U.K. M4 Money Supply Unexpectedly Drops In December

dopester

tomterm8 wrote: »

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.

How are they going to force velocity up? With helicopters? Yo free money, go party, keep buying.

A trend of credit expansion has two components: the general willingness to lend and borrow and the general ability of borrowers to pay interest and principal. These components depend respectively upon (1) the trend of people’s confidence, i.e., whether both creditors and debtors think that debtors will be able to pay, and (2) the trend of production, which makes it either easier or harder in actuality for debtors to pay. So as long as confidence and production increase, the supply of credit tends to expand. The expansion of credit ends when the desire or ability to sustain the trend can no longer be maintained. As confidence and production decrease, the supply of credit contracts.

The psychological aspect of deflation and depression cannot be overstated. When the social mood trend changes from optimism to pessimism, creditors, debtors, producers and consumers change their primary orientation from expansion to conservation. As creditors become more conservative, they slow their lending. As debtors and potential debtors become more conservative, they borrow less or not at all. As producers become more conservative, they reduce expansion plans. As consumers become more conservative, they save more and spend less. These behaviours reduce the "velocity" of money, i.e., the speed with which it circulates to make purchases, thus putting downside pressure on prices. These forces reverse the former trend.

The structural aspect of deflation and depression is also crucial. The ability of the financial system to sustain increasing levels of credit rests upon a vibrant economy. At some point, a rising debt level requires so much energy to sustain - in terms of meeting interest payments, monitoring credit ratings, chasing delinquent borrowers and writing off bad loans - that it slows overall economic performance. A high-debt situation becomes unsustainable when the rate of economic growth falls beneath the prevailing rate of interest on money owed and creditors refuse to underwrite the interest payments with more credit.

When the burden becomes too great for the economy to support and the trend reverses, reductions in lending, spending and production cause debtors to earn less money with which to pay off their debts, so defaults rise. Default and fear of default exacerbate the new trend in psychology, which in turn causes creditors to reduce lending further.

A downward " spiral" begins, feeding on pessimism just as the previous boom fed on optimism. The resulting cascade of debt liquidation is a deflationary crash. Debts are retired by paying them off, " restructuring" or default. In the first case, no value is lost; in the second, some value; in the third, all value. In desperately trying to raise cash to pay off loans, borrowers bring all kinds of assets to market, including stocks, bonds, commodities and real estate, causing their prices to plummet. The process ends only after the supply of credit falls to a level at which it is collateralized acceptably to the surviving creditors.

Sir_Humphrey

tomterm8 wrote: »

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.

Just building infrastructure alone as the Japanese did will not solve the problem. However, one difference between the UK and Japan is that Japan already had excellent infrastructure in 1989. So building extra infrastructure was pretty pointless, the government should have focussed on boosting consumer demand. In the UK, the opposite has been the case. UK consumers love to spend, but the UK has mostly lousy infrastructure, however most of the (modest in scale) fiscal boost has been to consumption.

Japan made a lot of other mistakes in policy in the early 1990s, so you cannot look at one factor in isolation. Their attempts at QE in 2001 were pretty useless as well.

Sir_Humphrey

To Dopester - I should have said avoid deflation so far. It could resume if the wrong policies are put into place after the election.

The policy of the Tories is to cut govt spending to keep IRs low. IRs will only remain as low as they are if deflation re-occurs. So it seems that the Tories think that deflating the economy will help recovery.

Bizarre.

kennyboy66_2

dopester wrote: »

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.

Would it be fair to say that you now have posted William Rees Moggs and James Dale Davidson's entire works, including their private correspondence, shopping lists and notes to the milkman ?

tomterm8

dopester wrote: »

How are they going to force velocity up? With helicopters? Yo free money, go party, keep buying.

China, and in fact the UK, has done it so far by mandating lending. Shock horror, if you order the banks to lend, then velocity of money goes up. Mandated lending doesn't get the press coverage it should have, because its the most radical policy the current labour government carried out during this debacle.

Whats in the pipe line, IMHO, is to alter the overnight deposit rates on banks to lower them into negative teritory. The effect of this is to make it expensive for the banks to hold excess reserves. Lending money, even at a projected loss, becomes cheaper for the bank than holding it on deposit with the bank of england.

This is a pretty radical policy move, but not as radical as mandated lending, which the UK government has already taken.

dopester

kennyboy66 wrote: »

Would it be fair to say that you now have posted William Rees Moggs and James Dale Davidson's entire works, including their private correspondence, shopping lists and notes to the milkman ?

Just mainly from the deflationary chapters. Also the 2nd quote is actually from Robert Prechter.

tomterm8, my own suspicion is that course of action would spook the markets and lead to a wider panic. Forced lending to sectors / businesses / individuals who ordinarily wouldn't qualify for the borrowing. Forced lending to those who are not good risks and where the money won't come back, isn't a path to stability or recovery.

It is feasible they might try to speed the growth of money/credit is such a way in the attempt to fend off asset deflation and rescue insolvent debtors, but it will be checked against by sound money. By those wanting to protect their own interests, including depositors, who are already rightly scared enough.

The best solution is obviously to let the bust fully take it's course, but so many people here think they are justified in trying to stop it, 'to protect people' - when to do so artificially only causes more damage. Your protection may do you special favours and protect you, but at the cost of others. It should be allowed to play out and allow natural recovery and the markets to reorganise.

A lot of mistakes to be made during the boom and the bust is part of the correcting of those mistakes.

The boom does certain things, certain bad things. Usually the boom is considered to be good times.

In economics this is the exact opposite.. boom times are the bad times.. boom times are the bad times because that's when the mistakes are made.

On the contrary, people feel and understand the bust as something bad and something terrible.. while in reality it is the exact opposite. The bust, what the bust does, is correct the previous mistakes in the boom.

Well, what are the previous mistakes in the boom?

Well they're very simple; malinvestment.

//

Liquidations.. asset is sold to the highest bidder

Who will be the highest bidder? The answer is simple - those that can use best the capital as it is today, or those who can retrofit it best for some other use.

In other words what the liquidation does is to change the use of a poorly invested asset, into a better use that will be more profitable.

In an auction the most efficient wins. A liquidation takes an inefficiently invested and used asset, and put in to it's best currently available efficient use.

Liquidation is the process to enhance or increase efficiency and thereby productivity and thereby overall output. So liquidation serves as the reversal as malinvestment. With liquidation you put it back to the right line of business.

BusinessCycles, Part 4 of 4 - The Austrian Bust, Prof. Krassimir Petrov
Google Video

drc

inspector_monkfish wrote: »

U.K.'s M4 money supply decreased 1.1% month-on-month in December after an increase of 0.1% in November, data from the Bank of England showed Thursday. Economists had forecast 0.9% rise in December.

http://www.rttnews.com/Content/AllEconomicNews.aspx?Node=B2&Id=1185663

What does this mean to the layperson?

HammerSmashedFace

purch wrote: »

A Big Black Hole marked Deflation :eek:

Dopester, where art thou.:D Either way the over-leveraged are screwed, deflation = debt growth, whilst wages stagnate or inflation = higher IR's whilst wages stagnate.

Heads you lose, tails you lose.

Edit. oops didn't read the whole thread to realise he's already here.

HAMISH_MCTAVISH

drc wrote: »

What does this mean to the layperson?

Base rates are staying low for some time.

Mr.Brown_4

HAMISH_MCTAVISH wrote: »

Base rates are staying low for some time.

Where's the slightly suprised and quizzical smiley that gives a hint of interest while raising a sardonic eyebrow... when you need it?