U.K. M4 Money Supply Unexpectedly Drops In December

Sir_Humphrey

Generali wrote: »

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?

I don't think it would either, you would have to ask a monetarist why it might work.

The way to avoid a liquidity trap is for the government to become an investor of last resort. If the govt took the QE money and used it itself to build infrastructure etc, this would overcome the liquidity trap by both boosting growth and increasing inflation (both of which are good things if you are in deflation)! The UK govt did this is in the 1930s, a lot of the London Underground under the LPTB was built this way for example.

The Tories seem to think that having low interest rates alone will allow economic recovery. Osborne has been quite explicit in this. That is economically illiterate both from a Keynesian and Monetarist point of view.

kennyboy66_2

Sir_Humphrey wrote: »

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.

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I hate the Tories and a lot of what they stand for with a passion, but this seems a ludicrous assertion.

tomterm8

I think that you might want to check http://web.mit.edu/krugman/www/trioshrt.html . Some people have taken the liquidity trap seriously. QE would have no effect if we were in a liquidity trap, for the reasons explained by Krugman. By definition, changing interest rates will not work in a liquidity trap, because it can only occur where the neutral interest rate is lower than 0%.

Generali

There can't be a recovery unless it is led by business. The Government will never be able to spend a way out of recession.

Devaluation of sterling and trying to get the export sector going is the way forward. It won't be popular (foreign holidays and electronics will be much more expensive) but it's probably the least painful way to sort things out.

The only trouble is, everyone else will be thinking the same thing before too long I reckon.

tomterm8

The only problem I see in that is that there are too many nations that need to devalue. The US, Eurozone, Japan, and UK all have cases for devaluation... and export lead growth needs someone to export to.

Sir_Humphrey

tomterm8 wrote: »

I think that you might want to check http://web.mit.edu/krugman/www/trioshrt.html . Some people have taken the liquidity trap seriously. QE would have no effect if we were in a liquidity trap, for the reasons explained by Krugman. By definition, changing interest rates will not work in a liquidity trap, because it can only occur where the neutral interest rate is lower than 0%.

I agree with Krugman, I read his blog. The Return of Depression Economics by Krugman is well worth a read, I found it the most interesting policy book on the Credit Crunch.

Krugman is a Keynesian and argues that more fiscal stimulus is the way to pull the USA out fo recession, and that Obama's plan has been too modest and too focussed on tax cuts. Given the dysfunctional nature of the American political system, where a Senate majority of 59-41 cannot even push through modest reform, it seems unlikely that the USA will get what it needs.

The current government measures have avoided deflation, but are too short-termist to really cement recovery over the next decade IMHO.

Unfortunately, the Tories have successfully persuaded public opinion that reducing the deficit is more important than fighting a liquidity trap.

If the bond vigilantes prevent this from happening, this would show the current version of Capitalism to be just about useless at serving the world economy.

I hate the Tories and a lot of what they stand for with a passion, but this seems a ludicrous assertion.

The Tories do not care if unemployment increases, the early 1980s and early 1990s show this clearly, nor do they care if wages remain depressed (they would not be anti-Union of they did). I should have probably said Tory right-wingers, not the (decreasingly influential) moderates such as Ken Clarke.

If they do care, then the problem is that the Tories have deluded themselves that their policies may help.

Labour's policies are not that impressive either, particularly since they caved in to the Tory fiscal arguments.

purch

The statistical correllation between money supply and inflation is poor

I sure that a certain Mr Paul Volker formerly of 33 Liberty Street NYC might disagree. :eek:

Sir_Humphrey

Generali wrote: »

There can't be a recovery unless it is led by business. The Government will never be able to spend a way out of recession.

Devaluation of sterling and trying to get the export sector going is the way forward. It won't be popular (foreign holidays and electronics will be much more expensive) but it's probably the least painful way to sort things out.

The only trouble is, everyone else will be thinking the same thing before too long I reckon.

I agree that we need to rebalance towards exports, but the evidence suggests that left to its own devices, extra liquidity just leads to asset price booms and destructive leveraged buyouts - the last thing the UK needs now is more asset-stripping.

The government needs to break the grip of the City on the economy and hand over more influence to people in the mould of the late Sir John Harvey-Jones. That means abandoning Thatcherism and moving to a German-style Social Market Capitalism. This cannot be achieved without govt intervention. I would expect neither Labour nor the Tories will do this until people suffer long enough to cotton on to this. Then electoral logic may just bring this about.

The strength of Capitalism is that it can adapt over time. Setting it in a Thatcherite 1980s aspic could well see it go the way of Soviet Communism.

Your last two paragraphs is very interesting. If there are not enough investors or consumers, then the Marxist late-Capitalist underconsumptionism theory could play out. Keynesianism is a perfect antidote to that problem (after all Keynes was trying to save Capitalism, not bury it).

tomterm8

From my perspective, Keynes, neo-Keynes, Monetarist, and conventional economic wisdom aside, it is hard to say we should rely over much on economic theory when the current circumstances are unprecidented, except for the great panics (i.e. 1870, 1929 etc), which occured in completely different monetary environments. I don't think we are in kansas any more, toto. We are in the same situation Japan was in in 1990, and fiscal spending didn't exactly work well there. Or the situation America was in during 1930, and fiscal austerity wasn't exactly very successfull there.

In any case, i think keeping money supply stable is pretty vital. I also think they will start to target velocity of money soon, by messing around with deposit rates.

dopester

Sir_Humphrey wrote: »

Krugman is a Keynesian and argues that more fiscal stimulus is the way to pull the USA out fo recession, and that Obama's plan has been too modest and too focussed on tax cuts. Given the dysfunctional nature of the American political system, where a Senate majority of 59-41 cannot even push through modest reform, it seems unlikely that the USA will get what it needs.

The current government measures have avoided deflation, but are too short-termist to really cement recovery over the next decade IMHO.

Labour haven't avoided deflation. It is not over. It has barely even begun.

Government policies can encourage growth (highways built in the US during the depression, leading to the boom of suburbia and businesses to serve it), but mostly their record is miserable.

The banks are right to deny lending to would-be borrowers in doomed sectors.. no matter how enthusiastic those who are applying to borrow.

Credit revulsion from more stable or emerging sectors, where they don't want to take on more money - you can't force them to borrow. Same for individuals.

Some of us have suffered the house price hyperinflation on the way up. Too many boomers act like total Gods compared to the circumstances of younger generations and the prospects for those coming through. You're not going to get away with no rebalancing of the situation. As a boomer if you're not in a secure position by now with savings, then you can only whine at yourself. A long wave of inflation many assume permanent can be checked back hard.

Disturbances analogous to economic depressions are characteristic of many complex systems in nature. Paleo-ecologists for example, have established that spectacular forest fires in Yellowstone Part, in which vast numbers of acres are consumed, such as that in the summer of 1988, "occur every 200 or 300 years." In effect there is a "long wave" of forest growth, followed by a major conflagration and a slow period of regeneration.

William H. Romme and Don G. Despain point out that forest systems evolve through various stages of succession. Growth is most luxuriant and varied immediately after a major fire. For quite logical reasons, the forest is not very flammable during the recovery period when a few widely spaced saplings and low-lying vegetation keep the forest floor moist.

Neither are major fires likely during the many decades when "the treetops rise too far above the the forest floor to be easily ignited from below." But during the "climax stage," when the understory of old-growth forests is littered with dead trees and rotting underbrush, a spectacular fire is almost inevitable. It is only a matter of time until lightning strikes in a dry season and the whole flammable mix explodes.*

The long cycle of economic life appears to be shorter than the long cycle of forest growth in Yellowstone Park, and we hope, less combustible. Yet both cycles may function in inheritantly similar ways. Just as it is impossible to prevent or suppress spectacular forest fires by putting out every small fire over time, so too, economic policies that aim to prevent depression by forestalling bankruptcies and enlarging debts may only increase the severity of the ultimate disturbance.

The mounds of debt paper issued by politicians in the leading countries, especially the United States, may merely be littering the understory of the economy with combustible material. When the spark is lit, it will produce a "mighty flame".

Of course, many people no longer believe that the long cycle of boom and bust still operates. They imagine that the climax of the cycle - the period of credit collapse and deflation - is now impossible because politicians have determined to prevent it. The is not the place to go into an extensive analysis of why this view is mistaken. We shall save that for another chapter. Suffice it to say that the populations of the leading industrial countries evidence a touching faith in the powers of politicians.

*The pattern of growth and conflagration is not unique to Yellowstone. Some Florida pine forests for example actually require fires in order to survive. The Florida pines have evolved so that their cones will not open to release their seeds unless they are heated to a high temperature by fire.