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Is rising inflation looming?

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tikunetih
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Re: Is rising inflation looming?

#298297

Postby tikunetih » April 6th, 2020, 2:19 pm

dealtn wrote:To be clear the commercial banks are not selling Gilts to the Bank of England, other than in a transmission sense.


Yes. I used that example as it's the simplified case that the other examples ultimately resolve down to (if you follow all the consequential double-entry in a real-world example).

eg. as you state:
Now all of these "bank account balances" sit at commercial banks, and if that commercial bank doesn't have a reserve arrangement with the Central Bank, it will have a bank account with another, that does. So ultimately all this increased "bank account balances" accumulate at commercial banks reserve accounts with the Central Bank.



What is important here is the myth that the Central Bank is buying Gilts from commercial banks who in turn deposit the "cash" created back at the Central Bank, so "nothing" is created, and QE doesn't work as it's a circular transaction. There is a whole transmission system, with potential real assets, real cash, real multiplier effects along the way.

QE worked (works?) but the magnitude of it, and the lack of inflation created, is hard to quantify, there being no observable control experiment in parallel to know what would have happened without it. The thinking is that those selling Gilts, swapped them in practice for alternative financial assets. Prices of Gilts went up, but the "proceeds" went into other financial assets which in turn had price rises. However the real world transmission mechanism of this "wealth effect" is weak. The main sellers, pension funds etc. didn't pass on this newly created wealth since their payments stretch way into the future. Individuals whose share portfolios benefitted didn't spend this increased wealth in the real economy, or did so only partially.


There's debate about the impact of it, with the "obvious" direct ones being lower yields (rates) / higher asset prices, but little other real economy transmission. Probably a bit of a psychological effect, modestly improving animal spirits. As well documented, the wealth effects are limited because those who most benefited - investors like us - simply saw larger portfolio balances but then spent very littleif any of it. Little leakage from the "financial" economy to the "real" economy that most people inhabit.

Beyond that, and as you say, without the counterfactual it's hard to judge, but it appears to be modest in impact, but better than nothing. Regarding inflation, it was possibly even disinflationary.

Certainly Japan's enormous QE program appears to illustrate the relative ineffectiveness of it in producing much in the way of inflation.

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Re: Is rising inflation looming?

#298321

Postby Nimrod103 » April 6th, 2020, 3:00 pm

dealtn wrote:
Nimrod103 wrote:
AIUI disinflation is just a reduction in the rate of inflation. It could be 5% to 3% or 1% to -1%. But Capital economics are predicting actual deflation of -1% over several months. So actual falls in prices, just like we have seen in the oil price.


Without reading their piece (which I used to get), or Morgan Stanley's (which I never thought much of) I wouldn't know. They may, both be predicting falling prices, but if that is just for a few months (August?) and not a persistent general fall in prices and aggregate demand in the longer term, then it isn't the kind of "deflation" that economists worry about. It maybe this is semantics about language.

If they are indeed predicting "deflation", that is interesting. But absent their research I can't really comment on it, and I wouldn't trust a journalist's interpretation of their research packaged into a newspaper article I'm afraid.


I don't think it is semantics. However, I have always taken theview that outright long term deflation is quite unlikely with a fiat currency. So the deflation of the late 1920s and 1930 ended when the UK came off the gold standard in 1931.

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Re: Is rising inflation looming?

#298403

Postby TheMotorcycleBoy » April 6th, 2020, 6:10 pm

dealtn wrote:To be clear the commercial banks are not selling Gilts to the Bank of England, other than in a transmission sense.

The BOE Asset Purchase facility allows the Central Bank, via its agent the BOE Asset Purchase Fund, to buy Gilts....

Firstly, many thanks for explaining the mechanics behind it all. Especially the liabilities/reserves side.

What is important here is the myth that the Central Bank is buying Gilts from commercial banks who in turn deposit the "cash" created back at the Central Bank, so "nothing" is created, and QE doesn't work as it's a circular transaction. There is a whole transmission system, with potential real assets, real cash, real multiplier effects along the way.

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. And I totally agree.

QE worked (works?) but the magnitude of it, and the lack of inflation created, is hard to quantify, there being no observable control experiment in parallel to know what would have happened without it. The thinking is that those selling Gilts, swapped them in practice for alternative financial assets. Prices of Gilts went up, but the "proceeds" went into other financial assets which in turn had price rises. However the real world transmission mechanism of this "wealth effect" is weak. The main sellers, pension funds etc. didn't pass on this newly created wealth since their payments stretch way into the future. Individuals whose share portfolios benefitted didn't spend this increased wealth in the real economy, or did so only partially.

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.

Matt

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Re: Is rising inflation looming?

#298409

Postby TheMotorcycleBoy » April 6th, 2020, 6:22 pm

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

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Re: Is rising inflation looming?

#298414

Postby dealtn » April 6th, 2020, 6:35 pm

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.

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Re: Is rising inflation looming?

#298418

Postby TheMotorcycleBoy » April 6th, 2020, 6:40 pm

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.

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Re: Is rising inflation looming?

#298435

Postby GoSeigen » April 6th, 2020, 7:46 pm

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

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Re: Is rising inflation looming?

#298498

Postby TheMotorcycleBoy » April 7th, 2020, 5:09 am

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.

;)

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Re: Is rising inflation looming?

#298508

Postby GoSeigen » April 7th, 2020, 7:51 am

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

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Re: Is rising inflation looming?

#298510

Postby TheMotorcycleBoy » April 7th, 2020, 8:05 am

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

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Re: Is rising inflation looming?

#298535

Postby dspp » April 7th, 2020, 9:25 am

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

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Re: Is rising inflation looming?

#298549

Postby TheMotorcycleBoy » April 7th, 2020, 9:57 am

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.

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Re: Is rising inflation looming?

#298560

Postby Howard » April 7th, 2020, 10:16 am

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

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Re: Is rising inflation looming?

#298570

Postby tikunetih » April 7th, 2020, 10:38 am

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.

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Re: Is rising inflation looming?

#300424

Postby TheMotorcycleBoy » April 13th, 2020, 5:02 pm

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.?)

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Re: Is rising inflation looming?

#300428

Postby tjh290633 » April 13th, 2020, 5:13 pm

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

TJH

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Re: Is rising inflation looming?

#300430

Postby Alaric » April 13th, 2020, 5:18 pm

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.

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Re: Is rising inflation looming?

#300448

Postby Nimrod103 » April 13th, 2020, 6:18 pm

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.

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Re: Is rising inflation looming?

#300451

Postby PinkDalek » April 13th, 2020, 6:34 pm

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. :D

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?

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Re: Is rising inflation looming?

#300456

Postby Alaric » April 13th, 2020, 6:52 pm

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.


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