Really2

Sir_Humphrey wrote: »

The BoE are targetting inflation, not money supply.

Well not true inflation and the economy, so it is hard to argue that money supply is not related to the economy.

Until we show some decent growth I think we will see the economy being the main BOE focus.

Generali

Sir_Humphrey wrote: »

The statistical correllation between money supply and inflation is poor (

You reckon? Got a link or do we have to accept your assertion?

Investopedia.com (an excellent website) disagrees with you for example:

in 2000, the Fed announced that it would no longer set targets for growth of the money supply as a matter of policy, although it remains an important indicator for predicting inflation and spending patterns among consumers.

http://www.investopedia.com/university/releases/moneysupply.asp

Sir_Humphrey

Really2 wrote: »

Well not true inflation and the economy, so it is hard to argue that money supply is not related to the economy.

Until we show some decent growth I think we will see the economy being the main BOE focus.

Inflation is inflation as far as I am concerned, whatever the cause. I would not argue that money supply is not a factor in inflation, rather that other factors are important too. The quantity theory of money is very simplistic and old fashioned.

I also agree that the economy will be the main BoE focus. My worry as someone of a Keynesian persuasion is the scenario where inflation is not met by wage increases causing a serious decline in aggregate demand. In old fashioned terms this would be cosh-push inflation. This would not be a spiral as such, but inflation at 5%, with incomes at 0% would be very painful for everyone other than the rich elite.

Dieter Helm of Oxford Economic Research Associates (who has links to Policy Exchange, the Tory think tank) has suggested that living standards in the UK will permanent drop by 20-30% as a result of the credit crunch. I do not think the Tories would care if this occurred, provided their rich chums were alright Jack.

You have to bear in mind that such inflation would be bad for mortgagees, as the proportion of income servicing debt would remain the same, and their equity would be eroded by inflation as well - there is no way that HPI would continue in those circumstances, even if actual nominal drops in prices could potentially be avoided in that scenario.

tomterm8

Sir_Humphrey wrote: »

The BoE are targetting inflation, not money supply.

That's odd... I would have thought QE is directly targetting the money supply. I don't see any reason you'd print money if you didn't want the supply of money to go up. Anyway, I made no comment about inflation, I was saying money supply is a limiting factor as far as GDP growth is concerned right now. Inflation can go up even in times of low or negative growth.

Sir_Humphrey

tomterm8 wrote: »

That's odd... I would have thought QE is directly targetting the money supply. I don't see any reason you'd print money if you didn't want the supply of money to go up.

They are targetting CPI at 2% over the medium term, allowing for broader growth objectives. That is their mandate. As a means to that end, they are trying (at it seems failing) to increase the money supply to try to avoid a liquidity trap.

Really2

Sir_Humphrey wrote: »

They are targetting CPI at 2% over the medium term, allowing for broader growth objectives. That is their mandate.

http://www.bankofengland.co.uk/monetarypolicy/index.htm

Sorry I don't agree on that and neither does there monetary policy statement.

One of the Bank of England's two core purposes is monetary stability. Monetary stability means stable prices - low inflation - and confidence in the currency. Stable prices are defined by the Government's inflation target, which the Bank seeks to meet through the decisions taken by the Monetary Policy Committee.

A principal objective of any central bank is to safeguard the value of the currency in terms of what it will purchase. Rising prices – inflation – reduces the value of money. Monetary policy is directed to achieving this objective and providing a framework for non-inflationary economic growth. As in most other developed countries, monetary policy usually operates in the UK through influencing the price of money – the interest rate. However, in March 2009 the Bank's Monetary Policy Committee announced that in addition to setting Bank Rate, it would start to inject money directly into the economy. This means that the instrument of monetary policy shifts towards the quantity of money provided rather than its price.

CPI at 2% is not their only objective. I bet they wish it was as their job would be a lot easier.

Sir_Humphrey

Really2 wrote: »

http://www.bankofengland.co.uk/monetarypolicy/index.htm

Sorry I don't agree on that and neither does there monetary policy statement.

CPI at 2% is not their only objective. I bet they wish it was as their job would be a lot easier.

The MPC mandate is to target inflation. The purpose of the broader BoE covers other areas. The MPC is only part of the BoE, and some of its members are not BoE employees.

If the MPC mandate was to target money supply, then Mervyn King would be having to write letters explaining why M4 was too low, not why inflation was too high.

Generali

Sir_Humphrey wrote: »

They are targetting CPI at 2% over the medium term, allowing for broader growth objectives. That is their mandate. As a means to that end, they are trying (at it seems failing) to increase the money supply to try to avoid a liquidity trap.

I'm not sure how QE would avoid a liquidity trap. The idea (which nobody AFAIK has taken seriously in decades) is that demand for money becomes infinitely elastic. Why would changes in supply impact on the demand side?

Really2

Sir_Humphrey wrote: »

The MPC mandate is to target inflation. The purpose of the broader BoE covers other areas. The MPC is only part of the BoE, and some of its members are not BoE employees.

If the MPC mandate was to target money supply, then Mervyn King would be having to write letters explaining why M4 was too low, not why inflation was too high.

So will the BOE be increasing rates to fulfill that mandate or be looking after the economy in the next few months.;)

The inflation letter is just show, just that the government can't ask for a letter why the economy is in the poop as they should know.