Deflation Watch pt 153 - International Edition

tomterm8

It's interesting that when you look at government bond yields right now, they are actually lower than the CPI ... at least until around 7 years time.

Makes you wonder what the market knows.

Generali

michaels wrote: »

Monetarism is so 1980s - velocity of circulation not being a constant not an issue?

No problem for the UK to keep its CPI/RPI positive what with currency depreciation and administered price rises like VAT, duties, regulated rail fares etc.

I don't think velocity of circulation is constant and indeed I think that's the biggest scope for policy error, especially at the moment.

Surely I don't have to be a monetarist to think that price level = goods sold / money used to buy those goods?

lemonjelly

Generali I've been contemplating all this trying to get a better understanding of it. It has made me wonder, if M4 isn't rising, does this impact on the BoE withdrawing the QE money?


I appreciate they didn't literally print the cash, but where/how do they withdraw it from the system? & if M4 remains low/falls, does that make it more difficult, or impact on the BoE's decision on how & when to withdraw it?

(I also sense the potential for another blog...;))

Generali

lemonjelly wrote: »

Generali I've been contemplating all this trying to get a better understanding of it. It has made me wonder, if M4 isn't rising, does this impact on the BoE withdrawing the QE money?


I appreciate they didn't literally print the cash, but where/how do they withdraw it from the system? & if M4 remains low/falls, does that make it more difficult, or impact on the BoE's decision on how & when to withdraw it?

(I also sense the potential for another blog...;))

If M4 growh continues to fall it is highly unlikely that the BoE will unwind QE let alone increase interest rates.

lemonjelly

Generali wrote: »

If M4 growh continues to fall it is highly unlikely that the BoE will unwind QE let alone increase interest rates.

So if M4 doesn't grow, the QE money can't be withdrawn. Leaving the money in the system could be an inflationary pressure. This means that the timing of withdrawal is not only difficult to assess, but hugely important!:eek:

tomterm8

lemonjelly wrote: »

So if M4 doesn't grow, the QE money can't be withdrawn. Leaving the money in the system could be an inflationary pressure. This means that the timing of withdrawal is not only difficult to assess, but hugely important!:eek:

If M4 doesn't grow, my understanding is that QE would not cause inflation.

lemonjelly

tomterm8 wrote: »

If M4 doesn't grow, my understanding is that QE would not cause inflation.

Yes. Perhaps I should have said "risk" rather than "pressure". Of course, this does assume that the QE money will eventually filter through the system into circulation. I suppose the worry is what happens if that filtering process happens all at once/too quickly?

Generali

lemonjelly wrote: »

Yes. Perhaps I should have said "risk" rather than "pressure". Of course, this does assume that the QE money will eventually filter through the system into circulation. I suppose the worry is what happens if that filtering process happens all at once/too quickly?

I will try to write a blog on this but it is a massive subject so perhaps I'll have to break it up a bit into more manageable pieces from a writer's and a reader's POV!

The mechanism by which an increase in the money supply causes inflation is pretty simple. The theory is that life is a bit like an auction with people bidding to buy scarce goods and services. If you give the people in the auction more money then they can bid more. If they can bid more, prices will end up higher. Prices increasing is inflation, close enough anyway (it is a little more complicated than that).

M4 is a measure of the money supply. If that is increasing quickly compared to output, inflation may well be the result. Withdrawing QE would directly and quickly reduce this measure of M4 and I suspect would impact on inflation faster than increasing interest rates.

The reason QE isn't filtering into price increases is that the mechanism for that happening is banks taking the QE funds and using it to lend more money and for whatever reason, bank lending is flat or even falling at present.

zappahey

Generali wrote: »

The theory is that life is a bit like an auction with people bidding to buy scarce goods and services. If you give the people in the auction more money then they can bid more. If they can bid more, prices will end up higher.

A bit like loose lending, where anyone with a pulse could get a mortgage, meaning that people could bid higher on housing?

Generali

zappahey wrote: »

A bit like loose lending, where anyone with a pulse could get a mortgage, meaning that people could bid higher on housing?

Precisely. In fact my argument is that as the money supply increased in the 2000s, inflation in general goods didn't rise because of the huge expansion of output in China. However output of houses didn't rise so much so their price rose dramatically.