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It’s the velocity of money, d’ye see?

Spud’s insistence that there’s been no inflation as a result of money printing:

Yes. Households have accumulated £230 billion of excess savings, according to the Office for Budget Responsibility, but so to, according to the Treasury, have businesses. On Bank of England data, net deposits of non-financial firms are £144 billion above pre-pandemic levels. That
“over £300 billion of excess savings” is actually £374 billion and nearer £400 billion. It is equivalent to 16 per cent of gross domestic product, a sizeable war chest indeed.

These excess savings of households and firms are the counterpart to the excess borrowing by the government during the pandemic. Were they all splurged, not only could we dismiss talk of recession, but we might be concerned about the inflationary impact of Sunak’s cost-of-living help package, though at £15 billion it was small in relation to these big numbers.

If all that money is still there in savings then the velocity of circulation of money is low. And if it were all spent then V would rise. Which would be distinctly inflationary of course.

Which gives us an insight into Spud’s insistence that all those savings must actually be invested in building real world things – that’s exactly what the trigger for massive inflation would be. For MV really does equal PQ.

Or, to run this same story another way, sure money printing works. But only as long as it’s not actually spent on anything.

20 thoughts on “It’s the velocity of money, d’ye see?”

  1. Yesterday it was rising household debt; today we have increasing household savings. Is the Chubby Fool able to understand what is happening here?

  2. “excess savings”…. You mean money they feel people shouldn’t have? *prepares torch, pitchfork, and rope*

  3. @Diogenes
    “Yesterday it was rising household debt; today we have increasing household savings. ”
    There’s no inconsistency there. It’s quite possible to have both rising household debt & rising household savings. They don’t have to be the same people. It’s even likely. What Spud wants to do is transfer from one to the other. But that’s effectively what government has been doing during years of artificially low interest rates.
    Which is the problem with Spud’s ideas that get ridiculed here. If you actually look at what’s happened/happening, UK government’s actually adopted the majority of them. He has been remarkably successful. He just doesn’t get the credit.

  4. ‘He has been remarkably successful. He just doesn’t get the credit.’

    Perhaps the UK government would be happy if he could get the blame, BiS?

  5. @BiS, point granted but Spud can only understand the world in black and white. One thing is good and the other is bad. He cannot comprehend tradeoffs and ambiguities. If household debt expanding is bad, how can household savings increasing be bad? It is as if he doesn’t realise that if those savings were “splurged”, in his terms, then household debt would increase still further. He wants the money to come out and not get replenished. If only he could make another donkey epic

  6. BiS

    Which is why I make the point that he is directly responsible for the coming deaths of billions as a result of the huge dislocation as the result of QE and lockdowns. He is effectively the intellectual ballast behind the cost of living crisis. Let’s give credit where it is due!

  7. @Tim Worstall

    Do you agree with Guy’s article?

    Runaway Inflation Was the Entirely Predictable Consequence of Lockdown
    …It is stunningly easy to understand how inflation happens at a basic level. If there was such a book, it would be a chapter in the Noddy in Toyland Guide to Economics. There is no such book, so I will explain

    The inflation equation works like this: m×v = p×q where:…

  8. It is really easy to pick holes in Murphy’s outpourings. It is a lot harder to find anything that stands up! For the most part he provides puzzles – the challenge is to find all the errors. That he is oblivious to this is perhaps the fun part!

  9. @Diogenes
    ” but Spud can only understand the world in black and white. One thing is good and the other is bad. He cannot comprehend tradeoffs and ambiguities.”
    You’re saying your politicians & opinion formers are better at this?

  10. And what Spud understands is not a given. Spud produces narrative that earns him a living, of sorts. JK Rowling’s not actually a wizard, is she?

  11. “I’ve laid out much the same explanation here on this site a number of times…..”

    You weren’t so anti QE back in the day though were you? From this website in 2010:
    Finally, and the most important point, they\’ve got horribly and terminally confused between monetary activities (of which QE is one) and fiscal or spending activities.

    Monetary stuff is bits like lowering interest rates: and when you cannot do that then you print money (QE) to lower them even further. You do this because you want to lower interest rates. Further, you do it because you know it is reversible. Inflation starts soaring away and you can sell the gilts back to the banks/market/pension funds, stick the money back in the BoE and cancel said money\’s existence. It is a temporary thing you see?

    They\’ve now run off and said \”Look! Free money! Now, what would we like to spend it on?\”

    Squeal like a piggie! Windmills! Insulation! Solar Cells!

    But this isn\’t temporary: this isn\’t reversible. This is not QE in effect: this is printing new money in order to go spend it on real assets. You know, Zimbabwenomics?”

    At that point you considered QE just a monetary process that the BoE could use, like raising or lowering interest rates. The men in suits would control the money supply, up and down as necessary, and everything would be great. It wasn’t at all printing money and spending it (completely ignoring the fact that even in 2009 onwards all the QE was spent on gilts issued by the government which then promptly spent that money into the real economy), no not at all it wasn’t.

    So what exactly has changed since 2010? This round of QE is exactly the same as the last one. BoE creates money, government issues gilts, BoE buys said gilts, government spends the proceeds on stuff (or gives it to people to spend on stuff). The only difference is what it spent it on – in 2009 it spent it on maintaining public spending at levels it could not afford, in 2020-21 it spent it on completely unnecessary shit. The process is identical. So why are you claiming now that QE is inflationary, when 10 years ago you were utterly sanguine about the whole thing?

    There’s lots of you ragging on Ritchie for suggesting that the BoE print money and spend it on his pet ideas, while completely ignoring the fact that thats exactly what QE was doing under your nose. It was giving free money to the politicians to spend as they saw fit. How did you manage to miss that?

  12. The thing is that most people saw inflation coming along, despite the beatings of Carney, Osborne, Brown, Murphy et al, but we didn’t expect it to take so long to eventuate in an undeniable form. In fact the ONS has been cooking the inflation indices to try and hide the rampant house price and other asset inflation of the last 10 years. The powers that be might even admit this soon

  13. @Tim Worstall, June 2, 2022 at 5:21 am

    Thanks, on reading I was thinking TW been saying same for years

    Always good to know there are other sane people


    My interpration of TW’s writing on 2008+ QE was it can only have a chance of working if the money kept out of broad economy

    To some extent it did, but the inflation element was apparent then with assest prices increasing

    Lockdown QE was pushing money into broad economy and at same time reducing production of goods & services. Guaranteed inflation

    Rishi Corbyn continuing with restrict production (Oil, Coal, Gas…, NHS, DVLA…), tax more and print more money. Come autumn and restrict production on steroids as factories ordered to shutdown due to gas shortage

    In inflation last thing we want is helicopter money for all. We need deregulation, tax cuts and mass public sector sackings

  14. “My interpration of TW’s writing on 2008+ QE was it can only have a chance of working if the money kept out of broad economy”

    Well how exactly can that ever happen? All the QE money was spent by the State, because it was the entity that issued the gilts that the BoE bought with the printed money. Ergo all the QE was injected straight into the real economy. It paid for pensions and benefits, and State salaries that would otherwise have been unaffordable.

    The only difference between 2009 and now is the state of the economy – then we were in a financial slump, so debt money was disappearing, so printing some more and spending it didn’t overly raise the amount of money sloshing around the economy. But in 2020/21 the economy was only artificially slumped, by the State itself. Once it took its thumb off the scale the whole thing was going to rebound massively, with the effects we see today.

    QE always gets into the real economy, thats one of the main reasons its done (suppressing interest rates is the other). Our host either missed or ignored the fact that the money was hitting the real economy in 2009 because conditions then meant the effect was relatively benign.

  15. @Jim

    No, the 2008- QE bailed out financial sector and the money mostly remained in their ring fenced required capital. However, it’s never ended. Financial sector was at death’s door in Autumn 2019. Then…

    Very different from Rishi Corbyn’s QE

    @Tim Worstall

    What is your response?

  16. “No, the 2008- QE bailed out financial sector and the money mostly remained in their ring fenced required capital. However, it’s never ended. Financial sector was at death’s door in Autumn 2019. Then…”

    Nonsense. The financial bailout was a fraction of the money raised by the initial QE.Most of the bailout was in the form of guarantees, which were never called upon, thus no cash was required. And the State has pretty much broken even on the bailout, its gotten back nearly all the money it spent. The net injection of cash into the financial system is zero. Where all the QE money went was government spending – the 2009 QE was spent by the State. They issued the gilts, the BoE bought them with printed cash, the State spent the cash into the economy. Exactly like they have done this time. There is no functional difference between QE1 and QE2 (or is it QE3?). The process is identical. All thats different is the overall economic situation.

  17. @Jim

    If 2008- QE went into wider economy there would have been rampant CPI/PPI inflation, it didn’t so there wasn’t

    I didn’t agree with QE as I believed it would store up future problems and the idea would be expanded and misused as it has been

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