Wed 11:11 pm +01:00, 8 Nov 2023
posted by Tapestry
“It could be that we are going to be really lucky and that we see a big fall in inflation, or it could be that we are about to head into a big recession, or some combination of the two,” he says.
“Just looking at the money supply numbers does not necessarily tell you which one of those it is going to be. In the worst of all worlds, we would end up with deflation and recession, which I think is a significant threat.”
When deflation strikes and prices fall, people hold off spending in anticipation of lower prices, thus hammering the economy. At the same time, the real value of debts rises and crushes borrowers.
Ward and Jessop both argue the Bank of England bears some responsibility for the current situation after going overboard with quantitative easing during the pandemic.
The money supply was already surging as households, unable to spend, piled up cash in their bank accounts. The Bank then pumped more cash into the economy. It has since overcompensated with too much quantitative tightening since the end of 2021, they argue, restricting the amount of money flowing through the economy.
Tracking the money supply is still wildly unfashionable in the world of economics. This month’s Monetary Policy Report – the Bank of England’s major quarterly update on the economy – included just a single paragraph on it.
However small though it may be, it represents the biggest mention in any Monetary Policy Report for more than five years.
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