The Lemon Fool

Perhaps the reason QE didn't create inflation is because it got swallowed up by the deluge of negative equity, and overpriced housing stock talked up in the States, bought by ninjas etc. in the lead up (2003-2006). Remember that so much false value, had been generated on both the housing and the capital markets, so when this value collapsed (2007-2009) we had the deflation which QE's "potential to inflate" effectively cancelled out.

Well that's my theory for this evening at least.

Matt

TheMotorcycleBoy wrote:
Your wording confused me a tad here. But I think I'm with it, you're stating that real assets are created by QE, I think.

Central Bank buys Gilt from a Commercial Bank in exchange for cash. The Commercial Bank places cash on deposit, as reserves with the Central Bank.

Central Bank buys Gilt from a Commercial bank who bought a gilt off a Pension Fund in exchange for cash, which it used to buy shares, the sellers of whom bought a car, and also went on holiday, the car seller, built an extension, the holiday seller paid commision to an agent, who gifted some to his niece, who bought some jewellery from a recently qualified art student, who happened to be engaged to the electrician on the extension job, who now both felt comfortable enough to announce their engagement and put a deposit down on a venue, who used the deposit to pay for decoration works ....... all of whom were paying and withdrawing "cash" into their commercial bank that they place on deposit, as reserves with the Central Bank.

Scenario 1 is the lazy thinking many have of how QE (didn't) work. Scenario 2 is one of the possible stories of how it did.

dealtn wrote:

TheMotorcycleBoy wrote:
Your wording confused me a tad here. But I think I'm with it, you're stating that real assets are created by QE, I think.

Central Bank buys Gilt from a Commercial Bank in exchange for cash. The Commercial Bank places cash on deposit, as reserves with the Central Bank.

Central Bank buys Gilt from a Commercial bank who bought a gilt off a Pension Fund in exchange for cash, which it used to buy shares, the sellers of whom bought a car, and also went on holiday, the car seller, built an extension, the holiday seller paid commision to an agent, who gifted some to his niece, who bought some jewellery from a recently qualified art student, who happened to be engaged to the electrician on the extension job, who now both felt comfortable enough to announce their engagement and put a deposit down on a venue, who used the deposit to pay for decoration works ....... all of whom were paying and withdrawing "cash" into their commercial bank that they place on deposit, as reserves with the Central Bank.

Scenario 1 is the lazy thinking many have of how QE (didn't) work. Scenario 2 is one of the possible stories of how it did.

Agree.

Some great posts by tikunetih and dealtn on this thread, practically all of which I agree with.

The only caveat I'd mention is that I think we'll find that commercial banks are capital constrained (as observed by tikunetih) only temporarily: when this constraint is relaxed there will be huge scope for banks to expand their lending.

GS

GoSeigen wrote:Some great posts by tikunetih and dealtn on this thread, practically all of which I agree with.

What, even his

dealtn wrote:real multiplier effects along the way.

TheMotorcycleBoy wrote:

GoSeigen wrote:Some great posts by tikunetih and dealtn on this thread, practically all of which I agree with.

What, even his

dealtn wrote:real multiplier effects along the way.

Yep.

I know it was tongue in cheek but compare and contrast:
1. "If a Central Bank creates one dollar of base money then, because of the Money Multiplier, nine dollars of money is created."
"There's no point building 5G masts in African countries because blacks don't appreciate technology and development and will probably just set them on fire."

2. "When Central banks create base money there are potential multiplier effects along the way."
"People with darker skin tend to originate from lower latitudes."


Get it?

GS

GoSeigen wrote:

TheMotorcycleBoy wrote:

GoSeigen wrote:Some great posts by tikunetih and dealtn on this thread, practically all of which I agree with.

What, even his

dealtn wrote:real multiplier effects along the way.

Yep.

I know it was tongue in cheek but compare and contrast:
1. "If a Central Bank creates one dollar of base money then, because of the Money Multiplier, nine dollars of money is created."
"There's no point building 5G masts in African countries because blacks don't appreciate technology and development and will probably just set them on fire."

2. "When Central banks create base money there are potential multiplier effects along the way."
"People with darker skin tend to originate from lower latitudes."


Get it?

GS

I think so. Mainly because there's no definite 9x (or anything predictable factor at all, be it 5x, 10x, 20x). The size of the x will be determined by several things (in addition to financial capital/reserve rations), e.g. taxation, time between transactions. Etc. etc.

Matt

TheMotorcycleBoy wrote:

GoSeigen wrote:

TheMotorcycleBoy wrote:What, even his

Yep.

I know it was tongue in cheek but compare and contrast:
1. "If a Central Bank creates one dollar of base money then, because of the Money Multiplier, nine dollars of money is created."
"There's no point building 5G masts in African countries because blacks don't appreciate technology and development and will probably just set them on fire."

2. "When Central banks create base money there are potential multiplier effects along the way."
"People with darker skin tend to originate from lower latitudes."


Get it?

GS

I think so. Mainly because there's no definite 9x (or anything predictable factor at all, be it 5x, 10x, 20x). The size of the x will be determined by several things (in addition to financial capital/reserve rations), e.g. taxation, time between transactions. Etc. etc.

Matt

If the X multiplier falls below unity then there is a serious issue. ( think) the greater the propensity to save helicopter money as opposed to spend it, the lower the X. And the more open an economy the more external suppliers (foreign countries) benefit from the largesse as imports are sucked in, vs a closed economy where the largesse circulates as domestic demand. It is the X that can be ascribed to the domestic economy that is (I think) relevant.

Given the UK's persistent balance of trade deficit (especially after stripping out the petroeconomy period) this is an issue for the UK, imho.

regards, dspp

dspp wrote:

TheMotorcycleBoy wrote:

GoSeigen wrote:Yep.

I know it was tongue in cheek but compare and contrast:
1. "If a Central Bank creates one dollar of base money then, because of the Money Multiplier, nine dollars of money is created."
"There's no point building 5G masts in African countries because blacks don't appreciate technology and development and will probably just set them on fire."

2. "When Central banks create base money there are potential multiplier effects along the way."
"People with darker skin tend to originate from lower latitudes."


Get it?

GS

I think so. Mainly because there's no definite 9x (or anything predictable factor at all, be it 5x, 10x, 20x). The size of the x will be determined by several things (in addition to financial capital/reserve rations), e.g. taxation, time between transactions. Etc. etc.

Matt

If the X multiplier falls below unity then there is a serious issue. ( think) the greater the propensity to save helicopter money as opposed to spend it, the lower the X. And the more open an economy the more external suppliers (foreign countries) benefit from the largesse as imports are sucked in, vs a closed economy where the largesse circulates as domestic demand. It is the X that can be ascribed to the domestic economy that is (I think) relevant.

Given the UK's persistent balance of trade deficit (especially after stripping out the petroeconomy period) this is an issue for the UK, imho.

regards, dspp

Thanks, DSPP

That's an interesting point. I'd not really considered the X<1 case. Presumably/hopefully? near zero bank rates may hold ppl away from depositing. However we need suppliers back. I was online shopping for Mel's birthday pressies and one or two popular DVDs I looked at were either out of stock, or the delivery times on longer than expected lead time.

By co-incidence I viewed this on a dvd last night.

I think it may be helpful in giving us a senior banker's view of this discussion.

Warning, for those of a serious disposition, it is a short clip from "Yes Minister".

https://www.youtube.com/watch?v=KgUemV4brDU

regards

Howard

TheMotorcycleBoy wrote:If my memory serves me that, the purpose of the QE (both sides of the pond), was to defuse the lack of trust that Banks held of each other, recalling that so many were tarred with the "Toxic Asset" brush. CDOs, CDO2s and so on...where as what the QE did was to furnish, as you said earlier, those Banks which real cash assets, and hence Instis regained confidence to deal and lend between themselves again.

No, it was the recapitalisation of financial institutions, preventing insolvencies and thereby removing counterparty risk, that likely played the primary role in restoring trust in, and between, banks and other instis.

These recapitalisations comprised state-funded action such as the US's $700bn TARP program, what the UK did injecting capital into / taking full ownership of RBS, Lloyds, Northern Rock, B&B, what Ireland did with AIB, BoI, etc. Plus, all the private sector funded recapitalisations that occurred around this time to avoid insolvency and/or strengthen balance sheets, such as Buffet's $5bn into Goldman preference shares, Barlcay's £7bn capital raise etc.

Govs/CBs also had liquidity support programs to "unblock the plumbing".


As mentioned earlier, bank lending was capital constrained not reserve constrained, so any increased reserves arising from QE transactions was just a sideshow and not really relevant to the above.

The purpose of QE was to lower longer term interest rates, and by lowering yields raise asset prices and achieve (somewhat of) a wealth effect.

Mel has recently returned from Tesco. She was moaning about price rises. Tesco paracetamol packets at 75p (they were about 25-32p before covid, we think). I resorted to Google to see what it thought:

Yes, I apologise in advance, it's from the Express:

https://www.express.co.uk/news/uk/12586 ... uk-covid-1

"The price of two times of TOTM Applicator Tampons was raised from £2.20 to £3.20.

Cartons of soup went up from £1.25 each to £2.50.

Packets of sliced crumbed ham shop up from £2 to £3.

And multi-packs of bottle of Diet Coke are now going for £8 instead of £7.

A spokesman for Tesco denied prices had been ratcheted up."

I knew this would happen. Putting aside the "economics theorems" the reality for everyday folk, is "stuff costs more now". Just as bad is this (which is inevitable), the cheap brands and packaging options are going fast, and one is left with the expensive ones. e.g. Heinz Ketchup. Mel reckons only the glass bottle options available, and only pricey olive oil brands. Me wonders, if basically, the factories that make all these staples, are temporarily closed? Or only half staffed (social distancing of factory workers....etc.?)

Matt

There has been no paracetemol of any sort in our Tesco for at least 3 weeks. Plenty of Ibuprofen, and Aspirin, of course.

TJH

TheMotorcycleBoy wrote:I knew this would happen. Putting aside the "economics theorems" the reality for everyday folk, is "stuff costs more now".

If supermarkets can sell all that can be delivered to them, subject only to the low density of shoppers, they will presumably be holding back on special offers and deals of x% off when spending £ Y with a loyalty card.

Incidentally what is the explanation behind the egg shortage? I can understand a run on yeast and bread flour if people have taken to baking their own, but why eggs? You might even expect a glut as the catering trade won't be taking any.

Alaric wrote:

TheMotorcycleBoy wrote:I knew this would happen. Putting aside the "economics theorems" the reality for everyday folk, is "stuff costs more now".

If supermarkets can sell all that can be delivered to them, subject only to the low density of shoppers, they will presumably be holding back on special offers and deals of x% off when spending £ Y with a loyalty card.

Incidentally what is the explanation behind the egg shortage? I can understand a run on yeast and bread flour if people have taken to baking their own, but why eggs? You might even expect a glut as the catering trade won't be taking any.

I imagine it is a shortage of consumer sized packaging. The same reason has been mentioned for the shortage of flour. Giant factory sized sacks are plentiful apparently.

TheMotorcycleBoy wrote:Yes, I apologise in advance, it's from the Express: ... I knew this would happen.

Yes, well, even The Express gets the article date correct more often than not. It is dated 23 March and your OP 5 days later.

That aside, the heading of the article is clear:

Tesco end multi buy deals on 600 items in desperate bid to prevent shoppers stockpiling and the article includes

“We have not increased our prices. ... “It means some products have gone back to their pre-promotion prices.

I don’t really see how you can draw any conclusions from this, which was commenced during LooPaperGate etc from memory.

The cost of paracetamol is really not going to make much of a difference to inflation, is it?

PinkDalek wrote:The cost of paracetamol is really not going to make much of a difference to inflation, is it?

If inflation is defined as a rise in Retail Prices, every little helps.

PinkDalek wrote:

TheMotorcycleBoy wrote:Yes, I apologise in advance, it's from the Express: ... I knew this would happen.

Yes, well, even The Express gets the article date correct more often than not. It is dated 23 March and your OP 5 days later.

That aside, the heading of the article is clear:

Tesco end multi buy deals on 600 items in desperate bid to prevent shoppers stockpiling and the article includes

“We have not increased our prices. ... “It means some products have gone back to their pre-promotion prices.

I don’t really see how you can draw any conclusions from this, which was commenced during LooPaperGate etc from memory.

The cost of paracetamol is really not going to make much of a difference to inflation, is it?

If you read the whole article, you'll see that the first part details tsco ending the multi buy thing. The next bit (what i italicised) shows the resulting new prices of stuff.

The thing is, if the consumer en mass pays inflated prices for stuff, then the consumer is witnessing inflation.

What about *you* ? Is your basket of goods costing you more or less?

Matt

TheMotorcycleBoy wrote:What about *you* ? Is your basket of goods costing you more or less?

I've absolutely no idea as I'm not permitted to do the shopping and we can't get much of what we normally have anyway, at least not from the same places as what used to be normal. One thing I would say though is our experience isn't the same as yours. We can mainly only get the cheap brand in-house stuff and not our normal choice.

I did understand your point though but I don't think the special situation back then and a random few listed items proves anything much at this stage. Why buy coke anyway; diet, classic or not. If they'd listed all 600 items and done some statistics that may have been of interest. Maybe they did, I don't know, but I didn't read the thing.

Did they also examine when the "promotion" commenced etc. Though not.

My main point is you "knew this would happen" on 28 March/13 April but you then draw on an article written on 23 March.

PinkDalek wrote:My main point is you "knew this would happen" on 28 March/13 April but you then draw on an article written on 23 March.

True! I only came across the article yesterday, since Mel had just returned from tesco and was stating how little she got for £75, and I looked upon google to find data for recent recorded price rises. We notice this type of a lot with two teenage kids, and Mel is on a low wage (Screwfix sales assistant 36hours/week contracted) and she's now (for about 2 weeks) been furloughed down to 80% pay. I'm curious as to whether the forecasts we made in the last 6 months for the cost of assisting our eldest's Uni first year will alter as a result.

When I said I "knew this would happen", then yes, I've been reading a lot of basic economics lately (Keynesianism and Monetarism etc.), and like I've stated already here, there's seriously reduced supply, demand not reduced as much (in my arrogant opinion!!), and QE injecting money and hence wages. Mel and me have both seen certain things go up (of course one's brain isn't a perfect database of everything food purchase).

Another thing which intrigues me, is when things "get back to normal", there could be lots of UK consumers (who've been bankrolled effectively, but had little purchasing opportunities) who'll go on spending sprees. Possibly.

M