When you use your ATM card on your UK account in Dublin (as it happens I did just this on Thursday) the Bank in Eire debits the withdrawal in euros to the account it holds in euros in Dublin for its UK counterpart. It then tells the UK branch what it has down and they agree an exchange rate and the UK bank debits your account with the equivalent amount in £s and credits the account the UK bank holds in the name of its Eire counterpart. The effect is that you get Euros to spend in Euroland but in UK no sterling has left the country.
I am merely pointing out that it is not necessarily correct to assume that the UK banks will have to increase interest rates in order to replace what has been withdrawn.
Well I would have thought that what happened spoke for itself but let me explain. The BoE (or should I say the Chanc of the Exch) arbitarily entered the market and raised the BoEs base rate twice during the day. The market certainly did not predict this would happen in any way whatsoever, it was out of the blue.
As already said, it is merely a measure of the money that is being used, not potentially used, that is also measured, but is a different measure. I would have thought it was quite obvious that it would be helpful to know how much could be used and how much is being used. The first is called 'sanctioned lending limits plus credit balances plus notes & coin in circulation from the Bank Return for the Issue department' and the second is 'money supply'.
Going back to your theory about you using an unused overdraft facility, this is of course also faulty example because you may ask for an increase in it tomorrow. Similarly, those with substantial equity in their house could also, potentially, borrow huge sums against it. This is largely immeasurable but none the less equity drawdown figures are collected by the BoE. But most people (in uk, but perhaps not in USA) dont continually drawdown that equity even if they could do so. So the money supply measure is of value because it gives an indication of actual demand, not theoretical or potential demand which, as I have already said, another measure.
yes it might, in the same way as any other sterling deposit. I was merely explaining that the payment mechanism does not automatically result in the dosh leaving the country which is what I think you were suggesting.
No.
I havent said that at all.
I am disputing your assertions that a) interest rates will rise in order to attract deposits to replace funds lost to the system. b) Central banks dont ave an instrumental effect on interest rates and c) payment for foreign goods results in a loss of liquidity in the UK banking system.
I am saying that funds are not necessarily lost to the system and this includes the payment for foreign goods. I am also saying that Central banks most certainly do act in a forceful way to influence and change interest rates.
Yes, if drawn credit increases to a worrying degree to the extent that excessive inflation may occur then the Central Bank will increase the discount rate to reduces the number of times money can recirculate in the system and therefore attenuate any increase in the money supply. Interest rates also effect the velocity of money. Additionally, an increase in demand will naturally increase interest rates if there is a shortage of supply or if the market enables such an increase, but in those circs the net interest margin (i.e. the difference between interest paid and interest received) is likely to increase and will not necessarily be reflected in an increase in deposit interest rates. The rise in interest rates does not occur in order to attract investment, after all where would that investment come from? Only from the pool of existing sterling money.
eh? that they DID buck the market trend by their intervention that day. and by their intervention all the banks' base rates also changed, almost instantaneously. The markets showed no indicator at all.
If I seemed to suggest that, it was a mistake. I know the nature of foreign exchange. No single transaction has a predictable effect, but a large volume of import transactions is likely to bring about the extinction of some credits in the banking system.
I stay with (a) and (c) when we are discussing a huge jump in consumer borrowing. On (b) my position is that central banks can, and do, have an effect, but that the effect is limited.
Generally when MLR rises deposit rates also rise.
It's a while since I looked with any attention at velocity of circulation, but my recollection is that it used not vary greatly, not nearly as much as interest rates can vary.
I don't dispute that central banks can have an effect on the market. I agree that it is an important agency, and can do much good (or bad). What I am saying is that the effect is limited: it can adjust the market, but it cannot buck it.
[You are challenging me to think about things that I have not engaged with recently; that's good. Thank you for giving the discussion your time and attention.]
Thats fair enough. In 1992 the intervention was actually an attempt to control the exchange rate rather than internal money supply matters, so perhaps I misled you there.
Its been a memory cleaner for me too! Thanks for the discussion.
I know. Let's say there are 10 million such "individuals", and on AVERAGE each is worth 400 and can spend 1400. That's a total worth of some 4 billion, and spending power of 14 billion.
BUT the money supply can sit anywhere between 4 billion and 14 billion - depending on how the 10 million individuals have set up their accounts. See?
Equally, I could make a transfer tomorrow - from current a/c (creating an overdraft) to savings a/c. Why should the money supply be higher tomorrow than today because of this? [I only made the transfer "for fun"...]
"John Boyle" wrote
No it doesn't. If I and 10 million other people all make (say)
100 transfers from current a/c's to savings a/c's tomorrow (just for the hell of it!), the "actual demand" is the same as today. But the money supply jumps by around 1 billion.
Is it? Let's imagine Fred invents a new "super-widget" and wants to put it into production...
Stage 1 : Eureka! Fred has the idea. Stage 2 : Fred applies to the bank for a 1 million "credit facility" to set up a factory. Stage 3 : Bank approves the credit facility. Stage 4 : Debit & credit balances are set up in two a/c's for 1m. Stage 5 : Fred buys factory from "Factories-R-Us".
[If the credit facility were an overdraft, you'd see Stages 4 & 5 effectively merged (Fred either transfers directly from his current a/c, or writes a cheque on the current a/c); alternatively, if the facility were a loan then Stages 3 & 4 would occur close together.]
I suggest the real impact on the economy, and also when Fred starts to "use" the money, doesn't happen until stage 5 (factory purchased).
However, I agree that the "money supply" is "opened-up" prior to Stage 5. But when? I'd say it happens at Stage 3 (credit approved), because Stage 4 (debit & credit balances created) is actually *neutral* for all parties concerned.
[There would be a couple of extra stages if Fred used cash to pay for the factory - Fred drawing cash from the bank and then "Factories-R-Us" paying it into their bank. We see the money supply reduce (temporarily) by 1 million when Fred draws the cash, and then increase back again when "Factories-R-Us" pay the cash into their bank. I still think it makes sense not to affect the money supply in this way...]
And I have given you one definition of money supply, and told you that there are others. Note that I said "a way of counting", not "the way of counting".
No. I am saying that indicators that describe large populations do not necessarily make sense when applied to individual cases.
Yes, in the sense that every element of the money supply has an owner. But my point is that your personal money supply figure is not a useful indicator of anything, even to you. It's part of a bigger picture. The big picture, the total money supply in an economy, is useful data to those who have the ability to affect an economy, government and central banks.
Don't jump on the word "aggregation" and ignore what is aggregated.
Okay. But don't lose sight of the fact that many of those entities are not individuals operating as you or I might do. In particular, note that government is very big.
No. Extreme or unusual cases are overwhelmed by more normal cases.
If the supply of money grows faster than the supply of goods and services on which to spend that money, the result is an inflationary pressure. Central banks try to ensure that the money supply remains fairly well in line with the supply of goods and services, and they have some capacity to make that happen.
As John told you, they keep an eye on it, and they make judgements based on experience on what might be reasonably expected to happen. The instruments of economic measurement and management can not be entirely precise in a free society, but every reasonable effort is made to make them as good as possible.
A drop in the ocean.
You are very persistent in trying to suggest that one case is a good parallel for a whole economy. It isn't. You have proved that for yourself, in that a reckoning of your money supply can give a false impression of how you stand. You have not proved that calculating the total money supply for an economy is an exercise without value.
In dealing with personal finances, you are wiser to use the precepts of accountancy. Those who seek to manage an economy have good use for the precepts of economics.
Do you not see how improbable your scenario is? Of course you do. You're just pushing it a bit. No, correction: you're pushing it a lot. The average sensible punter will not borrow simply to have money sitting in an account. It will happen with a few people who don't pay much attention to their personal finances, and it will happen temporarily if people raise a loan and have the money in a current account before going shopping.
You are persistently ignoring the definition of money supply. The money supply is increased at Stage 4, when the credit is created. It does not matter that from Fred's point of view and from the bank's point of view the transaction is what you term neutral. In accountancy, everything is neutral, in that every debit has a corresponding credit.
Economics and accounting involve different ways of looking at the world.
Nah. There are an awfully large number of offset mortgages out there already. On those, the interest rates are effectively the *same* for all linked accounts...
Anyway, your introduction of interest rates as an argument is flawed. The "money supply" is a snapshot in time. *During* that snapshot in time (ie a single instant), the amount of interest being incurred & earned is zero! So, the money supply (as defined) can "spike" by all those people making transfers, but then quite quickly undoing them. Even if they borrow at 7% and deposit at 1%, the exercise would cost them very little in interest overall.
No, I am persistently noting your definition of money supply and pointing out its shortcomings.
"Padraig Breathnach" wrote
I thought it was obvious that I had noticed that! I was suggesting a reason why it is silly to use that Stage, and proposing a better (IMO) Stage at which it should change...
Now, can you give a better reason to use Stage 4 rather than Stage 3?
But that "bigger picture" is made up of millions of similar other entities - I am not unusual in having "undrawn credit facilities".
"Padraig Breathnach" wrote
Of course they are. But surely you must agree that it is *not* "extreme", *nor* "unusual", for someone to have "undrawn credit facilities". The number of people must be quite large...
"Padraig Breathnach" wrote
As I am not an unusual case, and millions of others *also* have "undrawn credit facilities", then the total money supply must also "...give a false impression of how [we all] stand."
BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here.
All logos and trade names are the property of their respective owners.