Is rising inflation looming?

[88V8]

......the belief that arises from a fixed amount of money. The concept is that you have to rob Peter to pay Paul.
Whereas from a floating amount of money point of view, you just pay Paul, who spends the money with Peter (who then becomes Paul and spends it with a different Peter and so on) and collectively all the Peters pay via a percentage tax *from the new income they wouldn't otherwise have got*.

In a closed economy. If it's all spent in a way that is tax-equal.
But we scupper that with imports.

And for instance, take housing. Increased prices due to excessive population/demand, Treasury largesse in stamp duty holiday, and extended borrowing beyond thirty years.
How is that neutral?

V8

[TheMotorcycleBoy]

Maybe there are examples where fiscal stimulus could reduce spending but I confess I'm scratching my head a bit.

You have to be a mainstream economist and believe in "fiscal crowding out" - which is based on the idea that there is a fixed amount of money that swaps hand at a certain price. There isn't a fixed amount of money.


NeilW

Let's assume I'm a typical Western consumer. If I'm given more money I will tend to spend more. More stuff, more holidays etc. That seems to be the way most people react to largesse. So why would a fiscal stimulus not give rise to increased spending generally?

Put another way, a fiscal crowding out of my Easter holiday might have me going away in the autumn as well. Next year this is exactly what I'm planning. Not from direct fiscal stimulus but from a combination of money saved last year and a desire to 'catch-up' on enjoying the rest of my life.

I get the impression a lot of people are thinking like this just now.

BoE

I think you have a point here. i.e. lots of pent-up spending when the curtain of covid lifts.

I guess what you have to counter that with is the number of people who won't be able to spend because they used to work for small business that have since collapsed. Or larger businesses that have laid ppl off - a lot have.

Lots of people might have loans/rent arrears etc. to pay off.

What we need the difference in unemployed from the summer of 2019 (for instance) and now, and try to figure how much consumer demand is down as a result.

Also, personally I could be one of those whose saved and invested more in the covid period. Perhaps lots of US recipients of stimulus cheques, will have bought on the SP500, if they didn't really need the cheque. I can't see that many cashing the investment to go on 2 holidays the next year, since Yanks get a lot less holiday entitlement than us....although they may spend on a new SUV etc.

I guess the kicker will be if lots of ppl remain unemployed whilst small+medium recover/start again.

Matt

[GoSeigen]

By pure coincidence, I've just come across this very good summary of the current inflation and interest rate situation. Read a bit down the page, the answer to the question "Will interest rates ever increase to 4 or 5% again, or are they going to remain at record lows for the foreseen future?"

https://www.quora.com/What-is-the-diffe ... rest-rates

GS

Sorry, we have very different definitions of "very good" in that case.

Perhaps I was too generous, but it was a whole lot better than I'm accustomed to seeing even from economic journalists. Any specific problem from your POV?

GS

[dealtn]

By pure coincidence, I've just come across this very good summary of the current inflation and interest rate situation. Read a bit down the page, the answer to the question "Will interest rates ever increase to 4 or 5% again, or are they going to remain at record lows for the foreseen future?"

https://www.quora.com/What-is-the-diffe ... rest-rates

GS

Sorry, we have very different definitions of "very good" in that case.

Perhaps I was too generous, but it was a whole lot better than I'm accustomed to seeing even from economic journalists. Any specific problem from your POV?

GS

Well I guess he is American, so some lenience given as interest rates are higher there currently, and typically lower than here generally, but to even start his piece with "interest rates are at historically normal rates" is a stretch. Even using "interest rates" to refer to the entirety of the treasury curve, they would be in a range of normal spectrum, but towards the lower end of that, which is stretching the definition of reality somewhat. In addition given "real interest rates" are negative that is going some way to be considered normal.

The prices in the treasury market too aren't really set by "traders" seeking to make gains from price appreciation either. That market is vast and that motive is not that of any but the most marginal buyer (or seller). (Very little of that trading exists in dark pools either, although mostly off market).

Its hard to be enthused by the remainder of any argument being made if that's the basic level of analysis if I am honest.

[GoSeigen]

Sorry, we have very different definitions of "very good" in that case.

Perhaps I was too generous, but it was a whole lot better than I'm accustomed to seeing even from economic journalists. Any specific problem from your POV?

GS

Well I guess he is American, so some lenience given as interest rates are higher there currently, and typically lower than here generally, but to even start his piece with "interest rates are at historically normal rates" is a stretch. Even using "interest rates" to refer to the entirety of the treasury curve, they would be in a range of normal spectrum, but towards the lower end of that, which is stretching the definition of reality somewhat. In addition given "real interest rates" are negative that is going some way to be considered normal.

The prices in the treasury market too aren't really set by "traders" seeking to make gains from price appreciation either. That market is vast and that motive is not that of any but the most marginal buyer (or seller). (Very little of that trading exists in dark pools either, although mostly off market).

Its hard to be enthused by the remainder of any argument being made if that's the basic level of analysis if I am honest.

Fair enough, but I wonder if you missed that the piece was written three to four years ago? Not that it makes a huge difference, but his thoughts have been borne out, at least in the first few years of his "foreseeable future"...


His comment about trading treasuries I took as simply contrasting with the common layman view that "interest rates" are controlled by central banks. I'd go further than him and say that in the recent past central banks and everyone else has acted as if the former control monetary rates whereas IMO they have mostly simply being following the yield curve of risk-free markets, i.e. practically forced to make the changes they have made. In other words the market dog has very much been wagging the Central Bank tail.

GS
GS

[dealtn]

Fair enough, but I wonder if you missed that the piece was written three to four years ago?

Yes I had, apologies, although like you I don't think that makes a tremendous difference.

[Bubblesofearth]

I think you have a point here. i.e. lots of pent-up spending when the curtain of covid lifts.

I guess what you have to counter that with is the number of people who won't be able to spend because they used to work for small business that have since collapsed. Or larger businesses that have laid ppl off - a lot have.

Lots of people might have loans/rent arrears etc. to pay off.

What we need the difference in unemployed from the summer of 2019 (for instance) and now, and try to figure how much consumer demand is down as a result.

Also, personally I could be one of those whose saved and invested more in the covid period. Perhaps lots of US recipients of stimulus cheques, will have bought on the SP500, if they didn't really need the cheque. I can't see that many cashing the investment to go on 2 holidays the next year, since Yanks get a lot less holiday entitlement than us....although they may spend on a new SUV etc.

I guess the kicker will be if lots of ppl remain unemployed whilst small+medium recover/start again.

Matt

Here in the UK I think unemployment could fall quite rapidly. A lot of jobs have been lost in hospitality/retail which can hire back just as quickly if needed, e.g. if demand surges. Plus the furlough scheme means many people are not significantly worse off than when working, especially as they've not been able to spend as much over the last year. Yes, some businesses have gone under but others will quickly fill any gaps that appear.

BoE

[Bubblesofearth]

Now ask who has that been taken off to allow you to spend more?

As the fiscal stimulus is essentially debt then it has been taken off future tax-payers.

NeilW[/quote]

[NeilW]

[
As the fiscal stimulus is essentially debt then it has been taken off future tax-payers.

Peter is the future taxpayer. In neoclassical economics the inter temporal budget constraints states that is imputed into the existing interest rate. Therefore it is always taken off in the current period.

Which makes sense up to a point (except the neoclassical confuse money and stuff and think there is a one to one relationship between them). The future can't send bread back to now to pay for your additional physical consumption now. It has to be made now.

[NeilW]

In a closed economy. If it's all spent in a way that is tax-equal.
But we scupper that with imports.8

Except we have a floating rate currency. Which means whatever we spend on imports actually pays for UK exports. Because they don't use Sterling abroad. The FX system automatically reflects the money back into the Sterling currency area.

So yes Sterling is a closed system. There's no difference between "abroad" and "here" in money terms. It's either bought or sold with Sterling or it isn't.

That's another neoclassical problem - always thinking in terms of fixed exchange rates and conversions, even though that all stopped in 1971.

NeilW

[johnhemming]

Except we have a floating rate currency. Which means whatever we spend on imports actually pays for UK exports. Because they don't use Sterling abroad. The FX system automatically reflects the money back into the Sterling currency area.

Sterling is used in various places some of which might be considered "abroad".

However, there are quite a few capital transactions as well as imports and exports.

[TheMotorcycleBoy]

I think you have a point here. i.e. lots of pent-up spending when the curtain of covid lifts.

I guess what you have to counter that with is the number of people who won't be able to spend because they used to work for small business that have since collapsed. Or larger businesses that have laid ppl off - a lot have.

Lots of people might have loans/rent arrears etc. to pay off.

What we need the difference in unemployed from the summer of 2019 (for instance) and now, and try to figure how much consumer demand is down as a result.

Also, personally I could be one of those whose saved and invested more in the covid period. Perhaps lots of US recipients of stimulus cheques, will have bought on the SP500, if they didn't really need the cheque. I can't see that many cashing the investment to go on 2 holidays the next year, since Yanks get a lot less holiday entitlement than us....although they may spend on a new SUV etc.

I guess the kicker will be if lots of ppl remain unemployed whilst small+medium recover/start again.

Matt

Here in the UK I think unemployment could fall quite rapidly. A lot of jobs have been lost in hospitality/retail which can hire back just as quickly if needed, e.g. if demand surges. Plus the furlough scheme means many people are not significantly worse off than when working, especially as they've not been able to spend as much over the last year. Yes, some businesses have gone under but others will quickly fill any gaps that appear.

BoE

It's hard to find exact numbers. Here are some medium sized businesses that have gone under:

https://www.business-live.co.uk/retail- ... 0-18177619

but what is less clear is the little businesses, e.g. back street car mechanics, local bakers/butchers/cafes, hunting+fishing shops, nail bars, hairdressers, local hardware stores. When those places shut I guess a lot of entreprenurial types "just give up", and them and all their staff have much much less to spend.

So I was curious what kind of drag we (and other countries) will see as these smaller ventures pick up, IOW new younger entreprenuers come along, if at all.

Matt

Matt

[dealtn]

but what is less clear is the little businesses, e.g. back street car mechanics, local bakers/butchers/cafes, hunting+fishing shops, nail bars, hairdressers, local hardware stores. When those places shut I guess a lot of entreprenurial types "just give up", and them and all their staff have much much less to spend.

I suspect many of them "start again" rather than "just give up".

[Bubblesofearth]

Peter is the future taxpayer. In neoclassical economics the inter temporal budget constraints states that is imputed into the existing interest rate. Therefore it is always taken off in the current period.

My understanding was that it was taken back in the form of future tax increases. It is interesting that imoney market rates have budged very little with the fiscal stimulus. Presumably an indication that inflation expectations remain muted? In turn reflecting no dramatic increase in demand in the medium term? If so then IMO this is wrong.

I guess it's probably more likely I'm wrong!

BoE

[TheMotorcycleBoy]

but what is less clear is the little businesses, e.g. back street car mechanics, local bakers/butchers/cafes, hunting+fishing shops, nail bars, hairdressers, local hardware stores. When those places shut I guess a lot of entreprenurial types "just give up", and them and all their staff have much much less to spend.

I suspect many of them "start again" rather than "just give up".

I hope so. But I think it will take time. And some will have forever their customers, i.e. they have gone to Amazon etc. So those particular local businesses and jobs wont ever return. Just an opinion.

[NeilW]

I guess it's probably more likely I'm wrong!

BoE

You're right. Mainstream economists are wrong. When the savings that are the Gilts are spent, that generates the tax that essentially pays off the need for the Gilt. If they are never spent then there is no issue. Somebody has some savings - probably a pension fund.

[NeilW]

However, there are quite a few capital transactions as well as imports and exports.

Financial transactions sum to zero and are eliminated in economic analysis. Nowhere material uses Sterling other than here.

[johnhemming]

However, there are quite a few capital transactions as well as imports and exports.

Financial transactions sum to zero and are eliminated in economic analysis.

In the real world there is a chart of capital flows:
https://tradingeconomics.com/united-kin ... ital-flows

[NeilW]

[
In the real world there is a chart of capital flows:

Yes, and in the real world they are balanced precisely by current flows. All because somebody put a line across a set of accounts to allow them to appear in the first place.

But the financial accounts do sum to zero, as you can read in the National Accounts specifications if you so please. Because that's how financial accounts work. Sterling Financial Capital held in Birmingham Alabama is no different to Birmingham England. It's the same thing, with the same overall economic effect.

NeilW

[johnhemming]

Which is true this:

[
In the real world there is a chart of capital flows:

Yes, and in the real world they are balanced precisely by current flows. All because somebody put a line across a set of accounts to allow them to appear in the first place.

But the financial accounts do sum to zero, as you can read in the National Accounts specifications if you so please. Because that's how financial accounts work. Sterling Financial Capital held in Birmingham Alabama is no different to Birmingham England. It's the same thing, with the same overall economic effect.

or this:

Except we have a floating rate currency. Which means whatever we spend on imports actually pays for UK exports.

Do imports balance with exports or does the difference between imports and exports balance with capital flows?