Home > The Economy > Quantitative easing in the UK did not lead to an increase in the supply of money (graph)

Quantitative easing in the UK did not lead to an increase in the supply of money (graph)

from Merijn Knibbe

“You can lead a horse to water, but you can’t make it drink”

Did ‘quantitative easing’ in the UK lead to an inflationary increase in the supply of money and did it, therewith, increase inflationary risk? Not in the UK. At least, not at this point in time, as households and companies are deleveraging. The graph shows ‘M-3 money’. But other definitions of money (according to data of the Bank of England) show the same pattern. The increase of the money supply is either way below the increase of nominal GDP (the divisia index, a weighted average of different kinds of ‘money like’ assets wich more or less ranks these assets according to liquidity) or even show decreases (M-1 and M-2). A severe (oil-)price shock, low unemployment leading to high wage increases or a tight housing might change this, once upon a time. Or, to quote the results of some econometric testing (using methods pioneered by Sims):

“Regarding the causal link between money growth and inflation, neither VS nor CV find convincing evidence for a leading indicator role of money growth on inflation. Most increases in inflation are not preceded by an increase in money growth. The reverse causality is very prominent though.”

Which is of course completely consistent with the idea that money growth is endogenous to the system. The Post-Keynesians are right. And this article quoted indeed also finds that Central Banks have a rather impossible task when they want to use the interest rate to control the supply of money.

Which of course does not leave them impotent: they still can topple democratic governments and replace them with, as in the case of Greece, Italy and Spain, with governments lead by or dependent upon former Goldman Sachs and Lehmann employees. And wasn’t there also a connection between Draghi, head of the ECB, and Goldman Sachs? And wasn’t Goldman Sachs the bank which enabled the Greek to cook their books during the reign of Draghi?

The banks don’t control money – but they do control politics (did I forget to mention Paulson?). Which leaves us with the question: why do Central Banks exist?

  1. January 16, 2012 at 11:31 pm

    Central banks exist so that a small group of private individuals can control governments.

  2. Jorge Buzaglo
    January 17, 2012 at 5:09 pm

    “Why do Central Banks exist?”
    Good question. I think central banks exist as a remnant of the past, when monetary systems were relatively isolated by capital controls and banking sectors were closely regulated by central banks, which were in turn under the control of the political system. The Hayekian dream has been almost totally realized; the monetary and financial system is today a largely extraterritorial, privately owned, unregulated global system. Global daily average foreign exchange market turnover reached $4 trillions in 2010; a substantial portion of the money supply is today provided by global, extraterritorial markets.

  3. Alice
    January 18, 2012 at 9:03 am

    Just out of interest does anyone here have any history on incidents where quantitative easings (expansionary monetary policy call it what you will…) actually has led to too much money chasing too few goods (Miltons inflation monster)?

    It would be good to compare with the situation now…after all we have had perhaps the largest quantitative easings known in history but there is no sign at all of Milton’s monster.

  4. robert dulin
    January 18, 2012 at 3:23 pm

    Central banks exist to co-ordinate actions between the lenders in a society. Specifically to keep individual lenders from issuing their own money substitutes, such as private bank notes or other credit instruments.
    Secondary lenders, (any lender except the central bank. individual, institutional or bank) can only lend money that is already in existence. They earn their interest by creating velocity of that money.
    QE does no good if it is in the hands of secondary lenders waiting to earn interest payments for the creation of velocity.
    The business plan is that all money that gets into the economy earns interest for some lender.
    Using this plan, the lending cartel essentially owns the people and their government.
    They are just managing their property as any cattleman would manage his herd in a pasture.
    They have to be managed because there are certain things that are not understood.
    Cows know a lot of thinks, but they don’t know not to stand in the street.
    People don’t know how to use a money system to create equitable property exchange in their society.
    Whenever you hear or see the word “interest” just say MOO.

  5. January 18, 2012 at 5:27 pm

    @Alice: Germany in early 1920s. Austria and Hungary as well around the same time. Everybody knows that didn’t end up well though.

    • merijnknibbe
      January 18, 2012 at 10:26 pm

      Are you sure this was ‘quantitative easing’? As far as I know, the German government, burdened by war time debts and reparations, started to pay not only government employees but also strikers in the Ruhr-area (occupied by the French) in freshly printed money, which led to a fast growth of money in circulation and the whole thing. Quantitative easing has at this moment not led to a fast increase of money in circulation (as measured with M-3, the ECB’s favoured measure). I do however admit that as people at this moment are rapidly changing their portfolio’s the traditional m-1, m-2 and m-3 metrics are somewhat fuzzy)

      Compare it with this somewhat simple example: it is as if the ATP’s are stuffed with money as the banks know nothing else to do with the stuff, but people are not taking the money out of the machines.

      And inflation is in fact falling, slightly, at the moment, in the UK and the USA and the EZ.

      • Alice
        January 19, 2012 at 7:32 am

        Now someone explain to me the difference between paying strikers and government employees in newly printed money – to the effect of quantitative easings we have now?. Maybe now any money thrown at people simply is being hoarded under the floorboards and removed from more usual investments like property and shares (saved by whatever means and not being spent) ie liquidity trap. This might just be the time that it would work to pay those government employees and strikers in newly printed money.

  6. Jorge Buzaglo
    January 26, 2012 at 6:37 pm

    Hayek’s dream is almost realized: global, freely moving, endogenous, private money. Alas, he did not envision that it would become “The road to [financial] serfdom.”

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