Sunday, 13 July 2008

The Existential Inflation issue

Thinking about yesterday's post and the reaction, it strikes me that there is a fault line in economics thought at the moment. Monetarist declare inflation is all money supply, Keynsian's and others that it is pure supply and demand.

Yet today we face global inflation for oil, food and commodities and a contraction in money supply; it is a complete contradiction for policy makers to deal with. Let alone politicians, none of whom I have heard even mention this issue at any length.

I have come down on the side of the monetarists, over supply of money was one of the main causes and under-supply of money is going to cause the recession; but this still does not deal with the issues of commodities and oil, both of which have true demand changes in their profiles.

It would be good to hear some real thought about what is the answer to the problem we face. The Bank of England is clearly stuck for ideas - it chooses the middle ground and leaves interest rates unchanged ( not the middle ground in some ways, as rates are far too high).


Sackerson said...

The way I think of it, is like an inflatable beach mattress. The money supply determines how much air is in the Li-Lo; supply and demand step on the li-Lo at different places and make it bulge unevenly. Too simple?

Anonymous said...

Another good analogy, Sacks.

Anonymous said...

Huge numbers of "traders" buy commodities forward with no intention of ever taking physical delivery. This simply leads to speculation-driven price increases by which the players are not affected (unlike the rest of us!) except to take their profits and run. Cut out this speculative frenzy nonsense and you might see a rapid rationalisation (and reduction) of commodity prices. Without these types in the market, buyers would be only those who actually have to take physical delivery of the commodities which they need for their businesses.

Old BE said...

I would be very interested to know whether oil and food have changed much in real terms compared with housing. Retail prices have benefited from the China effect allowing rates to be too low which encouraged the bubble. But have oil and food now simply caught up with the relative devaluation of the pound?

Anonymous said...

The only thing to do is to cut interest rates dramatically and worry about inflation later, as we are doing anyway

There is no other answer.

As to the money supply, well I agree to a point, but it still rests on people wanting it to spend, and right now no-one wants to spend, and let's be honest, spending other peoples money is what got us into this mess.

RobW said...

I'm not convinced there is a real commodities problem at the moment in the supply and demand sense.

I think we're just reaping the results of loose monetary policies.

Anonymous said...

Paradoxically, supply and demand changes the money supply, which alters demand and if possible supply.

The cunumdrum is not helped by our measurements.

Economics is not a science.

Oil is going through a Malthusian shock.

Oil is involved in so many products.

Bloody minded people on both sides are blind fools.

Stagflation is a pain in the arse.

Stock up on Gin, hic.

AntiCitizenOne said...

I can't believe that anyone thinks that lowering interest rates will help.

Interest rates down.

Pound crashes.

Imports go up (and up).

Lenders and the prudent punished via inflation will lead to massively higher interest rates forever after.

The main cause of current economic problems has been the removal of bank reserves.

Old BE said...

CU - are interest rates "high" anyway? Retail inflation is probably on a par or even above base rate meaning that it is better to spend than to save. That is hardly "deflationary"...

I agree with AC1: surely we can calm oil and food prices by strengthening the pound and once we are over the inflation "blip" rates can be lowered strongly to restart our export industries.

We haven't had a recession for such a long time it's probably about time we did. We can't just keep re-inflating every time or we'll surely just end up back in the cycle of the 60s and 70s where inflation and rates just get higher and higher.

Anonymous said...

So how do we strengthen the pound and do we want to with a recession looming?

The only way to solve this AC1 is to help manufacturers and business, and the only real way to do that is to drop interest rates.

Painful but the way we are at the moment probably the only realistic way to start the ball rolling. A month or two down the line then yes we look at other issues, but CU is right in that interest rates are far too high as a comparison with our competitors rates and that is ultimately a problem we need to address.

Old BE said...

Sorry I still fail to see how fixing the effects of too much money by printing more money will work. Or is significant inflation better than a sharp slowdown? Are we really all Heathites on here?

James Higham said...

It would be good to hear some real thought about what is the answer to the problem we face.

It does not necessarily come from the economists, who have blinkered eyes. There are other factors playing on demand.

CityUnslicker said...

BE - The point on inflation is that raising our interest rats does nothing to global oil or food prices.

AND if these are a bubble and suddenly drop then have been raising interest rates on a false prospectus anyway.

Interest rates set the tone for the economy 18 months to 2 years hence; our low rates of the past left us in the mess today. this does not mean the solution is to follow the policies that would have helped 2 years ago to fix the problems of the future.

Current rates are fighting the last war so to speak. As for money supply, we need that too or else the economy sinks - if you think there is enough money around try asking a bank for some....

Old BE said...

Raising rates boosts the value of sterling therefore reducing the domestic price of things priced in foreign currencies.

Old BE said...

Banks would have a lot more cash if their savings rates were competitive with inflation, too. Despite the "crunch" and supposed lack of availability of cash in the economy, most savings rates are pitifully low. That suggests that it is still much easier for banks to borrow the money they need from the markets than from retail customers.

CityUnslicker said...

BE - don't forget real rates are high, LIBOR remains way above the official rate - just look at the real rates you get offered for loans etc.

As for savings, well banks are increasingly making better offers - they are helped by the governments affectation for CPI instead of RPI which fools people into thinking they are getting good offers...

HBOS was offering 10% recently, that is double rate of 2 years ago - have interest rates doubled in the last 2 years?

Woody Finch said...

I don't think there is anything that can be done to stop the forthcoming recession. Lift rates and hike borrowing costs, slash rates and kill the pound. Either way the consumer is buggered.

Instead we should be asking: how can we manage the transition to an economy more based on production and less on consumption?

Anonymous said...

"Yet today we face global inflation for oil, food and commodities and a contraction in money supply"

Money supply is not contracting. According to the BoE, M4 is growing at more or less the same rate as before. The extra money clearly isn't being invested in property. One presumes that much of the increase in funny money is now being used to speculate on commodities at the expense of the general public.

Steven_L said...

Does HBOS's 10% actually work out at 10% or s it one of these things where you agree to put in an amount monthly and earn the monthly equivilent over the first year?

Northern Rock are offering a guaranteed 7% until 2013 I believe.

I'm quite chuffed with myself for shorting BskyB at £5 a couple of weeks back, but kicking myself for taking such a small punt on it.

I sometime wish I was one of these people that save my money and peruse the high street in search of the best interest rate. I think I'll always be a gambler.

Which brings me to my suggestion on how to save capitalism.

I was discussing the idea of 'gamblism' as a form of civilisation with a fellow gambler a month or so back. I reckon I've worked out how it will work now.

Between them, government and big business have just about all the personal data we need to securitise the general public and create a market to trade them in.

For data protection people will have a unique, partially randomly generated code as opposed to a name.

Ratings agencies will grade everyone according to where they live, socio-economic class etc.

10% of tax revenues (including VAT, fuel, fags etc) will be collected by the market maker and paid in the form of a dividend to the owner of the security concerned.

Entrepreneurs will create derivative and options of the securities. People will be packaged up then sliced up into weird and wonderful securities.

Think about it. SIMS was a revelation, why not take it all one step further?

(apologies if I sound a bit mad today, one of those weekends)

Old BE said...

Halifax's thing is/was you put in a certain amount every month then after twelve months you get 10% APR. If you miss a month or take your money out before the end of the twelfth month you get no interest at all.

I can borrow on my credit card for 2.9% a year. What credit crunch?!?

Anonymous said...

Contraction in the money supply?

Um... No. America's money supply is growing quickly. China claims to be have a target of 16% growth this year (good luck).

CityUnslicker said...

'Money supply is growing'

Rubbish - go look at the stats, the money supply growth rate is clearly falling and this is data from 2 months ago.


Anonymous said...

Th emoney supply GROWTH RATE may be falling but the amount of broad money in circulation still grew by £6billion in May. Still, the breakdown of the May figures is rather worrying. The figures suggest that British consumers are finding it utterly impossible to raise any kind of credit whilst much of the lending that is going on is to financial institutions and being used to get out of the UK economy and invest elsewhere.

This is hardly surprising, but really indicates just how hard those high-street retailers are going to get hit.

Thing is, if the financial insitutions are still creating moeny for investment purposes, where is it going? Stock markets all over the world are in bear market territory, property is falling rapidly. Even government bonds can't be a safe bet with some pretty dubious financial decisions being taken by money central banks and treasuries. Commodities are the obvious choice for that investment, and financial institutions looking to mitigate huge losses from other investments have little choice but to look to commodities, I would say. Problem is that burnishing that particular golden egg results in the premature death from starvation of the goose that laid it. No doubt the treasuries and central banks of the world are desparately trying to ensure that this doesn't happen.

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