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Everybody’s wrong except for me!

He still doesn’t get it, does he?

But it is worse than that. The Bank of England has had to admit before now that almost everything it thought about banking, how banking worked and how money is created within the banking system, was wrong. They did this in 2014 when they were forced to admit that bank lending creates new money, and so deposits, and it is not bank deposits that fund loans. Doing so they had to quite explicitly admit that everything text books had said about banking was wrong and needed to be rewritten.

Hundreds of years of thought by tens of thousands of very clever people. All wrong because the truth has been revealed to I, Murphy.

The bit where he goes wrong being this:

and it is not bank deposits that fund loans

Deposits still fund loans even if we take everything else he says as being true. Because, by 4.30 each day, a bank must find a deposit that funds whatever loans it has made. That it couldn’t is what made Northern Rock bust, they couldn’t borrow – ie, create deposits – through the interbank system. They were able to issue mortgages, they did issue mortgages, that didn’t create the deposits and therefore they had to attract deposits from elsewhere to fund those loans. Which they couldn’t – they were bust.

As ever any theory which contradicts observable reality is wrong. That’s science that is.

But, you know, Smurf….

Most of what the Bank thinks it knows about inflation – that it is created by excess demand caused by wage settlements that are too high – is simply wrong and does not fit with the evidence of the current experience of inflation.

Niether the bank nor anyone else believes that. We all know what the current cause of inflation is – an expansion in the money supply. What worries is that the ccurrent level of inflation will become embedded in expectations than therefore – and then – lead to inflationary wage demands. We’re worried about the future, not wage inflation right now.


And then we get to the giggle:

Henry then asked what I had done. I said I had simply thought about the issue. I sat back, keyboard in front of me, and thought that there had to be a ‘missing X’ in the inflation equation that might explain why continual increases in interest rates were not bringing the UK inflation rate down. All I really did was ask “what is the missing X?”

The answer then stared me in the face. The missing X is the fact that because of the current structure of the UK economy interest rate rises not only could not bring inflation down as the Bank wants, but could in all likelihood be forcing inflation upwards. We have now reached the point where increasing the price of money is in itself inflationary.

All those tens of thousands of clever people, those centuries of thought. Not one realised what was obvious to the Sage of Ely from staring at his keyboard. We are honoured to be alive at such a time that we can be in this glorious presence.


Am I right? Theoretically I think I am: the case I have made is logical and fits the facts. It’s a good theory.

Can I prove it? Not yet, is the honest answer. We’d need some rate cutting from the Bank to do that.

No, no, we can look at Turkey. So, did cutting interest rates there reduce inflation?

15 thoughts on “Everybody’s wrong except for me!”

  1. One hopes you’re not including the people at the BoE & macro-economists in general amongst those tens of thousands of clever people, Tim. Mob of cretins would be more like it. That we would be where we are was entirely predictable 15 years ago by anyone with any sense.

  2. As for inflation, I’d argue that there are lots of things that can make prices rise. But there’s only one thing that can keep them doing it indefinitely. That’s printing more money.

    My friend proved this to me when he proved he was a billionare. In Zimbabwean currency of course.

    So it looks like I agree with you on this one Tim.

  3. Here. This is typical of the geniuses running your country:
    Households will be spared £120 net zero levy, says Grant Shapps
    Measures to fund hydrogen industry will not be tacked on to energy bills, vows minister

    WTF else will be funding it? Since ‘households’ is just another word for taxpayers or consumers. Maybe he should be asking whether imposing this totally unnecessary cost is a good idea? Perish the thought. The religion requires it, Praise Gaia!

  4. I’ve often wondered why this polymath with the planet-sized brain spends his time with mundane problems.

    He could probably show a practical solution to nuclear fusion power generation on the back of a napkin during the first two courses of a pub lunch and devise a cure for cancer over dessert.

  5. Turkey has just raised interest rates to 15%. Their policy of stamping down on interest rates has seen inflation rocket to 40%+.

  6. The Meissen Bison

    The answer then stared me in the face.

    The answer must have had a strong stomach then.

    the truth has been revealed to I

    Oh dear – that’s just earned some hapless monk an extra æon in purgatory.

  7. Oh my. Moses had God in a burning bush, Mohammed talked to an angel but Murphy gets divine revelation just from gawping at his keyboard, even though it had a missing X. I wonder what he’ll call his church?

  8. A couple of months ago, I asked the Spud on his blog whether he thought that lowering interest rates in Turkey had been successful in curbing inflation. His reply was that Turkey had problems other than galloping inflation and that I was a stupid troll for not understanding that. I asked him what these other problems were and was promptly banned

  9. Andrew Bailey, The Governor

    This isn’t strictly true. Bank lends you £100 and deposits this into your current account. in doing so creates two entries in its balance sheet. An asset (the loan) and a liability (the deposit). The loan is self funding.

    Of course no-one takes out a loan to leave funds on deposit so the liability crystallises when you take money out. The interbank settlements need to be balanced at the end of the day, not the loan book. (Ignoring capital and fractional reserving).

    Thus banks create money, but only as far as fractional reserving and capital allows. That’s been allowed far too much as central bank policy as the muppets thought it was their job to support growth. Their job was and was only price stability. They’ve failed at that.

  10. “Hundreds of years of thought by tens of thousands of very clever people”

    There are, to a first approximation, three components to Economics.

    (i) Adam Smith.

    (ii) Footnotes to Smith.

    (iii) Error.

    If even a very clever chap such as Maynard Keynes couldn’t sort out macroeconomics it’s probably hopeless to pretend that the midgets who followed him could.

    P.S. On footnotes: I’ve found Hayek impressive but he does venture further afield than Economics. But then so did Smith.

  11. Higher wages DO fuel inflation. The bloated public sector in the UK gets pay rises and…er.. the government… er… has to print more money to pay for them.


  12. Harry Haddock's Ghost

    Thus banks create money

    No they don’t, not according to you own example. At no point is there a permanent increase in the amount of money in existence beyond the end of day totting up.

  13. I was told by a banker 40 years ago that
    “Every pound has a home.”

    Only the Bank of England or Banque National de Bongobongoland can create money out of thin air.

  14. @dearieme on Adam Smith
    Thing about Wealth of Nations is that anyone reasonably intelligent & observant could have written it. As Tim’s page heading says “It is all obvious or trivial” Economics should not be a hard subject to get to get your head round, since one’s basically living it.
    Which leads me to suspect that when someone’s expounding something on the subject that’s difficult to understand, it is most probably bollocks. (See Spud)

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