Deflation Watch pt 152

Generali

M4 money supply figures were released by the Bank of England last Friday and they make for pretty grim reading IMO.

Seasonally adjusted provisional figures for April are as follows: M4 increased by £0.6 billion (0.0%), lower than the average flow for the previous six months of £3.9 billion. The twelve-month growth rate continued to fall, to 3.3% from 3.5% in March.


M4 lending decreased by £9.9 billion (0.4%) in April. The twelve-month growth rate increased to 4.3% from 4.0% in March.


M4 lending (excluding the effects of securitisations etc.) decreased by £9.5 billion (0.4%) in April. The twelve-month growth rate continued to fall, to 2.8% from 3.2% in March.

[Bank of England's bolding of text]

Inflation is not the enemy right now IMO. The BoE should and I think will keep interest rates low for some time yet and restart QE. Even that I fear will not be enough.

lemonjelly

Is it as simple as saying that the banks not lending money is the cause of this? Is that too simple an explanation?

Given that the BoE have effectively put £250bn extra into the economy, I am really confused as to how come the amount of money in circulation is not rising.

Generali

lemonjelly wrote: »

Is it as simple as saying that the banks not lending money is the cause of this? Is that too simple an explanation?

My feeling is that it's a mix of banks not lending and people not borrowing.

lemonjelly wrote: »

Given that the BoE have effectively put £250bn extra into the economy, I am really confused as to how come the amount of money in circulation is not rising.

The money supply isn't the same thing as the amount of money in circulation. The equation economists use is:

money supply = amount of money x number of times on average the money is spent

If people and companies are 'hoarding money'* then the number of times money is spent (known as velocity of circulation) is falling and so the money supply will fall. If the money supply falls then prices will probably fall too.







*eg saving and paying off debt, they are the same thing in economics

lemonjelly

Generali wrote: »

My feeling is that it's a mix of banks not lending and people not borrowing.

But are people not borrowing because access to credit is more restricted than it has been, or because it is a lot more expensive (rates for borrowing have definitely increased in the past couple of years in my view), or are they choosing not to borrow?

Generali wrote: »

The money supply isn't the same thing as the amount of money in circulation. The equation economists use is:

money supply = amount of money x number of times on average the money is spent

If people and companies are 'hoarding money'* then the number of times money is spent (known as velocity of circulation) is falling and so the money supply will fall. If the money supply falls then prices will probably fall too.

*eg saving and paying off debt, they are the same thing in economics

Very interesting. I know I have been making all sorts of efforts to restrict spending especially on unnecessary items where practical. If this type of practise is/has become more widespread through the population as a result of the past couple of years I can see how this affects us all. But why then is inflation occurring now? Is it that it will take time for the prices to start falling (if they do)?

chucky

Generali wrote: »

My feeling is that it's a mix of banks not lending and people not borrowing.




The money supply isn't the same thing as the amount of money in circulation. The equation economists use is:

money supply = amount of money x number of times on average the money is spent

If people and companies are 'hoarding money'* then the number of times money is spent (known as velocity of circulation) is falling and so the money supply will fall. If the money supply falls then prices will probably fall too.







*eg saving and paying off debt, they are the same thing in economics

but the again (being devil's advocate) the retail numbers (i think) are on the increase month on month.

can it still be the case?

Generali

lemonjelly wrote: »

But are people not borrowing because access to credit is more restricted than it has been, or because it is a lot more expensive (rates for borrowing have definitely increased in the past couple of years in my view), or are they choosing not to borrow?

Yes.

For example, my sister in law can no longer get additional credit of any sort because she is a bad risk. She is no more a bad risk than 2 years ago but the attitude of banks has changed.

My brother in law OTOH is a very good credit risk. He is choosing to pay down his debt (aka saving in the economics world).


Both are contributing to falling money supply.

lemonjelly wrote: »

Very interesting. I know I have been making all sorts of efforts to restrict spending especially on unnecessary items where practical. If this type of practise is/has become more widespread through the population as a result of the past couple of years I can see how this affects us all. But why then is inflation occurring now? Is it that it will take time for the prices to start falling (if they do)?

IMO a big part of the current inflation is made up of two things:

- The stats people not knowing how to deal with falling spending overall in the inflation numbers
- There being a lag between spending patterns changing and them impacting the inflation figures

That's not the same thing as saying that prices aren't rising. Inflation from rising import prices changes spending patterns and that takes time to happen and to measure.

purch

M4 money supply figures were released by the Bank of England last Friday and they make for pretty grim reading

Maybe they should forward them onto the OECD to stop them talking nonsense about Inflation. :eek:

It's pretty obvious that the inflationary pressures are not coming from increased consumption/borrowing !!!!

lostinrates

Generali wrote: »

Yes.

For example, my sister in law can no longer get additional credit of any sort because she is a bad risk. She is no more a bad risk than 2 years ago but the attitude of banks has changed.

My brother in law OTOH is a very good credit risk. He is choosing to pay down his debt (aka saving in the economics world).


Both are contributing to falling money supply.

.

I don't understand really. We are like your B-i-l, we can get credit, but the property we want it seems, cannot...(practically anyway, theoretically it can....but has to have lots of work done before completion: a no go for us because of the ''particular'' nature of our vendors). I have been speaking directly with the underwriters and have been told that self build mortgages are also a bit of a no go, and anything sort of old wih the issues old buildings often have.

If the lenders/underwriters are so worried, it worries me.:o

edit: please scratch that. Turns out if I sound confident the underwriters feel confident. Thus, we are exchanging.

How terrifying. debate forum's self proclaimed dunce convinces underwriters.

Masomnia

purch wrote: »

Maybe they should forward them onto the OECD to stop them talking nonsense about Inflation. :eek:

It's pretty obvious that the inflationary pressures are not coming from increased consumption/borrowing !!!!

So a devalued £ and increased taxes on consumption?

Just trying to learn here!

Generali

lostinrates wrote: »

How terrifying. debate forum's self proclaimed dunce convinces underwriters.

Nice one LIR!

Masomnia wrote: »

So a devalued £ and increased taxes on consumption?

Just trying to learn here!

Yes, IMO

StevieJ

Masomnia wrote: »

So a devalued £ and increased taxes on consumption?

Just trying to learn here!

Yes and exchange rate could fall further but inflation is likely to be tempered by low wage inflation and spare capacity in the economy, well that is what the BOE are expecting anyway.