Deflation Watch pt 152

tomterm8

It's very worrying, how many months has M4 been falling now?

carolt

I don't really get this. Can you explain (in v simple terms ) why this matters and maybe give examples of where this has happened before and the results.

I see prices rising, inflation rising - why does this matter so much?

tomterm8

carolt wrote: »

I don't really get this. Can you explain (in v simple terms ) why this matters and maybe give examples of where this has happened before and the results.

I see prices rising, inflation rising - why does this matter so much?

The M4 lending figure matters because it means a significant number of people either can't or won't borrow money. Since a lot of future productivity depends on borrowing today to have returns tomorrow, it means we will have 'less stuff' in the future... if a company can't get money to invest in a new factory, etc.

The M4 figure is a measure of how much money there is in the whole economy; in order to sustain growth, M4 needs to increase by roughly the same amount as the economy grows. This means money will remain worth roughly the same as it used to be (in terms of buying stuff). Otherwise, either prices must fall, or the economy will shrink. It is harder for prices to fall in aggregate than for the economy to shrink. Therefore, when M4 falls, it tends to trigger either a period of slower growth or an out and out recession.

michaels

I suspect the second point may be a big issue at the moment. Despite the weakness of GBP prices for electronics/white goods have continued to fall but in times of financial strain such big ticket purchases are likely to make up a smaller proportion of the average 'basket'. I suspect this will lead to an increasing divergence between measured and perceived inflation, not sure what the macro consequence of this will be.

The fall in M4 is bad news especially given the recent sharp fall reported in consumer sentiment indices as the govt start to talk in earnest about the scale and pain of cuts to come.

One anti-deflationary (in terms of the measured index at any rate) tool not mentioned is the use of govt administered price rises - VAT being the best example but also duties and even regulated prices like rail fares and water prices - perhaps the VAT increase should be timed to prevent deflationary expectations setting in.

Generali wrote: »

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.

carolt

tomterm8 wrote: »

The M4 lending figure matters because it means a significant number of people either can't or won't borrow money. Since a lot of future productivity depends on borrowing today to have returns tomorrow, it means we will have 'less stuff' in the future... if a company can't get money to invest in a new factory, etc.

The M4 figure is a measure of how much money there is in the whole economy; in order to sustain growth, M4 needs to increase by roughly the same amount as the economy grows. This means money will remain worth roughly the same as it used to be (in terms of buying stuff). Otherwise, either prices must fall, or the economy will shrink. It is harder for prices to fall in aggregate than for the economy to shrink. Therefore, when M4 falls, it tends to trigger either a period of slower growth or an out and out recession.

Can't we just be more productive with what we have and borrow less? Surely this is the reality for lots of businesses at the moment?

abaxas

carolt wrote: »

Can't we just be more productive with what we have and borrow less? Surely this is the reality for lots of businesses at the moment?

Most businesses would love to do that, but sadly employment law gets in the way.

carolt

Does it? How?

tomterm8

carolt wrote: »

Can't we just be more productive with what we have and borrow less? Surely this is the reality for lots of businesses at the moment?

No, not really. we are talking about aggregate measures here, it is highly unlikely that you could improve how effectively you use credit over the entire economy in a matter of months.

There have only been a few occasions in history where such a rapid change might have happened, such as the two industrial revolutions. Can't actually show it happening because figures don't go back that far.

Normally, such changes are slow, and wouldn't really show up in month on month figures like these.

kennyboy66_2

Generali wrote: »

The latest provisional M4 numbers from the Bank of England:

http://www.bankofengland.co.uk/statistics/m4/current/index.htm




Money supply continues to fall. I can't see how prices can rise in the short-medium term while M4 is collapsing like this. I still don't see a happy ending here, regardless of whether you have Tory cuts or Labour stimulous.

As much of the increase in M4 effectively found its way into house prices /asset prices over the last decade, rather than general prices, maybe thats were the contraction will be felt as well. Or rather thats were it may first appear.

lvader

Bring it on, I'd love a bit of deflation for a few years. :beer: