Deflation Watch pt 152

Generali

foreversummer wrote: »

Thanks Purch.

Don't suppose Generali is around to interpret them for us?

He might be....

M4 is the broadest measure of the money supply in the UK. It comprises:

- sterling notes and coins (physical cash)
- money held on deposit by banks, companies and individuals, including off balance sheet items
- money resulting from repos (a type of secured loan, usually between banks)

Because it includes all money on deposit it will include money created by banks by credit creation.

M4 lending is a measure of money being created by banks through the means of credit creation.

Both measures of M4 are falling on a monthly basis and have barely risen over the year. The reason for that is that people and companies are paying back debt rather than borrowing money. That causes a fall in the money supply.

This could mean that deflation results as for the most part, inflation and deflation are caused by changes in the money supply. Deflation coupled with low growth rates usually leads to some pretty unpleasant economic results.

I hope that makes sense. I keep meaning to write a thing about money supply. It's a big topic though.

tomterm8

One of the problems is when you get deflation plus falling money supply, it can easily turn into a vicious spiral... deflation means it is more expensive to borrow, so people cut back spending to pay back debt, resulting in falling money supply, which leads to worse deflation... etc...

sabretoothtigger

Came across this counter for uk debt and this seemed the most relevant thread for it, deflation is aided by debt?
Ive read gdp growth can occur during deflation also, which is confusing

Every household will pay £1,893 this year, just to cover the interest

http://www.debtbombshell.com/

Generali

Debt repayment is deflationary. Slightly strangely, so is the VAT increase because it takes money from the economy.

michaels

Especially as there is no such thing as a wage/price spiral or adaptive expectations.

And of course fiscal tightening has a real impact on the economy as rational agents do not just infer that a lower deficit now equals less taxation in future.

Generali wrote: »

Slightly strangely, so is the VAT increase because it takes money from the economy.

Generali

michaels wrote: »

Especially as there is no such thing as a wage/price spiral or adaptive expectations.

Are you being sarcastic or is that your belief? (Genuine question as it's impossible to tell with the written word).

When 2,500,000 are unemployed and it looks like a whole lot more are set to lose their jobs, workers rarely have the bargaining power to push up wages.


http://www.statistics.gov.uk/cci/nugget.asp?id=10

In the year to May pay growth (including bonuses) in the private sector stood at 2.8 per cent

Real wages are falling. A VAT increase doesn't do anything to enable firms to increase wages to workers and it doesn't make the labour market any tighter.

dopester

Generali wrote: »

Reading between the lines, credit is available but people and especially businesses just aren't interested in taking it up. Deleveraging continues and I expect to see another round of QE before long.

So where will this QE go, Generali?

How will it get out there to stimulate the economy?

Helicopters?

Generali

dopester wrote: »

So where will this QE go, Generali?

How will it get out there to stimulate the economy?

Helicopters?

Buying up more crappy assets would be my guess. Greek bonds perhaps?

I'm not sure how successful it will be but the Governments and Central Banks want to be seen to be doing something, especially now austerity has been launched.

ManAtHome

Helicopter fuel is pretty expensive these days - they'll probably decide to save money by keeping the trips short - something like BoE to Canary Wharf..?

Generali

dopester wrote: »

So where will this QE go, Generali?

How will it get out there to stimulate the economy?

Helicopters?

I ironic really. The Government is in financial trouble as they've spent so much on bailing out the banks. The obvious solution is to print money to hold down taxes in the short term and avoid deflation. However they can't do that as the bond market won't let them.

Who are the big investors in bonds? Banks!