Having lunch with a banker friend of mine I suggested that we were heading for a period of stagflation – inflation with no or limited growth. This was 2005.
Students learn that inflation comes from excess demand over supply and that this cannot happen when an economy is not growing. We now have 3% inflation and zero or negative growth. Oh dear – can anyone explain?
Markets have started to work out that debt can’t drive consumerism forever. The developed world is over-indebted, disparities between developed and developing countries and between rich and poor within those countries are more extreme than ever. When the poor have more debt than they can handle and the rich rely upon the masses to drive the economy then there is a problem!
The Government buys its own bonds from banks with money that it creates. Bond prices go up, interest rates go down and banks keep buying bonds of which there is a good supply since Governments are so indebted. The money supply goes up, there is no impact on economic activity except via two mechanisms – interest rates being low reduces borrowing costs for those on variable rates and the exchange rate weakens boosting exports. The latter is the undeclared objective – it is called “beggar thy neighbour”. It doesn’t work. When will journalists stop pandering and call a spade a spade?
UK, last 20 years. Bankers freed from regulation shower politicians with money and jobs after politics. Politicians continue to deregulate the financial markets. The financial markets run wild and start heaping debt on to debt of ever more spurious pedigree. No one is worried because everyone is making money.
Suddenly the whole thing explodes. The bankers are now in a position to ask for favours under threat of devastating the economy. 1 trillion of favours. The Bank of England reduces rates and starts pumping in money to keep up the bond prices. Woe betide us if they ever fell.
Finally, only in the last few days have articles appeared that state that Governments are helpless and that with no more to borrow they can do nothing if the developed economies slip into recession again. Where are the bankers now? The bankers are on their boats mate!
As mentioned in a previous post, the Fed decided in early 2006 to kill the M3 measure of the money supply. It is difficult to measure money and costly however scrapping broad money measures is tantamount to saying that money supply growth doesn’t matter.
The monetarist view of economics says that Read the rest of this entry »
For more than a decade monetarism has largerly been ignored. US broad money supply (M2) has doubled in a decade and credit fuelled massive increases in household debt and asset prices.
Now the pyramid game has come to an end and monetarism seems to be making a come back – “Governments must reduce interest rates and support the banking system otherwsie we will end up repeating the mistakes of policy makers following the 1929 crash!”.
This is wishful thinking and it is way too late Read the rest of this entry »
Here are some easy ways to save money – it makes a real difference in a short time and means that you can still ski and holiday in the sun despite the downturn: Read the rest of this entry »
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