Question for the Economics Gurus

August 2022 Forums General discussion Question for the Economics Gurus

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  • #230512
    Bijou Drains
    Participant

    Am I right in assuming that the recent increase in inflation are partly as a result of quantitative easing?

    My assumption being is that the treasury are buying back Government Bonds (generally by printing more currency) from the pension funds and other investors. Generally those who have gained the cash would hold on to quite a bit of it in liquid frms, during a period of low inflation, as investing it isn’t going to give much back.

    Add to this during a growth in the economy there will be an increase in the need for more currency to balance out the greater level of production of commodities. Presumably once the economic cycle changes to low growth more of that cash will leak out into the system and result in a reduction in the exchange value of money against general commodities. I’m working on the basis that increases in costs of fuel, (specific price rises) etc. are not really inflation (general price rises), although it seems that these appear to be conflated by some economists.

    I was also wondering if the move over to more cashless transactions would also have an inflationary impact. I remembeer reading one of Hardy’s articles or pamphlets that the speed in which transactions took place could also have an effect on inflation, working on the basis that cash in people’s wallets, purses and under the floor boards is not circulating, and also cash held in hands in business in the form of tills, cash floats, etc, are also not circulating. Electronic payments would effectively speed up the circulation of this cash and mean that more cash was circulating at any particular time.

    Is this roughly correct?

    #230513
    DJP
    Participant

    Would be interesting to hear thoughts on your first two paragraphs.

    My thought on your third one is that the faster the velocity of money, the less of it is needed to do the same volume of transactions within the same period of time – all other things being equal. Faster velocity of circulation just means that the same amount of money is doing more work, not that more money is circulating.

    • This reply was modified 2 months ago by DJP.
    #230515
    ALB
    Keymaster

    I don’t think “the recent increase in inflation” will have anything to do with quantitative easing. In fact it isn’t necessarily an increase in inflation proper, ie overissuing money-tokens in relation to what the economy requires leading to a depreciation of the money-tokens and a rise in the general price level.

    What it is, strictly speaking, is an increase in the Consumer Price Index. This measures the changes (usually increase) from month to month in the prices of a basket of consumer goods and services bought by the average consumer. The prices of the goods and services in the basket can go up for other reasons than a depreciation of the currency (inflation proper). For instance, due to paying demand exceeding available supply (which may be limited for supply chain problems caused by covid lockdowns and now sanctions on Russia).

    It is government policy (remit to the Bank of England) to raise the price level by 2% a year. In other words, to depreciate money by that amount. This will be inflation proper (monkeying with the money supply).

    The increase in the CPI above this 2% to 5, 6, 7 % and predicted double-digits by the end of the year can be put down supply chain problems. It is mostly due to the increase in energy prices for heating and fuel for cars and the repercussions of this on other prices.

    If this is the case, the CPI should eventually fall back towards 2% but it looks as if this may take longer than the government and Bank of England originally expected. In the meantime workers will have to try to protect themselves from a fall in their standard of living by pressing for the price of what they sell — their ability to work — to go up. As they can be expected to do, with given the relative labour shortage with some chance of success.

    Incidentally, there is a discussion on this on Discord tomorrow evening at 7.30 on the eve if TUC march and rally in London on Saturday.

    #230516
    kohara66
    Participant

    I make no claim to being an economic guru but I assumed most Central Banks the since 2008 financial crisis have been attempting to stimulate the economy with low interest rates and QE in the hope capitalists would invest in production. Is that not the case? Hasn’t the Central banks actions instead led to an asset price bubble in stocks, shares, property etc?

    There are plenty of economic gurus on youtube blaming a rise in prices, especially in America, on QE with charts like this one to prove their point:

    https://fred.stlouisfed.org/series/WALCL

    #230519
    ALB
    Keymaster

    Yes, raising the price of financial assets does seem to have been the main result of QE.

    Even the House of Lords came to the conclusion that it was a failure in terms of encouraging real economic activity:

    Cooking the Books 1

    #230520

    LETTER. ( Clear and simple )

    Inflation and Quantitative Easing

    Dear Editors
    I have read many of your economics publications and note that your explanation of inflation may be summarised as – the excess issue of an inconvertible paper currency. Now, I thought that this is exactly
    what is being done (21st century style) with quantitative easing. However, in the Socialist Standard
    January 2010 in the article ‘Financial Alchemy’ you appear to be saying that this is not happening and that quantitative easing will not result in inflation. Please could you clarify this point for me and for other readers.

    GRAHAM WILDRIDGE (by email)

    Reply: We do indeed argue that the cause of inflation is the excess issue of an inconvertible paper currency, that is, currency that is freely printed and not convertible into an underlying commodity like gold. Currency can be said to be issued in excess when it is above and beyond the amount needed to carry out production and trade, injecting purchasing power into the economy that is not related to real wealth generation. This effectively means a bloating of monetary demand in the economy not sufficiently matched by increased production, which then serves to pull up prices as a whole. Wherever currency has been issued in excess this way, prices have risen and this has been far and away the main reason why the price level now is well over thirty times what it was before the start of the Second World War. The amount of currency in issue has risen far faster than has been warranted by increases in production and trade, with the amount of currency in circulation being £450m in 1938 whereas it is now around £54,000m and still rising.

    Quantitative easing (QE) is an interesting phenomenon in that when it was first mooted no-one seemed to be clear on what, precisely, would be involved. Our view has been that if it exacerbates the ongoing excess note issue then it would be inflationary. The way QE has worked in practice, with the Bank of England setting up a separate Asset Purchase Facility (APF), means this does not seem to have happened. Notes and coins are still increasing at the same sort of annual rate they have been the last
    few years, and there has been no noticeable change to this. What has happened instead is more unusual.

    In practice, a massive loan has been granted by the central bank. This has been loaned by the Bank
    of England to the Asset Purchase Facility and it has been used to buy financial assets. The vast majority
    of the APF’s purchases appear to have been government gilts with a smaller amount of corporate bonds being bought – in buying these up, their prices have risen, their interest payments (yields) have fallen for investors and so in turn equities have become a more attractive investment (which is what has largely fuelled the recent stock-market recovery).

    The effect of all this on the overall price level has been minimal at most though, as it has been a process concentrated specifically on these types of financial assets. In some ways it is a massive, debt-fuelled version of what used to be called ‘open-market operations’ by the central bank.

    As Charles Bean, the Deputy Governor for Monetary Policy at the Bank of England has stated with regard to QE and its effect on financial assets: ‘not only does the price of gilts rise as a consequence of
    the Asset Purchase Facility’s initial purchases, but also the prices of a whole spectrum of other assets… Also the rise in asset prices increases wealth and improves balance sheets. In this way, Quantitative Easing helps to work around the blockage created by a banking system that is still undergoing a process of balance sheet repair.’ It can be added that when the prices of gilts rise and their yields fall, this helps to keep interest rates low too as there is a close connection between government gilt yields and the interest rates charged by the commercial banks.

    To make all this happen the initial loan to the APF has been generated by a metaphoric flick of an electronic switch in the only way this can ever occur – through the actions of the central bank itself,
    the lender of last resort. As we have explained previously private banks are completely unable to expand
    their balance sheets with a stroke of the pen or flick of a switch, only the central bank can initially do this,
    just as it can inflate the currency it issues.

    The key point is that this loan by the Bank of England to the APF, effectively a massive IOU or series
    of IOUs, has to be paid back. When the APF sells these assets back into the markets it will have precisely the opposite effect to when it was buying them up, draining away the temporary additional purchasing power that had been created and pumped into the financial system.

    So, all in all, this is a central bank financial stimulus aimed at lowering interest rates, increasing economic activity and pushing up the price of financial assets. But it has to be temporary because if the Treasury is not to create another big financial black hole for itself it will at some point have to sell back the assets it has bought through the APF (ideally at the prices it bought them at, or higher), as otherwise it will just have lumbered itself with tens of billions of pounds worth of gilts it had issued earlier to finance its own government debt! So while it is a transitory financial alchemy of a sort, with any profits that accrue from this buying and selling process going to HM Treasury, so the Treasury also has to
    indemnify any losses incurred.

    QE is not inflationary in the traditional sense in that while it can fuel asset price bubbles in certain sectors of the economy it does not cause general price rises and is only temporary. Currency inflation
    causes more general price rises across the economy as the excess currency circulates throughout
    it, and of course can – and indeed will – continue for decades if not deliberately halted.– Editors.

    #230521

    Confusion about Money and Inflation

    The confusion about money and inflation. Propagated by the Monetarists of our time

    #230532
    ALB
    Keymaster

    According to this headline, the US has begun to undo Quantitative Easing — Quantitative Tightening — by selling the government and other bonds the Federal Reserve bought. This should have the opposite effect of bringing down the price of financial assets. What the authorities are afraid off is doing this too quickly and provoking a financial crash. They want to deflate the bubble gradually. Whether they succeed we will see.

    https://www.ft.com/content/2496105a-d211-4abe-ab5d-46a91876428f

    #230541
    Bijou Drains
    Participant

    DJP – “My thought on your third one is that the faster the velocity of money, the less of it is needed to do the same volume of transactions within the same period of time – all other things being equal. Faster velocity of circulation just means that the same amount of money is doing more work, not that more money is circulating.”

    Surely due to less money being needed to do the same job, this would increase the amount of money being circulated? Is it not that a proportion of the cash that used to be hanging around in wallets, cash registers, down the back of the settee, in piggy banks, etc. is out and about circulating?

    A bit like a football team where there used to be 11 players with 5 on the bench, the players on the bench (the cash that was in the wallets, purses, piggy banks, etc.) are now out the pitch.

    I’m pretty sure Hardy wrote something about this. It might have been in “Some Aspects of Marxian Economics”, I can’t find my copy of it and I can’t find a PDF on line.

    #230542

    https://www.newsweek.com/us-already-recession-atlanta-fed-1716570?utm_source=PushnamiMailing&utm_medium=email&utm_campaign=automatic&UTM=1655464607863&subscriberId=60ebe8fe94bbe71ea0bca852

    According to the Atlanta Feds, the USA is already in a recession. Other reports indicate that China is traveling into the same road. They are just trying to hold the bull by the horns

    #230543
    #230544
    DJP
    Participant

    “Surely due to less money being needed to do the same job, this would increase the amount of money being circulated?”

    No, I don’t think so. All it means is that for example if the velocity of money doubled – one ten pound note can now do the work that one twenty pound note (or two ten pound notes) was doing previously. Eg the single ten pound note can circulate now circulate twice (rather than once) and do twenty pounds worth of transactions.

    “A bit like a football team where there used to be 11 players with 5 on the bench, the players on the bench (the cash that was in the wallets, purses, piggy banks, etc.) are now out the pitch.”

    I don’t see how this relates to the velocity of money. The speed at which something travels and the amount of it are two separate things.

    Maybe if the players suddenly developed the ability to run at twice the speed as previously you would only need 5 players to do the work of 10? Don’t know how the analogy holds up..

    #230545

    Andrew Kliman and The Failure of Capitalist Production

    Kilman the failure of capitalist production

    #230546
    ALB
    Keymaster

    The classic quantity of money equation is:

    M = P x T, divided by V

    Where M is the quantity of money, P the prices to be realised, T the number of transactions, and V the velocity of circulation of money.

    Mathematically, if V increases then M should decrease. What you think would happen in practice depends on whether you think the level of prices determines the amount of money in circulation (in which case money would be withdrawn from circulation) or whether you think the amount of money determines the level of prices (in which case the price level would go up).

    I would have thought that today, when money is no longer convertible into gold (and so can’t be withdrawn from circulation as bullion), the effect should be to raise the price level or, rather, that the central bank would not have to issue so much new money to fulfil its remit to keep the price level rising (and money depreciating) at 2 percent a year.

    #230547
    DJP
    Participant

    “I would have thought that today, when money is no longer convertible into gold (and so can’t be withdrawn from circulation as bullion), the effect should be to raise the price level or, rather, that the central bank would not have to issue so much new money to fulfil its remit to keep the price level rising (and money depreciating) at 2 percent a year.”

    Yes, that would seem to make sense.

    I have seen this formula in places before. Out of interest is it from Marx or somewhere else?

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