Oh FFS

The first of these ideas says that if demand for a product rises and the supply does not then its price is going to increase. Economists would say this is so basic that no one could really argue with it. So let me do so.

First, this assumes that there are no alternative products available. The reality is that there usually are. Few things are so essential now that this is not the case.

Spud is assuming that economists haven’t heard of substitution now, is he? Seriously, he can’t be this dim, can he?

What is necessary then for inflation to happen is that not just one product must suffer excess demand, but all must.

There is an alternative theory out there, that inflation is an excess supply of money, the one thing…..

The point is, that what quantitative easing did was create new money. This is indisputable. That’s what the Bank of England says it does. That’s not news then. Or a shock. It’s a statement of fact.

But what is not a fact is that this leads to inflation, as some economists claim. They quote the quantity theory of money. This is a piece of economics that says if there is more money chasing the same quantity of goods prices go up. This is why they say we face inflation now.

They note that quantitative easing (QE) creates money without any more work being done and without any extra tax being due so they argue that this must lead to inflation. But they are wrong, for a number of reasons.

The most important reason is that they assume the government creates all money when making their claim. It is true that the government is important when money creation is being considered but it most certainly does not create all money. That’s because banks also create money.

Banks create money by lending. That is how all money is created. So, when lending increases the money supply goes up. The corollary is that when loans are repaid then the money supply goes down. There are few other rules in economics as basic as that.

And in the money equation. MV=PQ, the rate at which narrow money – the BoE created kind – turns into wide money, the form that influences inflation, is the rate at which banks increase their lending. Or, as we can also put it, V in the equation. V is hugely suppressed at present. One US measure of it went from 3 in 1960 to 11 in 2010 or so and is now back at 3 again. And the P³ bet is that it won;t go back to 11. Not everyone else is quite so sure…..

24 thoughts on “Oh FFS”

  1. After how many weeks did he stop attending econ lectures? Did he make it through the first week? First half a week?

    How many decades of economics textbooks does he expect need to be completely rewritten now the man has single-handedly discovered this concept of “substitution”? And just how was everyone else too thick to have spotted it until now?

  2. It’s the believers who are funny.. they are really looking for something to hang on to, bit like faith or religion. The more naive and economically illiterate the more Murphys gospel strikes a chord. In reality it’s boom bust Keynesian economics with the the tweak no inflation till full employment. There is still an outside chance he gets a seat at the Labour table if Starmer is outed by the far left. He sees himself as Britain’s answer to Kelton.

  3. Thinking about it, isn’t it a terrible shame that during the Weimar Republic, everybody had to go to The German Shop to buy The German Good? If only there had been alternative shops, selling alternative products, the whole face of world history would be ever so different….

  4. Bloke in North Dorset

    “ Give him time and he will invent the theory of the firm, or price elasticity, or inferior goods”

    I look forward to him tackling comparative advantage.

  5. His views on the “discredited” idea of comparative advantage are going to be wonderful to behold

  6. People are desperate to spend. One example is that outdoor tables in beer gardens are booked up for weeks after they are allowed to open. Demand exceeds supply. They can charge pretty much what they want. Inflation is coming.

  7. “People are desperate to spend….etc”

    I can’t help but wonder how much of that is reports on the protected middle classes.
    A great many people I’ve exchanged thought with are shit scared of the economic future. Shit scared people don’t spend. (unless they’re expecting to have their savings taken away or devalued – two of the possible futures)

  8. “the protected middle classes”

    The number of working class people overtook the working class back in 2000. Now the UK is probably 55-6O%
    That’s a lot of demand.

  9. Due to the lockdown the demand for bicycles increased enormously. It became very difficult to get hold of new bikes and new parts. There is still a shortage of new bikes and new parts. This has led to a surge in demand for used parts and bikes and prices in the second-hand market increasing. It’s not affected to a great extent the list price of new bikes but you’ll be hard pressed to find any discounted bikes (if you can find stock)

  10. I’ll willingly concede that like Sgt Schultz, I know nothing, nothing. But when I look at Zimbabwe (the one I love to sink the boot into), the Weimar Republic, Hungary after WW2, and innumerable instances of debasing the currency, I simply can’t take him seriously.

  11. ” But when I look at Zimbabwe (the one I love to sink the boot into), the Weimar Republic, Hungary after WW2, and innumerable instances of debasing the currency, I simply can’t take him seriously.”

    Its interesting – has there ever been a case of hyperinflation that wasn’t one that involved printing billions and billions of actual physical banknotes? Have we ever had a case where it was electronic money creation that caused the meltdown, in a country where money is also predominantly electronic? I only ask because we have quite a few examples now of countries who have been pressing the electronic print button, but have yet to experience a currency meltdown – Japan for example has been printing money via QE for decades, and yet inflation comes there none. The US has been QE-ing like mad since 2008, as have we, and still no inflation. If the now US injects $Xtn into their economy and inflation doesn’t come, where does that leave our side of the argument?

    My feeling is that there is a difference between handing out notes to people in an economy that is predominantly note based, and injecting electronic cash into the banking system of a predominantly electronic money economy. I’m not saying that the end result might not be the same, I’m suggesting that the latter may ‘work’ for far longer than the former. And if it can ‘work’ for many years, even decades then that makes it very hard to use the ‘look what happened to Weimar/Hungary/Zimbabwe’ argument, because you are being constantly proved wrong. Until of course you’re right but then its too late.

    We need a better argument IMO than pointing at what happened to countries that did something different to what we are doing, and were very different structurally to start with. We don’t have an example of electronic money printing causing inflation and currency destruction to point to.

    I also have the feeling that globalisation is a powerful deflationary force, and has been artificially suppressing inflation in the Western world for over 20 years now. That may be masking the Western tendency to inflate their money supplies, by supplying almost limitless cheap goods. The question is – when (if at all) will that deflationary pressure end? Presumably as the poor nations doing the producing get richer and reach a position where they want to consume themselves instead of just producing. This process has some way to run, so my feeling is that all the current round of money printing won’t create a ‘loaf of bread costs a wheelbarrow of money’ situation any time soon. Thus we have to face the reality that the money printing could ‘work’, even if only in the short to medium term. Or indeed even in the longish term.

    Its all very well to constantly predict catastrophe, but thats not much good if its preceded by years even decades of no catastrophe. Your predictions lose all credibility.

  12. “One example is that outdoor tables in beer gardens are booked up for weeks after they are allowed to open. Demand exceeds supply.”
    Is there a secondary market? Prices will rocket if a good weather forcast matches your booking.

  13. “Have we ever had a case where it was electronic money creation that caused the meltdown,”

    Yes, Zimbabwe. After the hundred trillion dollar bit they brought in real time settlement gross dollar. Electronic only. Which very quickly inflated just as the previous dollar had. For the same reason – over-production.

  14. Electronic money, of the type created by central bankers rather than waving a card at a machine, is a not-quite-real money. It seeps out into the real world as inflation of assets such as house prices.*
    What the present Great Panic shows is that the world carries on quite fine with an awful lot of people not working who never would be missed. It’s a virtualised world, of unreal money and unreal jobs and unreal problems. The past year has shown that it is perhaps not as brittle as supposed, but maybe that is because we are living on borrowed time, borrowed competency, the machine is already broken with too few who know how it works or how to fix it, we just don’t know it yet.

    * House price money isn’t real money, what you pay for a mortgage each month is real money. That real money pays for house price tokens, which is what house prices are. Day to day I think carefully about spending a hundred pounds, moving house and ±5,000 is neither here no there.

  15. ” House price money isn’t real money, what you pay for a mortgage each month is real money. That real money pays for house price tokens, which is what house prices are. Day to day I think carefully about spending a hundred pounds, moving house and ±5,000 is neither here no there.”

    Yes, its obvious that a huge proportion of the inflation of the money supply just seeps into asset prices rather than the cost of bread. And as such has less impact on people’s lives than if bread cost £10/loaf and everything else to match.

    ” After the hundred trillion dollar bit they brought in real time settlement gross dollar. Electronic only. Which very quickly inflated just as the previous dollar had. For the same reason – over-production.”

    In that case why aren’t we (or Japan or the US) like Zimbabwe? We’ve been inflating our money supply for years, decades even. According to your theory we should have rampant inflation and currency debasement by now, but we don’t. How do you explain that? (And don’t waive your hands and utter the magic words Velocity of Money, because that sh*t is just economist-speak for ‘We don’t know’)

  16. @Jim
    What makes you think inflation isn’t rampant?
    Price of a newspaper has doubled in a few years, price of my broadband likewise. Basic paperback novel now £8.99, seems only a few years since £5.99.

    Booze likewise. Electricity. Oh, and isn’t gold (the real stuuff, not paper promises) soaring?

    Seems the only inflation figure not soaring are the official ones, and that’s because they are fraudulent: “what commodities are dropping in price? Right, we’ll massively increase their weighting then”.

    Seems to me, real inflation, what it costs to live, is some 15% or higher pa.

  17. @ttc

    For all the problems with inflation measurement – and there are many – there’s no way that the overall price level faced by consumers is doubling every 5 years, which is what 15% annual inflation would imply. That’s pretty easily tested too, even if you’re sceptical of official sources. The price of a new car hasn’t doubled in the last five years (easy enough to check prices on five-year old online reviews). The price of a new sofa or washing machine or fridge or laptop hasn’t doubled (CamelCamelCamel can give you a clue for a lot of goods). My weekly supermarket bill certainly hasn’t doubled, and I would be surprised if yours has.

  18. “How do you explain that? (And don’t waive your hands and utter the magic words Velocity of Money, because that sh*t is just economist-speak for ‘We don’t know’)”

    No, that’s the explanation of “not yet”.

    And we’ve not being doing it anywhere near as bad as Zim did either.

  19. When I rummage round the house and look at all the books I’ve wasted my money on over the years, I’d guess that Australian currency is worth maybe one hundredth of what it was when I started.

    Of course if I think of what the parents paid for the old family home and what it’s worth nowadays, I’d say it’s a two-hundredth. But Oz had about 7 or 8 million people back then. Now we’ve got about 27 million. So scarcity and gentrification has probably raised the value.

    So I’d argue that while we may Zimbolise one of these days with all the money we’re wasting on the green garbage and the coronacrap, we haven’t quite got there yet.

  20. @MBE
    “is doubling every 5 years, which is what 15% annual inflation would imply.”

    As chance would have it, when tidying, I found a copy of the (midweek) Daily Telegraph from July 2015, cost £1.40.
    Yesterday, it cost: £2.50.
    Not sure how long £1.40 lasted, or when £2.50 began, but that’s an increase of £1.10 in under 6 years: 78.5%
    Compounded over exactly 6 years, that is 10.1%, so the real ratea bit higher, depending on how much less than 6 years the price difference straddles.
    So a bit less than my 15% estimate, but not by much. Certainly a great deal more than the 2% twaddle from the “official figures”.
    I wonder if I have some old leccy bills hanging around….

  21. CPI is the average over all items. Electronics have been getting cheaper over the same period, no? Etc, etc.

Leave a Reply

Your email address will not be published. Required fields are marked *