Fixed-rate Loans

"John Boyle" wrote

No, he doesn't actually use it until Stage 5 (whether it's an overdraft or a loan). Stage 4 occurs at around the same time as Stage 5 if the credit were granted as an *overdraft*, but at around Stage 3 if it were given as a *loan*.

If the credit is granted as an overdraft then yes, it *is* counted when he "uses" it. But if it is granted as a loan then no, it is counted *before* he "uses" it.

"John Boyle" wrote

Then why (in the case of a loan) is it counting the dosh that *could* be used to buy the factory, but which hasn't yet been used?

"Padraig Breathnach" wrote

Stage 4 doesn't have any effect on the economy. It is the

**credit approval** (Stage 3) that *allows* Fred to buy the factory. He *actually* buys the factory at Stage 5.

Further, the definitions used for money supply count this 'bank credit' at around Stage 3 if the credit is a *loan*, but not until around Stage 5 if the credit is an *overdraft*. Even though it is approved at Stage 3, and used at Stage 5, for *both*...

Wouldn't it make more sense for the 'money supply' to increase/decrease when the size of the economy increases/decreases, and not when it doesn't?

The current definitions aren't even consistent between cash & credit: banknotes are counted within the money supply as soon as they are "born" (ie, printed) even before they are passed to the high street banks; but credit is *not* counted when it is "born" (ie, approved) ...

"John Boyle" wrote

I'm really not quite sure what you think my "purpose" is ...

"John Boyle" wrote

I agree that it could be useful to measure the ability of people to obtain credit - this might be included in [1] "total spending power the population *could* achieve" (if they obtained the maximum credit that banks would allow them).

Another thing we can measure is [2] "total spending power the population *can* achieve" (using their available credit already approved).

Yet another measure is [3] "total spending power the population

*would* achieve" (if they first had to pay off any debit balances from their credit balances - sort of a 'net worth' factor).

The money supply sits (I think) somewhere between [2] and [3].

I believe that [2] and [3] (and even perhaps [1]) are concrete levels of "spending" that describe different aspects of the size of the economy.

I think that the money supply wobbles about between [2] and [3], changing level when actions occur which really have no effect on the size of the economy (eg transfers between accounts of the same entity, or cash moving across a bank counter).

"John Boyle" wrote

That's where we disagree. I say that someone with a credit balance of +1million in one a/c, and a debit balance of +1million in another, is not "using" 1million any more than the person next to him who has 0 in each of their a/c's.

Economics is a behavioural science. If such behaviour was part of the rich tapestry of human life, it would be difficult, er.... more difficult, to come up with a useful measure of money supply.

Not much more difficult, mind you: a temporary jump of 1 billion in the UK money supply index would not be that big a deal.

Are you certain ?

Somewhere in the deep recesses of my Economics memory I sense a recollection that for some purposes unused credit facilites are indeed treated as a component of money supply.

Conceptually, it does make some sense.

Now, would yiz all stop hijacking my thread and discuss fixed-rate loans or else move to the money supply district with Maggie T., Lord Howe (of Aberavon, not the other johnnie), Nigella's ould lad and all those 80s relics ... er, I mean the money-supply thread or else start an actuary-bashing thread (that might require a whole new newsgroup !)

LOL !

[snip]

Indeed. An actuary having a purpose- whatever next ?

Yes.

An undrawn credit facility is a kind of nothing thing. I think I have one, but I don't know. I had once, and never needed to use it (lucky me!) and I don't know if it is still there for me to use. That's how real it is.

You complain about thread-drift? How long have you been on usenet? And who went outside the quiet waters of ie.general into the raging seas of uk.finance?

Taking a fixed-rate loan makes you a speculator: you are making a bet on future rates of interest.

I am sorry but wouldn't this be better posted to just the finance group? As I have had to trawl through it all on the ie.general group and I notice it is posted to UK.finance and so some of it wouldn't apply to us here. Sorry just whinging!

In message , Tim writes

You keep quoting this scenario, but it is not typical. See my other posts.

You don't have to trawl through it. You are free to ignore it. It's as on-topic as anything else here. Ask Andy.

To the subscribers of uk.finance: DJ cross-posted this, and I failed to notice. For the purposes of my post "here" is ie.general. Sorry.

[snip]

Because of the ineffable variety of human behaviour, economists know that

*any* definition of money supply has shortcomings.

Why are we discussing this ? I started a thread about fixed-rate loans, and you (and others) kept rabbiting on about money. So, I started a new thread about money creation and now you've hijacked it again. Have a heart - I know, it's amost impossible for an actuary, but do your best - and start a new thread if you want to change the subject.

[snip]

In the old days, when John Boyle were a lad, banks' recording systems were such that they usually did not know.

Whether John left them any better, perhaps he will say.

"John Boyle" wrote

It has been suggested that people don't generally make transfers which create these scenarios, but that is the exact position that people are first put in when they get a 1million loan.

Add-in the effect from everyone else who has recently been granted a loan, and you'll get a not-insubstantial effect on the money supply.

You keep saying that it doesn't have a huge effect on the money supply, but why let the choice of type of borrowing (loan or overdraft) have *any* effect at all, when it is simple enough to be consistent?

"John Boyle" wrote

My point entirely - this happens at the same stage for both loan or overdraft, Stage 2 (application) or Stage 3 (approved).

But it is not counted in the money supply until later (a little later for loan, much later for overdraft).

Okay Fergus, I'll tackle your question.

(You see how long an idea survives online. Thread drift happens spontaneously and almost immediately.]

Agreed, subject to the reservation you have entered about it not being the only one.

Agreed, despite Tim's wish to revise all of economic theory in his own image and likeness.

Agreed.

Not unreservedly agreed. Something that is good for the banking sector as a whole is not necessarily good for any one bank making a single choice about lending where a profit might be generated. And each bank makes a lot of single choices. All those choices aggregate into the performance of the whole sector. We have the classic dichotomy between the individual good and the common good.

It is because each bank operates primarily out of self-interest that the state (and, more recently, the EU) has taken on itself a role in controlling, or at least seeking to influence, the behaviour of banks collectively. Where your idea has some weight is in the idea that if there is a large volume of fixed-rate lending banks generally will use some of their considerable influence to push for monetary and fiscal policy intended to keep inflation down, and might be more amenable to such measures.

That may be so, but there is also a general view that Germans have a collective obsessive fear of a recurrence of hyper-inflation. Further, I think (but am too lazy to check) that German people have large volumes of savings in deposit accounts and every individual with a significant amount in a deposit account is a voter for policies that keep inflation rates down.

For you, and perhaps most personal customers, but the existence of lines of credit which may never be used is very real for most businesses; they even pay for them, and consider it money well-spent.

Those "raging seas" are my fourth home on Usenet. As for ie.general being "quiet waters" ...

Same as a variable rate loan in that regard.

You know, John, when you avoid legal issues, you can be quite sensible.