What are you doing? You’re saying to the bank by tapping your credit card on a credit payment machine that you would like to have an extra loan, which you promise to repay to the bank. The bank knows you because it’s done credit checks on you and says, “yes, okay, we believe that you will repay us. Therefore, we’ll let you have this money to make this payment now, to the person to whom you want payment to be made.”
It’s your promise to the bank to repay, matched by their promise to make payment to the person you’ve asked them to make settlement to that creates money. Literally, your exchanges of promises – the bank to you, you to the bank – creates the money that exists in this country.
That’s *credit* creation. Not *money* creation.
“Money” is note and coins and central bank reserves and stuff. M0 in the jargon. Add in all the credit and everything else and we get to M4. This distinction is important – tho’ it’s true we don’t have to use the words money and credit to describe it.
M0 is something under the control of the central bank. M4 is something influenced by interest rates – as well as financial repression, credit controls and so on. It is M4 that matters for inflation – that’s the amount of chitties that folk can spend chasing things.
The link between the two is V, velocity of circulation of money. It’s a multiplier – how may times does each bit of that M0 get used in the economy? Very strongly related to how much M4 – credit plus money – is created on that supply of base money, M0.
We can also use base money, narrow money, to describe M0, wide money to describe M4.
So, how much M4 there is is how much base money times the velocity of it, how much credit is created on top of it? Or, MV=PQ, the money equation.
It’s only if we grasp this that we can understand why Spud is so wrong about inflation. Lots of new M0 causes inflation because that multiplies up, by V, into M4. We can reduce this either by reducing V – raising interest rates – or reducing the M0 supply – QT.
Sigh.
Yesterday only governments could create money because without taxation money is worthless. Today, people create money by spending it. Or possibly “the banks” create money by you spending it, it’s not terribly clear.
Must be Thursday.
“Today, at noon
Posted on May 9 2024
I will be on The Jeremy Vine Show on BBC Radio 2 discussing Natalie Elphicke’s defection to Labour and why I am not convinced this is a good idea.”
Why the fvck is Richard Murphy’s opinion on this of any interest whatsoever? What expertise does he have in this matter? Why is the BBC using him and are they paying him for this?
I’m assuming that the first two pars are Capt Potato’s from which I glean:
1) That he has a credit card but that he doesn’t pay the balance in full at each cycle.
2) That he has an outstanding balance at least sometimes therefore which is an expensive way to borrow money and
3) That this outstanding balance is an “extra loan” (rather than an increase in an existing loan) so he already has an overdraft or some other borrowings from the same bank.
Let’s not grudge him a fee for making a fool of himself on radio. (I wonder if Guido will catch this? He’s no fan of Vine or the Demon Tuber.
BraveFart
While I agree he has no expertise in this field and its an egregious waste of License payers money to have the most ignorant commentator extant in cyberspace opine on anything, it does reveal (or another post reveals why he has an issue with Elphicke.
In this context, the welcome of Natalie Elphicke into Labour Party ranks was another clear indication of the total abandonment of principles inherent in this policy. Who cared that her comments on migration have appeared racist? What does it matter that she is anti-abortion? What is the problem with her having supported her sex-offending ex-husband? Why worry that she has persistently supported the increase of inequality in the UK? She believes in the power of markets. Isn’t that enough?
We can learn the following:
– Any opposition to immigration, of any type is racist
– On top of wanting Jews dead he now wants unlimited abortion on demand, probably including ‘post-birth’ abortion up to six months
– Once a ‘neoliberal’ has committed a crime then they are beyond the realms of rehabilitation. Of course this does not apply to the likes of Extinction Rebellion and Hamas whose genocidal tendencies are completely justified
– There’s only one type of inequality that is justified in the UK. That’s the publi sector pensions privilege whereby they have progressively destroyed private sector provision over three decades of left wing control. This creating the likely prospect that most people under 50 face an old age of starvation and austerity while they foot the taxes for public sector workers, many of whom still work from home 4 years after COVID. Hopefully on a personal level the SNP will promote him to the peerage and his long career of grift can conclude.
So his posts today are I think a revelation of sorts..
Queues formed at recycling centres around the country this morning as people rushed to return their radio sets before the Noon deadline.
” Lots of new M0 causes inflation because that multiplies up, by V, into M4. We can reduce this either by reducing V – raising interest rates – or reducing the M0 supply – QT.”
Except sometimes printing more M0 doesn’t increase M4 or inflation and sometimes it does. V is all over the place, at different times and different places and doesn’t actually exist, other than as a calculated value between 2 other measurable factors. Its the economists hand waving ‘fudge factor’ to make their assumptions about how the economy works not be completely discredited within 5 minutes. After all Japan has been printing money hand over fist for 30 years and no inflation has resulted. ‘Ah V must have fallen through the floor!’ say the economists. How convenient to have an invisible and non measurable variable that you can just declare has changed to make your equation work.
When you can measure V in a manner that doesn’t involve measuring 2 other things and working out the ratio between them, then I’ll take V seriously. Until then its bollocks.
Jim, V used to be defined as the number of transactions occurring in a given time period. So, just count the transactions, as it’s money changing hands.
Turns out that surveying is more than a wee bit tricky, so may be you could get a proxy via cash deposits and withdrawals from individual banks.
https://www.lse.ac.uk/Economic-History/Assets/Documents/Research/FACTS/WorkingPapers/2006/1306Morgan.pdf
(I once had a really knackered fiver follow me around for about two or three weeks.)
” V used to be defined as the number of transactions occurring in a given time period. So, just count the transactions, as it’s money changing hands.”
And did the equation actually add up at any point in time? Did anyone survey the complete economy and say money supply is this, number of transactions is that, level of prices is this and quantity of goods is that, and hey presto look it all equals out? No of course they didn’t because such a measurement process is impossible.
So MV=PQ is an economists truism, its true because they say its true. Its never been empirically proved, because it can’t be, any more than socialism can direct an entire economy efficiently, the calculations required are impossible. Its economists pretending they can reduce the economic activity of billions of people to a simple equation, which is arrogant nonsense. Which pretty much sums up economics.
Jeremy Vine is suing Joey Barton for libel. Perhaps this is why the potato was a guest on his show – the polymath of Ely has experience of defending himself in a libel case
When I use my CC it’s because I want the CC company to fund my working capital for the month, I pay off by DD every month, and/or I want them to bear the risk of high value purchases no being honoured.
I use bank transfer or debit card for local businesses because I want them to get the cash straight away.
The only cash I carry is when I play in our big golf roll ups and we have small entry fees with cash prizes and play matches for £1 within individual groups.
I am not unique amongst my friends and acquaintances from the discussions I’ve had.
Spud generalising his own situation to the whole population, again.
At the start of the day, presume I have £0 and a trader has £0, a total of £0. I borrow £100 and use it to buy stuff from the trader. At the end of the day I have -£100 and the trader has +£100, a total of £0. Where is this extra money?
@Jim
MV=PQ is true in the same way the gas laws or quantum mechanics in physics are true. They are pretty good approximations as long as you don’t look too closely at the underlying semi- random processes. As a tool, it’s reasonable as long as you understand what’s happening underneath.
Well ‘Helen Pautz’ has tied up Spud in a few more knots, but the defence is that “what conventional economics says about money, almost all of which is wrong as even the BoE has said.”
Are the BoR aware they’ve said this?
Mohave has a point.
The actual definition of temperature in thermodynamics is unworkable. We can’t find the energy of every particle and average them.
We measure it indirectly every time.
But it would be foolish to say that the weather forecast for temperature can never be justified because no-one went out an measured all atoms in the atmosphere.
@Boddicker he’s probably on the completely impartial BBC because he supports the agenda they don’t have for endless public sector spending and red tape. They’d hardly invite somebody who wanted to cut taxes or public sector jobs.
Yes MV = PQ is a tautology. Any one of the variables (let’s say V) is wholly determined by whatever measurements are chosen for the other three.
It’s a useful tautology if:
i) the government/central bank can determine M (call it “broad money”, although I know that’s not the way that Tim does this); and
ii) our definition of V behaves in a broadly predictable way over time (doesn’t have to be completely stable).
The evidence across different times and places is that (i) and (ii) generally hold. So the tautology is useful, and we know something about the likely response of PQ (call it “nominal GDP”) to monetary policy.
Quite why the massed ranks of economists at the Fed and BoE forgot this is in 2020-23 remains a mystery.
“MV=PQ is true in the same way the gas laws or quantum mechanics in physics are true. They are pretty good approximations as long as you don’t look too closely at the underlying semi- random processes. As a tool, it’s reasonable as long as you understand what’s happening underneath.”
So why pretend its an equation, with individual components that if one changes all the others must change? Thats its all mathematically precise? Why not just say that ‘The size of the economy depends on the amount of money in it, sometimes’ ? Which in itself isn’t exactly that illuminating. Its like saying the size of the balloon depends on the amount of air in it. Its true but not very useful. Again, rather like a lot of economics.
Stuart
He’s referring to a 10 year old document ‘Money Creation in the Modern Economy’ – there used to be a contributor on here that used it all the time as well.
Link is here – I disagreed with certain aspects of it at the time but the caveats put into it basically blow Murphy’s thesis out of the water. Like any polemicist he seizes the bits he likes and ignores the sections on the limits of the approach.
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf
Good work on getting through once again. The controls on new commentators announced with much fanfare last year have proved to be as substantial as MMT as an ideology!!
But it would be foolish to say that the weather forecast for temperature can never be justified because no-one went out an measured all atoms in the atmosphere.
But, as per that link to that German article in another thread, people *are* demanding to measure every single atom (transactions in the economy) to control the weather (dictate prices).
@Jim – “So why pretend its an equation,”
It’s just like the Laffer Curve, where there’s an underlying useful point to be made, which is then dressed up in pseudo-mathematical nonsense to make it appear more important. Economics seems to be more vulnerable to this, possibly because it’s so closely associated with politics, making it desperate to be a science while it cannot do much useful prediction.