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SuperTramp

Inflation, Hyperinflation, and M3

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Posted (edited)

Great post - I need to look deeper into that website. I don't know who runs it or if they have any agenda, but they do link to some interesting charts, like the Venezuelan stock market.

Argentina and Turkey look like they are on the verge of a hockey stick shaped chart, whereas Venezuela is already past it. Once the printing presses are going, and promises are made to people that this will be done, this will be paid for, it starts to snowball.

It is no wonder that it is easier to just buy and hold assets, rather than actually get your hands dirty by doing any real work. If your house makes £10K a year tax free, why would anyone slog away at a minimum wage job at the coal face?

Edited by 201p

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Thank you, I can't work out an agenda on the part of the owners of tradingeconomics.com, unless of course they're deliberately manipulating the numbers they report?

I hear you, the last 20 years have been very frustrating. Effectively, anyone who has been willing to pile into significant debt to purchase assets has essentially been able to enjoy almost risk free gains (and free from any hard work or diligence either) from ever looser monetary policy (the ruling elite and their connections would have known beforehand which way monetary policy was going, and have been given the opportunity to make even more money than the average Joe whose only philosophy was "you can't lose on bricks and mortar").

For anyone else who had some understanding of the machinations of government and central banks, and therefore had cause to doubt whether loose monetary policy would continue indefinitely, have seen our savings devalued, wages stagnate, and the price of accommodation spiral out of our reach.

If there is any definition of justice/injustice on a societal scale, this is as close as is possible to get, because the ruling elite are picking winners i.e. debtors, consumers, and intermediaries vs savers and producers.

Also, and rather sadly, I think, given the numbers, and precedent, the monetary games that western governments are now playing could continue for a very long time. That is to say, in terms of money printing, and what can occur, the UK, has only really just got started.

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I don't think that the UK is comparable at all; I'm not saying it's a bed of roses but I would still find it hard to draw any parallels between the UK and those countries.

The lateral scales vary incredibly but if you look at 2018M3 / 2010M3 (I'm just picking that because it works easily on the Turkish graph) then we have:

Turkey: 4x

Argentina: 10x

Venezuela: pass!

UK: 1.2x

So if we're seeing M3 growth as a proxy for inflation then 20% in 8 years works out at about 2.3% a year which sounds fine.  Unless your investments are all in cash earning 1% pa.

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Posted (edited)

I thought I would also post a graph of M3 in Japan.

Unfortunately the data only goes back to about 2002/2003 (I swear there used to be more data going further back, but I guess it has disappeared down the memory hole).

However, and again there appears to be no mystery over the lack of inflation in Japan over the so called "lost decade", as the money supply appears to have stagnated up until 2009 (which would mean a slow and persistent deflation as productivity increased).

An examination of 2009 and onward does show an attempt by the government and the BOJ to inflate, however, look at the right hand scale, M3 has barely increased by one third in nearly a decade (compare that to the UK where the doubling time for M3 from the 1980s to 2008, has about 8 years).

I remember all the hyperbole in the press over Abe's and Kuroda's "three arrows" initiative, part of which was stoking inflation, in monetary terms it's actually very conservative, and is little changed from their predecessors.

Coming back to the UK, and as immoral as the QE programmes and bank bailouts are, I have to give my due to Mervyn King here, he did just enough to stop the money supply shrinking (he replaced the bank liabilities that couldn't be honoured because of bad bank assets, with central bank money), without inflating the money supply into oblivion.

Watching debates between Keynesians and Modern Monetary Theorists with regard to inflation and monetary policy, the question of Japan, and the lack of inflation in Europe and the US after the QE programmes, has always left the opposition scratching around for a suitable answer, when the truth is quite clearly shown in the monetary measures.

In my opinion, it also shows how deeply mistaken Modern Monetary Theory is (I believe the theory says, in very brief summary, that money printing isn't a problem, because the government drain money from the economy through taxation. In reality the monetary data shows that governments do no such thing because their spending and entitlement programmes put the money straight back into circulation again).

JapanM3.jpg

Edited by SuperTramp
Minor edit

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Posted (edited)
27 minutes ago, Frank Hovis said:

I don't think that the UK is comparable at all; I'm not saying it's a bed of roses but I would still find it hard to draw any parallels between the UK and those countries.

The lateral scales vary incredibly but if you look at 2018M3 / 2010M3 (I'm just picking that because it works easily on the Turkish graph) then we have:

Turkey: 4x

Argentina: 10x

Venezuela: pass!

UK: 1.2x

So if we're seeing M3 growth as a proxy for inflation then 20% in 8 years works out at about 2.3% a year which sounds fine.  Unless your investments are all in cash earning 1% pa.

I wouldn't disagree with that, and I'm sorry if I didn't make myself clear previously, but in terms of silly monetary policy, part of what I was trying to show, was that in comparison to other countries where inflation is running out of control, the UK has barely started.

N.B. The interesting bit about the UK data is the period from 2010 to 2016, where you can see the battle between central bank printing money to inflate, and bad bank debts going bad and shrinking the money supply.

From 2016 onward it looks like debts have stopped going bad, and inflation is under way again. It will also be interesting to see if we get a full business cycle's worth of inflation (the cycle seems to run over 7-10 years) until about 2023-2026, or if we see contraction before then.

Edit, another take away from this is, in terms of indicators of inflationary problems, are the doubling time in money supply (4 years or less is not good), and the doubling time in the money supply halving consecutively over time.

Edited by SuperTramp
Small addition

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9 hours ago, SuperTramp said:

Thank you, I can't work out an agenda on the part of the owners of tradingeconomics.com, unless of course they're deliberately manipulating the numbers they report?

 

Also, and rather sadly, I think, given the numbers, and precedent, the monetary games that western governments are now playing could continue for a very long time. That is to say, in terms of money printing, and what can occur, the UK, has only really just got started.

It's  a business like Index Mundi

https://tradingeconomics.com/about-te.aspx

 

In terms of the original post,I think it's worth consdiering money supply figures in terms of velocity and GDP.Where money supply increases and velocity falls, the net effect of the printing isn't inflationary.The problem the Western CB's have is that they assumed velocity was a constant and not a variable.

The housing bubble isn't a result of the money printing but rather the lax regulatuion that's accompanied it.

Hyperinflations are genuinbely rare and you need a govt that has nothing to lose from it to get it.Western govts have too much to lose and will likely raise rates to head off inflationary pressures only to see velocity take off(jsut as it didn't with rate cuts).

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Posted (edited)
9 hours ago, Frank Hovis said:

I don't think that the UK is comparable at all; I'm not saying it's a bed of roses but I would still find it hard to draw any parallels between the UK and those countries.

The lateral scales vary incredibly but if you look at 2018M3 / 2010M3 (I'm just picking that because it works easily on the Turkish graph) then we have:

Turkey: 4x

Argentina: 10x

Venezuela: pass!

UK: 1.2x

So if we're seeing M3 growth as a proxy for inflation then 20% in 8 years works out at about 2.3% a year which sounds fine.  Unless your investments are all in cash earning 1% pa.

I think you have to be careful imputing price rises as a result of monetary expansion viz the earlier point about velocity.

Money supply really should be a proxy for inflation but it isn't,which implies a central weakness to the logic underpinning the monetary policy response post 2008

Worth noting as well,thst the Fed doesn't use M3 any more

https://mises.org/library/death-m3-fifth-anniversary

' Fed's lack of interest in the components of M3 can be directly linked to its inability to foresee the 2008 collapse of the financial system.

M3 was a highly imperfect statistic in that it did not capture the full extent of the leverage.

If the Fed had been tracking repos in 2007–2008, what they would have seen was the unfolding of the financial crisis one full year before it went critical. From Q3 2007 through Q2 2008, the repo market was starting to seize with lenders starting to demand higher and higher haircuts on collateral. In early Q1 2008, Shadowstats estimates that the rate of M3 growth started to decline rapidly as repo activity cooled. Then in September 2008, the repo market decided that it was unwise to lend additional funds to Lehman Brothers and the rest is history. '

9 hours ago, SuperTramp said:

I wouldn't disagree with that, and I'm sorry if I didn't make myself clear previously, but in terms of silly monetary policy, part of what I was trying to show, was that in comparison to other countries where inflation is running out of control, the UK has barely started.

N.B. The interesting bit about the UK data is the period from 2010 to 2016, where you can see the battle between central bank printing money to inflate, and bad bank debts going bad and shrinking the money supply.

From 2016 onward it looks like debts have stopped going bad, and inflation is under way again. It will also be interesting to see if we get a full business cycle's worth of inflation (the cycle seems to run over 7-10 years) until about 2023-2026, or if we see contraction before then.

Edit, another take away from this is, in terms of indicators of inflationary problems, are the doubling time in money supply (4 years or less is not good), and the doubling time in the money supply halving consecutively over time.

Agreed on the bit in bold.If velocity starts lifting then the UK could be in a world of pain but I think you have to be very careful watching it in isolation.

Edited by sancho panza

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Posted (edited)
15 hours ago, sancho panza said:

It's  a business like Index Mundi

https://tradingeconomics.com/about-te.aspx

 

In terms of the original post,I think it's worth consdiering money supply figures in terms of velocity and GDP.Where money supply increases and velocity falls, the net effect of the printing isn't inflationary.The problem the Western CB's have is that they assumed velocity was a constant and not a variable.

The housing bubble isn't a result of the money printing but rather the lax regulatuion that's accompanied it.

Hyperinflations are genuinbely rare and you need a govt that has nothing to lose from it to get it.Western govts have too much to lose and will likely raise rates to head off inflationary pressures only to see velocity take off(jsut as it didn't with rate cuts).

I'm not sure that velocity of money has much to do with inflation. I can't see any correlation at all, for example where is the spike in the velocity during the inflation of the 70s? Why is the velocity so high during the early to mid 1990s when inflation was falling and asset prices were low? Why is the velocity at record lows when inflation is now occurring in the USA? (See attached image for MV for the USA from 1950 - 2018):

I also cannot agree with the argument that the housing bubble was mostly caused by a lack of regulation, I believe the FSA regulations in the lead up to the bust in 2008 were well in excess of 10,000 pages, and were so complicated that as a consequence, no new banking licenses had been granted in nearly a century, within the UK.

Here's an article talking about regulatory changes and the grant of new banking licenses:

Banking Licenses Article

From the article:

Quote

The authorities launched a drive to make it easier to establish a new bank in the wake of the financial crisis, amid concerns that there was too little competition facing the established banks

I would argue instead that there are key bits of regulation and institutional changes that have allowed the money supply to increase dramatically and therefore increase asset prices. Otherwise where would people find so much extra money to pay for houses?

For example, the abandonment of fixed exchange rates in relation to the dollar (which in turn was tied to the value of gold) and the adoption of pure fiat currency.

Or, in the late 90s a few of the large building societies in the UK becoming banks (as I understand it building societies were not allowed to lend on a fractional reserve basis).

Quote

Worth noting as well,thst the Fed doesn't use M3 any more

https://mises.org/library/death-m3-fifth-anniversary

' Fed's lack of interest in the components of M3 can be directly linked to its inability to foresee the 2008 collapse of the financial system.

M3 was a highly imperfect statistic in that it did not capture the full extent of the leverage.

If the Fed had been tracking repos in 2007–2008, what they would have seen was the unfolding of the financial crisis one full year before it went critical. From Q3 2007 through Q2 2008, the repo market was starting to seize with lenders starting to demand higher and higher haircuts on collateral. In early Q1 2008, Shadowstats estimates that the rate of M3 growth started to decline rapidly as repo activity cooled. Then in September 2008, the repo market decided that it was unwise to lend additional funds to Lehman Brothers and the rest is history. '

I read that article as being highly critical of the Federal Reserve for dropping M3:

Quote

November 2005 was the interregnum between the long tenure of Alan Greenspan and newly appointed Chairman Bernanke. Most of the media coverage of the Fed at the time was a celebration of the Maestro and his wise stewardship of the economy. Thus, there was almost no reporting or domestic criticism of the discontinuance of M3. There were many concerns expressed by sophisticated fund managers, analysts, and foreign investors (central banks)

In addition to the argument that M3 should also include euro-dollar holdings (i.e. dollar holdings outside the USA), in order to help foresee future financial crises.

I think you're mixing up a different argument with the inflationary argument, in that I haven't tried to make the case that M3 could predict an imminent financial crisis (obviously you can see the inflation in the money supply and from that surmise that at some point in the future there will be problems, although without being able to discern a specific date for such events).

Also, I'm not sure how currency holdings outside the country of issuance can affect domestic inflation of that same country?

Surely, unless people were sneaking suitcases of euro-dollar, euro-sterling, or euro-yen, holdings back into the country of issuance, en masse, then repatriation of currency holdings would be going through the banking system, and therefore be picked up in M3?

I accept could still be wrong, and I would be very interested in any data that conflicts with what I've observed so far.

USMV.jpg

Edited by SuperTramp

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14 minutes ago, SuperTramp said:

I'm not sure that velocity of money has much to do with inflation. I can't see any correlation at all, for example where is the spike in the velocity during the inflation of the 70s? Why is the velocity so high during the early to mid 1990s when inflation was falling and asset prices were low? Why is the velocity at record lows when inflation is now occurring in the USA? (See attached image for MV for the USA from 1950 - 2018):

I also cannot agree with the argument that the housing bubble was mostly caused by a lack of regulation, I believe the FSA regulations in the lead up to the bust in 2008 were well in excess of 10,000 pages, and were so complicated that as a consequence, no new banking licenses had been granted in nearly a century, within the UK.

Here's an article talking about regulatory changes and the grant of new banking licenses:

Banking Licenses Article

From the article:

I would argue instead that there are key bits of regulation and institutional changes that have allowed the money supply to increase dramatically and therefore increase asset prices. Otherwise where would people find so much extra money to pay for houses?

For example, the abandonment of fixed exchange rates in relation to the dollar (which in turn was tied to the value of gold) and the adoption of pure fiat currency.

Or, in the late 90s a few of the large building societies in the UK becoming banks (as I understand it building societies were not allowed to lend on a fractional reserve basis).

I read that article as being highly critical of the Federal Reserve for dropping M3:

In addition to the argument that M3 should also include euro-dollar holdings (i.e. dollar holdings outside the USA), in order to help foresee future financial crises.

I think you're mixing up a different argument with the inflationary argument, in that I haven't tried to make the case that M3 could predict an imminent financial crisis (obviously you can see the inflation in the money supply and from that surmise that at some point in the future there will be problems, although without being able to discern a specific date for such events).

Also, I'm not sure how currency holdings outside the country of issuance can affect domestic inflation of that same country?

Surely, unless people were sneaking suitcases of euro-dollar, euro-sterling, or euro-yen, holdings back into the country of issuance, en masse, then repatriation of currency holdings would be going through the banking system, and therefore be picked up in M3?

I accept could still be wrong, and I would be very interested in any data that conflicts with what I've observed so far.

USMV.jpg

Lots of good points.I'll have to pop back tonight to answer.

I'm not having a go,here to learn,just like we all are.

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Posted (edited)

 

6 hours ago, SuperTramp said:

I'm not sure that velocity of money has much to do with inflation. I can't see any correlation at all, for example where is the spike in the velocity during the inflation of the 70s? Why is the velocity so high during the early to mid 1990s when inflation was falling and asset prices were low? Why is the velocity at record lows when inflation is now occurring in the USA? (See attached image for MV for the USA from 1950 - 2018):

I also cannot agree with the argument that the housing bubble was mostly caused by a lack of regulation, I believe the FSA regulations in the lead up to the bust in 2008 were well in excess of 10,000 pages, and were so complicated that as a consequence, no new banking licenses had been granted in nearly a century, within the UK.

Here's an article talking about regulatory changes and the grant of new banking licenses:

Banking Licenses Article

From the article:

I would argue instead that there are key bits of regulation and institutional changes that have allowed the money supply to increase dramatically and therefore increase asset prices. Otherwise where would people find so much extra money to pay for houses?

For example, the abandonment of fixed exchange rates in relation to the dollar (which in turn was tied to the value of gold) and the adoption of pure fiat currency.

Or, in the late 90s a few of the large building societies in the UK becoming banks (as I understand it building societies were not allowed to lend on a fractional reserve basis).

I read that article as being highly critical of the Federal Reserve for dropping M3:

In addition to the argument that M3 should also include euro-dollar holdings (i.e. dollar holdings outside the USA), in order to help foresee future financial crises.

I think you're mixing up a different argument with the inflationary argument, in that I haven't tried to make the case that M3 could predict an imminent financial crisis (obviously you can see the inflation in the money supply and from that surmise that at some point in the future there will be problems, although without being able to discern a specific date for such events).

Also, I'm not sure how currency holdings outside the country of issuance can affect domestic inflation of that same country?

Surely, unless people were sneaking suitcases of euro-dollar, euro-sterling, or euro-yen, holdings back into the country of issuance, en masse, then repatriation of currency holdings would be going through the banking system, and therefore be picked up in M3?

I accept could still be wrong, and I would be very interested in any data that conflicts with what I've observed so far.

 

Apologies for the extra cutting and pasting but you make a lot of good points.First of all,I think it's important to determine what we mean by inflation and aside from taking CPI/CPIH/RPI at face value, we have to accept that there are weaknesses using any of them and that they mostly,aren't that accurate at reflecting changing costs of living,particularly across an economy where the distribution of income is relatively equal.By that I mean for example, that the effect of food price inflation is disproportionately felt by lower income deciles.

It's also necessary to consider the price action on forex markets at any given time when viewing inflation, velocity and money supply data. So if the dollar is climbing,even through a period of QE,then there may be no resultant rise in prices.Which sort of brings us to where we are now.

 

'I'm not sure that velocity of money has much to do with inflation. ' Velocity is GDP/money supply. Inherently,if you print money and velocity drops GDP doesn't rise and inflation may well not result as some consumers simply delay or forego purchases.To see price inflation,you generally need velocity to either rise,or at least stay flat.

 

As per the four graphs below.USA CPI is up 47% since 2000.GDP is up 100%.M2 velocity down 33%.

M2 money supply is up 202%

During this period,expansion of M2 hasn't been very inflationary.Ergo,the reduction in velocity has helped ameliorate the increase in M2 in terms of inflation.

 

 

'I also cannot agree with the argument that the housing bubble was mostly caused by a lack of regulation'.

I used the word 'lax' but I should have chosen my words more carefully.We had lots of regulations,but a) they weren't very good, b) the people and organisations administering them weren't very good c) a lot of banks were quite blatantly ignoring them.

I remain sure that when this is all over,we'll see Glass Steagall get reinstated.You can virtually time the banking arms race from that moment.And let's remember it was written into law in the 1930's to prevent another Great Depression........

 

 

'I would argue instead that there are key bits of regulation and institutional changes that have allowed the money supply to increase dramatically and therefore increase asset prices.'

I don't disagree.Moving away from cash reserve lending onto using broader measures of capital and then Basel 1 which allowed banks to supposedly be monitored/compared internationally and reduce risk when in retrospect,it looks as it did anything but that which it was intended to do..I've posted this Steve Keen piece before but it shows how there was a body of evidence already in 2008 that banks were creating liabilities ahead of deposits which wasn't how the system was meant to work.Now,even the Bank of England accepts this but back in 08 we were being told it was the other way round.Clearly,allowing bankers to create laons ahead of deposits,pocket bonuses and then rinse and repeat was naieve.

http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/

Add in Glass Steagall and banks leaving cash reserve lending and you have the perfect storm for a credit bubble.

https://en.wikipedia.org/wiki/Glass–Steagall_legislation

'The separation of commercial and investment banking prevented securities firms and investment banks from taking deposits, and commercial Federal Reserve member banks from:

  • dealing in non-governmental securities for customers,
  • investing in non-investment grade securities for themselves,
  • underwriting or distributing non-governmental securities,
  • affiliating (or sharing employees) with companies involved in such activities.'

 

'For example, the abandonment of fixed exchange rates in relation to the dollar (which in turn was tied to the value of gold) and the adoption of pure fiat currency.'

Bretton woods is a separate debate I think.

 

 

'Or, in the late 90s a few of the large building societies in the UK becoming banks (as I understand it building societies were not allowed to lend on a fractional reserve basis).'

The BS's were using FRB but they were restrained from offering BTL mortgages and essentially offered savings and loans as I understand it.Becoming banks allowed them to ramp up credit expansion.I suspect when we see the current bubble collapse,we'll findd the BS's that are left taking some of the biggest losses.

 

'I read that article as being highly critical of the Federal Reserve for dropping M3:'

I read it that way too.I wasn't defending the fed.They should be using the broadest reliable measures they can imo.

 

'Also, I'm not sure how currency holdings outside the country of issuance can affect domestic inflation of that same country?'

The issue here as I see it is that some forex buyers of a currency may view foreign holdings as a reason to hold,say the dollar, and thus despite money printing,USD stays strong vs other currencies.

 

'Surely, unless people were sneaking suitcases of euro-dollar, euro-sterling, or euro-yen, holdings back into the country of issuance, en masse, then repatriation of currency holdings would be going through the banking system, and therefore be picked up in M3?'

Possibly a reason the Fed stopped using M3.

fredgraph(6).png

fredgraph(5).png

fredgraph(4).png

fredgraph(7).png

Edited by sancho panza

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On 26/08/2018 at 13:26, SuperTramp said:

I wouldn't disagree with that, and I'm sorry if I didn't make myself clear previously, but in terms of silly monetary policy, part of what I was trying to show, was that in comparison to other countries where inflation is running out of control, the UK has barely started.

N.B. The interesting bit about the UK data is the period from 2010 to 2016, where you can see the battle between central bank printing money to inflate, and bad bank debts going bad and shrinking the money supply.

From 2016 onward it looks like debts have stopped going bad, and inflation is under way again. It will also be interesting to see if we get a full business cycle's worth of inflation (the cycle seems to run over 7-10 years) until about 2023-2026, or if we see contraction before then.

Edit, another take away from this is, in terms of indicators of inflationary problems, are the doubling time in money supply (4 years or less is not good), and the doubling time in the money supply halving consecutively over time.

 

I was going to ask why this " and from 2010 onward stagnation in money supply growth until 2016" but I think your post above is the answer? Was it simply down to bad debts being written off?

I'm very much a layman with regard to economics, but keen to learn. So from now on, do you see high inflation / interest rates or just another ten years of what have just had?

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Posted (edited)

@Sancho Panza,

Hey, thanks for the post on MV.

This is something I want to investigate further,.

Some initial thoughts so far:-

- If MV = GDP / Money Supply, isn't this more a measure of how much one unit of a nation's currency can purchase of that same nations productivity, rather than speed of money changing hands? Not that it matters much, I accept that if you can at least increase GDP at the same rate as the money supply, then one unit of currency, should in theory still purchase the same amount of national productivity.

- In terms of nations with high inflation and hyper inflation, there's no way an increase in GDP can really ameliorate the price skew caused by increasing money supply, because the money supply is increasing so quickly.

For example, just taking the example of Turkey (see graphs above), the money supply is doubling every 4 years, in order to attenuate any price increases, productivity would have to grow at the same rate, which would be nearly 19% every year (not even China could manage that in the early 2000s).

Argentina is even worse, the doubling time in money supply is halving, given the slope of the curve, it looks like the doubling time is under 2 years. The last measurement I can take is 2 years, with the money supply doubling between 2016 and 2018, to keep up with that, GDP would have to grow at just over 41%.

I accept that some economic growth could soften it a little, but the usual 2-4% seen in growing economies, wouldn't ostensibly seem enough to even put a dent in growth rates of money supply seen in Turkey, Argentina, and Venezuela.

What I can't find so far, is a country where money supply has increased at a rate seen in the UK, with GDP either being flat, or perhaps falling slightly, and there being high inflation as a result.

I shall do some more digging, and also keep an eye on economic data as it comes in.

13 hours ago, null; said:

 

I was going to ask why this " and from 2010 onward stagnation in money supply growth until 2016" but I think your post above is the answer? Was it simply down to bad debts being written off?

I'm very much a layman with regard to economics, but keen to learn. So from now on, do you see high inflation / interest rates or just another ten years of what have just had?

Thanks for the question, I will get back to you.

Edited by SuperTramp
Addition

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Personally:

I don't believe that the central banks (= the government) will deliberately produce any information that'll lead to a removal of faith in the economy / currency (= the same thing).  

=> published 'quantity of money' stats won't tell you enough information to actually be able to invest based on that information.

[although I'm sure it'll all look like it should have been 'easy enough to read the data' in hindsight]

[and I do worry ever so slightly about m3 -- if the US has decided that 'it doesn't tell you anything useful' then there is a clear indication that it might actually tell me something useful (but might not)}

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11 hours ago, SuperTramp said:

@Sancho Panza,

Hey, thanks for the post on MV.

- If MV = GDP / Money Supply, isn't this more a measure of how much one unit of a nation's currency can purchase of that same nations productivity, rather than speed of money changing hands? Not that it matters much, I accept that if you can at least increase GDP at the same rate as the money supply, then one unit of currency, should in theory still purchase the same amount of national productivity.

- In terms of nations with high inflation and hyper inflation, there's no way an increase in GDP can really ameliorate the price skew caused by increasing money supply, because the money supply is increasing so quickly.

For example, just taking the example of Turkey (see graphs above), the money supply is doubling every 4 years, in order to attenuate any price increases, productivity would have to grow at the same rate, which would be nearly 19% every year (not even China could manage that in the early 2000s).

Argentina is even worse, the doubling time in money supply is halving, given the slope of the curve, it looks like the doubling time is under 2 years. The last measurement I can take is 2 years, with the money supply doubling between 2016 and 2018, to keep up with that, GDP would have to grow at just over 41%.

I accept that some economic growth could soften it a little, but the usual 2-4% seen in growing economies, wouldn't ostensibly seem enough to even put a dent in growth rates of money supply seen in Turkey, Argentina, and Venezuela.

What I can't find so far, is a country where money supply has increased at a rate seen in the UK, with GDP either being flat, or perhaps falling slightly, and there being high inflation as a result.

 

'- If MV = GDP / Money Supply, isn't this more a measure of how much one unit of a nation's currency can purchase of that same nations productivity, rather than speed of money changing hands? '

No,it's the speed of money.Velocity varies for a variety of reasons,People can hold off puchases if they fear for their jobs or they can speed them up if they're feeling confident.The problem came in 08 as they printed heavily to get GDP back up and velocity dropped.All the  CBs playbooks told them that if they devalued the value of money,people would spend it more frequently.How worng they were.

My genuine fear is that when velocity ramps up,they'll be unable to contain the inflationary genie once it's out of the bottle.

 

'- In terms of nations with high inflation and hyper inflation, there's no way an increase in GDP can really ameliorate the price skew caused by increasing money supply, because the money supply is increasing so quickly.'

I think we have to separate in flation from hyperinflation.The latter are very rare.

https://en.wikipedia.org/wiki/Hyperinflation

' While there can be a number of causes of high inflation, most hyperinflations have been caused by government budget deficits financed by money creation. Peter Bernholz analysed 29 hyperinflations (following Cagan's definition) and concludes that at least 25 of them have been caused in this way.[8]

Hyperinflation occurs when there is a continuing (and often accelerating) rapid increase in the amount of money that is not supported by a corresponding growth in the output of goods and services. '

 

'For example, just taking the example of Turkey (see graphs above), the money supply is doubling every 4 years, in order to attenuate any price increases, productivity would have to grow at the same rate, which would be nearly 19% every year (not even China could manage that in the early 2000s).

Argentina is even worse, the doubling time in money supply is halving, given the slope of the curve, it looks like the doubling time is under 2 years. The last measurement I can take is 2 years, with the money supply doubling between 2016 and 2018, to keep up with that, GDP would have to grow at just over 41%.'

Technically they're inflations.They do however give us a clear indication of where govts tend to go when they're in trouble.

 

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9 hours ago, dgul said:

Personally:

I don't believe that the central banks (= the government) will deliberately produce any information that'll lead to a removal of faith in the economy / currency (= the same thing).  

=> published 'quantity of money' stats won't tell you enough information to actually be able to invest based on that information.

[although I'm sure it'll all look like it should have been 'easy enough to read the data' in hindsight]

[and I do worry ever so slightly about m3 -- if the US has decided that 'it doesn't tell you anything useful' then there is a clear indication that it might actually tell me something useful (but might not)}

:ph34r:xD quite.....

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On 28/08/2018 at 19:38, null; said:

 

I was going to ask why this " and from 2010 onward stagnation in money supply growth until 2016" but I think your post above is the answer? Was it simply down to bad debts being written off?

I'm very much a layman with regard to economics, but keen to learn. So from now on, do you see high inflation / interest rates or just another ten years of what have just had?

The quick answer to your question is, yes, I believe bad debts being written off were shrinking the money supply.

I think though, you're looking for an explanation? Because why should debts that can't be repaid shrink the money supply?

The answer to that is, that there are two types of money, central bank money, and money created by commercial banks (they are effectively the same thing, but with one very important difference, which is not readily disclosed to the general public, unless you are willing to read the fine print of bank's terms and conditions).

The money created by central banks consist of the notes and coins in circulation, and also all the reserve accounts of the commercial banks at the central bank (commercial banks are required to keep a certain percentage of depositors money in an account at the central bank), this is termed narrow money.

The other sort of money is created by the commercial banks when they make loans, which seems counter intuitive because it would seem logical that banks should only be capable of lending the profits they make from investments they make with their depositor's (i.e. the person who has a savings and/or current account) money.

This isn't the case, as banks are not generally required by law to keep a 100% reserve of depositor's money (unless specifically stated in the terms of the conditions on the account being opened, these are usually specialist accounts, like Swiss bank accounts, or accounts with private banks such as Hoare or Coutts).

That is to say, if you deposit £1,000 with a high street bank, legally speaking, once you've deposited the money with them, it's not strictly yours anymore, and also, the bank are free to lend out a large percentage of that deposit to borrowers.

I'm not sure what the reserve requirement in the UK is now, as it's all changed, according to the Basel III rules (created as a response to the financial crisis of 2008) which have to be implemented by 2019.

I think it's a combination of a 6% capital plus 30 days worth of cash outgoings, which as you can see, isn't a particularly large percentage (before 2008 it was far worse, I can't remember where I read it, but I remember someone saying that Northern rock, the first bank to fail, had over 100 times loans to deposits).

This is why bank runs are not good for banks, because most high street banks, if all of their customers were to demand their deposits at the same time, the bank would not be able to honour it.

Bank lending works roughly as follows, say Person A, makes a deposit of £1,000 with Bank A, and then Bank A, lends 90% (for the sake of argument) or £900 of that to Person B, who gives that to person C, who deposits that back with bank A, who then subsequently loan 90% of that, or £810, to Person D.

The bank now only has £190 on deposit, but has made  £1710 worth of loans, and what was just £1,000 worth of narrow money or central bank money, has been multiplied out into £1710 worth of commercial bank money, with only £190 worth of central bank money left on deposit, and the total money supply is now £1900 (this is termed broad money, which is narrow money + bank loans).

The above process can continue until nothing more can be lent of the original £1,000, and there is just under 10 times more loaned commercial bank money than central bank money on deposit.

As such should any bank loan that falls into default, or the money that the commercial bank created when making the loan, effectively disappears, and shrinks the money supply.

All of this is fine, provided only a few loans fall into default, but should nearly 10%, or more, of the loans do so (for example because too much was loaned against a single asset that beings to fall in value i.e. property), the bank that made them will go bankrupt.

In terms of future events, I don't know what's going to happen, but I shall be certainly watching changes in M3, to give me some idea where inflation is headed (the summary of my posts is my belief, certainly in the UK, that the Bank of England is going to have to print an awful lot more money to stoke high inflation).

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I don't think so.

You as a bank loan me/create £1000 (remember the savers money is only there to allow me as a bank to create more money off it's back) and I spend it on 10 items. There is no way the bank can go and destroy that money once it's created, it's already out there. What are they going to do? They could even have some of this "bad debt" money deposited in their own bank and start lending off that!

Be more cautious in the next loan they "create". That's what creates the shortage.

 

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1 hour ago, sancho panza said:

'- If MV = GDP / Money Supply, isn't this more a measure of how much one unit of a nation's currency can purchase of that same nations productivity, rather than speed of money changing hands? '

No,it's the speed of money.Velocity varies for a variety of reasons,People can hold off puchases if they fear for their jobs or they can speed them up if they're feeling confident.The problem came in 08 as they printed heavily to get GDP back up and velocity dropped.All the  CBs playbooks told them that if they devalued the value of money,people would spend it more frequently.How worng they were.

My genuine fear is that when velocity ramps up,they'll be unable to contain the inflationary genie once it's out of the bottle.

 

'- In terms of nations with high inflation and hyper inflation, there's no way an increase in GDP can really ameliorate the price skew caused by increasing money supply, because the money supply is increasing so quickly.'

I think we have to separate in flation from hyperinflation.The latter are very rare.

https://en.wikipedia.org/wiki/Hyperinflation

' While there can be a number of causes of high inflation, most hyperinflations have been caused by government budget deficits financed by money creation. Peter Bernholz analysed 29 hyperinflations (following Cagan's definition) and concludes that at least 25 of them have been caused in this way.[8]

Hyperinflation occurs when there is a continuing (and often accelerating) rapid increase in the amount of money that is not supported by a corresponding growth in the output of goods and services. '

 

'For example, just taking the example of Turkey (see graphs above), the money supply is doubling every 4 years, in order to attenuate any price increases, productivity would have to grow at the same rate, which would be nearly 19% every year (not even China could manage that in the early 2000s).

Argentina is even worse, the doubling time in money supply is halving, given the slope of the curve, it looks like the doubling time is under 2 years. The last measurement I can take is 2 years, with the money supply doubling between 2016 and 2018, to keep up with that, GDP would have to grow at just over 41%.'

Technically they're inflations.They do however give us a clear indication of where govts tend to go when they're in trouble.

 

I didn't say Turkey and Argentina were hyperinflations, I was noting that in these countries there is no way GDP can keep up with money supply growth, which in terms of the velocity calculation (GDP / Money Suppy) will indicate falling velocity, despite increasing price inflation.

I've got Bernholz's book (Monetary Regimes and Inflation), and I've read it too.

His theory, in a nutshell, is that hyperinflations or high inflations occur in nations where they run deficits in tax revenue over a certain percentage.

The problem with this theory, I believe, is that it doesn't fully explain the lack of inflation in the industrialised nations after 2008, and also Japan after 1990 (Japan have run some awful deficits for many years now, with an eye watering debt to GDP ratio of over 250%).

This is one of the few theoretical descriptions I've seen of hyperinflation, but I think it's overly complicated and doesn't match all observation.

The graphs of M3 on the other hand, explains, to my mind, a great deal of the so called "mysterious anomalies" that the experts (talking heads, central bankers, politicians) cannot (I've lost count of the number of times I've turned on Bloomberg or something similar where a pro-government spending advocate chides a Jim Rogers type character with taunts of "where's the inflation?"), whether it's just inflation or hyperinflation.

My educated guess so far, unless I can find observation (past or future) to the contrary (i.e. high or hyperinflations in countries with comparable money printing programmes), is that we have seen the inflation from these programmes, and further central banks will need to print an awful lot more money to trigger higher inflation, let alone hyperinflation.

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Posted (edited)
19 minutes ago, XswampyX said:

I don't think so.

You as a bank loan me/create £1000 (remember the savers money is only there to allow me as a bank to create more money off it's back) and I spend it on 10 items. There is no way the bank can go and destroy that money once it's created, it's already out there. What are they going to do? They could even have some of this "bad debt" money deposited in their own bank and start lending off that!

Be more cautious in the next loan they "create". That's what creates the shortage.

 

The loan is usually created as a bank deposit.

For example, in the case of mortgage, it isn't withdrawn as cash, the money is transferred to the seller in the form of another bank deposit.

It would be unusual for a large bank loan to be withdrawn fully in cash, further there isn't enough physical money to do this for all the bank loans in existence (I accept this may happen in a small number of cases, but like I say it physically isn't possible for every single loan).

Just compare the number for total narrow money vs total broad money, in almost in any country, and you will find that total broad money is far larger.

Deposits created in one bank via the lending of another do end up in accounts, at other banks (and then some, in a complex web of loan -> deposit -> loan -> deposit -> etc.) and when the underlying loan goes bad, then both banks are affected, you're describing the system crisis that occurred in 2008.

Edited by SuperTramp

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2 minutes ago, SuperTramp said:

The loan is usually created as a bank deposit.

For example, in the case of mortgage, it isn't withdrawn as cash, the money is transferred to the seller in the form of another bank deposit.

It would be unusual for a large bank loan to be withdrawn fully in cash, further there isn't enough physical money to do this for all the bank loans in existence.

Who would take out a loan and not spend it? Either with cash or some other bank transfer, what's the point?

And when you pay back your £1,000 loan then you really have shrunk the amount of money in circulation by £1,000

Now I agree that the £1,000 bad debt loan will have to be paid out of the banks profits, but it won't destroy that £1,000 just that somebody else (the bank) will have to pay it.

Maybe I'm looking at it wrong?

 

 

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Posted (edited)
12 minutes ago, XswampyX said:

Who would take out a loan and not spend it? Either with cash or some other bank transfer, what's the point?

And when you pay back your £1,000 loan then you really have shrunk the amount of money in circulation by £1,000

Now I agree that the £1,000 bad debt loan will have to be paid out of the banks profits, but it won't destroy that £1,000 just that somebody else (the bank) will have to pay it.

Maybe I'm looking at it wrong?

 

 

You misunderstand, I didn't say that loans are left unspent, I said a loan is created as a bank deposit, that more often than not is transferred to somebody else's account in the form of another bank deposit (the fractional reserve system allows that deposit to be lent again and again and again, etc., in ever small amounts).

Example:-

Person A, borrows, £100,000, from Bank A, to buy, 10 Acacia Avenue.

Bank A, credits person A's account with £100,000.

Person A, transfers, £100,000 to bank account of owner of 10 Acacia Avenue.

Even small borrowing is mostly done through the banking system with credit cards.

And most of the money is existence is in the form of bank deposits.

Weird and scary, when you sit down to think about it.

Edited by SuperTramp

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3 minutes ago, SuperTramp said:

You misunderstand, I didn't say that loans are left unspent, I said a loan is created as a bank deposit, that more often than not is transferred to somebody else's account in the form of another bank deposit.

Example:-

Person A, borrows, £100,000, from Bank A, to buy, 10 Acacia Avenue.

Bank A, credits person A's account with £100,000.

Person A, transfers, £100,000 to bank account of owner of 10 Acacia Avenue.

Even small borrowing is mostly done through the banking system with credit cards.

And most of the money is existence is in the form of bank deposits.

I get all that. Thanks. 

But a bad debt (unpaid) doesn't shrink the money supply (it's still out there, somewhere). Paying it back does.

If both bad debts and good debts shrink the money supply then how do we get any inflation?

 

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