Why we have inflation – printing more money

Modern Central Banks ironically do not think money matters. Most of them no longer target money supply, and many provide little or no commentary on it. This is surprising given the fashion they entertain to create more and more money to tip into circulation. They should understand that if you create more money and all else stays the same prices will rise, as more money will chase the same volume of goods and services. That is why money matters.

I guess their response is that as  they create massive new amounts of money the velocity of circulation, the amount of use people make of that money, will fall. So it need not be inflationary. It is true that in the short term in the pandemic lockdowns more money was an offset to the collapse of demand, and use of the money tumbled as many people  and companies hoarded what new found cash came their way.

It did however have a first round inflationary effect, as it was planned to do. It inflated asset prices, pushing up the price of government bonds which the money was  used to buy. The people who sold the bonds to the Central Banks then often bought other assets like shares with that money, pushing their prices up even more than the  bonds. So far so good. The governments could borrow loads of money on the cheap, and the inflation cheered up anyone with assets and did  no harm to those without. I supported a vigorous Central Bank response to offset some of the worst economic consequences of the anti pandemic measures. I also thought governments would get away with a massive one off increase in borrowing, financing it at very low rates, all the time activity was so depressed.  There did need to be a  big offset and rescue packages given the economic severity of the policy.

If you carry on creating more and more Central Bank money to keep government borrowing rates low there becomes more danger that the money will start to find its way from asset markets into creating demand for goods and services. All those extra savings people made during lockdown as they saved their going to work costs whilst still banking their pay could be spent in a rush, driving up the velocity of money use.  If commercial banks use the extra cash they have to expand credit that too creates more demand for goods and services. By these means more created money can lead to goods and services inflation if the money starts to create more potential demand than there is supply.

Central Banks in the USA, UK and the EU should stop their money printing and bond buying now to reduce this risk. They and the other bank regulators should ensure total money growth is sufficient  to  allow decent growth without encouraging too much extra inflation. That can best be secured by setting appropriate levels of permitted lending / balance sheet strength for the commercial banks using their existing powers. States should continue to cut back their deficits and borrowing substantially by promoting growth policies which will swell revenues and cut crisis spending.


  1. DOM
    October 26, 2021

    We’ve been here before with Friedman. Miller and Modigliani. It’s a puzzle that can never be solved, certainly not by me

    I know one thing is true, political players are destroying the west, its financial base and its beauty, We don’t need an economic theory to explain that phenomenon. Evil stalks the west and its name is Marxism

    1. Everhopeful
      October 26, 2021

      Very true.

    2. Oldtimer
      October 26, 2021

      You forgot to mention Ben Bernanke, former Fed Chairman, and “helicopter money”. There was no shortage of the latter during the pandemic. The Fed, the ECB and the BoE are hooked on money printing and do not know how to get unhooked without causing the disaster of yet more economic carnage in the short term. Add to that the squander bug waste evident in so much misguided public spending programmes then the consequence is indeed the decline and destruction of the West as you point out.

      1. Everhopeful
        October 26, 2021


      2. John Hatfield
        October 26, 2021

        Copied from the Express.
        “Like Sunak, Healey had a formidable intellect, work ethic and grasp of economics, though those qualities did not help him in the 1970s as his Government limped from crisis to crisis, its authority draining away as quickly as its revenues before it was put out of its misery by Mrs Thatcher’s victory in 1979.
        Some Tories think Sunak could be facing the same fate because he has got his priorities wrong, with too much emphasis on growth in public expenditure and too little on tax cuts. Yesterday senior backbencher David Davis wrote that “there is every indication so far that the current course will take us on to the rocks”.

    3. Nota#
      October 26, 2021


      1. Nota#
        October 26, 2021

        Oops! +1 missing

    4. No Longer Anonymous
      October 26, 2021


      Replete with “it’s all for your own good”

    5. BOF
      October 26, 2021

      How true, Dom.

  2. Mike Wilson
    October 26, 2021

    Mr. Redwood – every time you write about the economy you always refer to ‘growth’. You always seem to assume it is necessary and desirable. Why?

    If we had no growth we would have no need of new money and asset prices – specifically house prices – could not rise. Surely a period of no house price rises would do the younger generation a much needed favour.

    1. Margaretbj.
      October 26, 2021

      All measurements pivot around GDP.The exclusion of this would cause more chaos than Brexit.

      1. Peter2
        October 26, 2021

        That is like a company chasing sales without concentrating on profit.
        If you had said GDP per capita I would have been more likely to agree with you.

        1. X-Tory
          October 26, 2021

          You beat me to it! It is only GDP per capita that matters, NOT overall GDP. But politicians do not dare talk about GDP per capita as it would show that immigration does NOT benefit the country, as GDP per capita is not increased by allowing in millions of un- or low-skilled migrants or bogus asylum seekers.

          1. alan jutson
            October 26, 2021


          2. Margaretbj.
            October 27, 2021

            I refer to Sunaks speech

    2. Nota#
      October 26, 2021

      @Mike Wilson – surely ‘growth’ equals improving wealth, therefore the funding of the safety and security of the people of this land. Something this Government fly’s in the face of.

      1. Peter Wood
        October 26, 2021

        Easy to ‘create’ growth too, look at China. New Government spending is included in GDP growth, but it’s often simply wasted money. GDP is a very blunt tool, and frankly not much use in a developed economy. But it keeps the trogs happy. What we need is a good handle on ‘value added’ growth. ie, for every £ spent, how much return does the country make. Low wage/no value added can keep GDP growing, but produces no ‘profit’ or increase in spending power.

        1. Nota#
          October 26, 2021

          @Peter Wood – the term investing is no longer to ‘create’ but ‘to give’ with no chance of reinvestment return

      2. Dennis
        October 26, 2021

        @Nota# surely growth means more use of resources which means more depletion of the environment plus more pollution, garbage and waste unless in the future techno fixes can do all the growth without all of that. Anytime soon?

  3. Everhopeful
    October 26, 2021

    And still nobody has explained to me WHY the IMF told all the countries under their control (!) to spend,spend,spend in 2020 ( when I would have thought economic trickery should have been at the bottom of the list) and then later instructed them to tax us hugely.
    I suspect that successive governments/IMF have not had a scooby as to what to do about the economy. How could it be otherwise since we are in this mess?
    Greed has probably played a huge part. They took our gold and land and now they’ve come back for everything else.
    And apparently Johnson wants to throw us to the lions! (Literally).

    1. Everhopeful
      October 26, 2021

      Re IMF.
      Could it be that they are busily devaluing all the currencies in the world in order to impose a digital replacement?

      1. Dennis
        October 26, 2021

        No doubt – the IMF is an arm of the US, being the economic mafia to keep control of those countries mostly by corrupting the leader of those countries with money. Good for mansion builders on various beauty spots around the world for them and for British banks to launder that money which is good for our economy and GDP, no?

  4. Mark B
    October 26, 2021

    Good morning.

    We discussed earlier about the Chancellor and the information he receives from the likes of the OBR. I think the general feeling that the information was poor and that has intern led to poor decisions being made. The same too can be said of inflation and the way in which it is calculated. Clearly, as I mentioned many times before, the government levels of inflation do not seem to match that of my own. This is, I believe, due to the way in which the government collects its information which, in my opinion, is wrong.

    Inflation is made up of two primary parts – The cost of labour, and the cost of materials. We could also include energy and transport costs but this does not apply to all areas of the economy, and not all to the same scale.

    The government has decided that it will control the lower end of labour with the minimum wage. Arguments for and against can be made at another time but, it is a cost to the consumer and an inflationary input. The value of our currency is also important. As many raw materials, including much of the energy we import is priced in Dollars (US) this too has an effect. Devaluing Sterling against the Dollar (US) makes the price of raw materials more expensive. This too has to be passed onto the consumer.

    Finally, Public Services. Public Services, (eg Local Authorities) all cost money and to run these they have to charge local residence. The increases we are seeing in these bodies has been far in excess both in cost and what they charge (eg Social Care and the Mayors Precipt). I do not believe that the government or the Treasury, much less the hopeless OBR, take these and other costs into account. For if they did I think we will find that the inflation rate to me much, much higher.

    1. IanT
      October 26, 2021

      We need to see the Public sector weaned off Final Salary (index linked) Pensions – but I can’t see it ever happening. Of course, the cost will become so great eventually that the money (e.g. cash in hand) will not exist to pay them – at least in anything more than Monopoly money.

      1. Dennis
        October 26, 2021

        When you see salaries in £millions, some have £billions, Jordan’s plimsoles sold for £millions and the like show that money has lost its value, becoming meaningless. As it is floating around in trillions when will ‘ordinary’ money no longer be adequate?

        In the 1950s £10 for 40 hours was a reasonable working man’s wage, now the minimum rate is nearly £10 per hour so the £ has lost its value by 40 times in one way of calculation – others are available. Still that is 60/70 years ago I suppose.

  5. Lifelogic
    October 26, 2021

    Indeed but Sunak and Boris seem to be determined to stoke inflation. Printing money (back door taxation), the Net Zero religion lunacy, the large increase to the minimum wage (a law making it illegal for many to work or learn how to), the watered down (ethanol-ed) down petrol, IR35, the many and vast tax and NI increases, the ever increasing size of the largely parasitic sector, his moronic eat out to help out scheme and his taxpayers £5k towards your £40k heat pump, ULEZ, road blocking, failing to deter insulation protestors…

    Everytime he open his mouth he put 0.1% on inflation it seems.

    William Hague in the Times says President Zi is revealing his own weakness by not attending COP26. Perhaps he just sensible though it was a waste of his time and indeed fossil fuels to fly their and stay at Glen Eagles and be driven the 40 miles back and forth in electric cars charges from diesel generators and diesel shipped up specially for the job.

    Perhaps he wanted to get on with making sure his people and economy has cheap reliable on demand energy so as to be far more competitive than the UKs.

    1. Peter Parsons
      October 26, 2021

      I don’t pay tax so that bad or cheapskate employers can use the benefits system to subsidise their poor practices, so the increase in the minimum wage to the level that the Resolution Foundation consider the minimum (outside of London, at least) is welcome.

      To quote Sir Winston Churchill from his speech on the Trades Board Act 1909:

      “It is a serious national evil that any class of His Majesty’s subjects should receive less than a living wage in return for their utmost exertions. It was formerly supposed that the working of the laws of supply and demand would naturally regulate or eliminate that evil. The first clear division which we make on the question to-day is between healthy and unhealthy conditions of bargaining. That is the first broad division which we make in the general statement that the laws of supply and demand will ultimately produce a fair price. Where in the great staple trades in the country you have a powerful organisation on both sides, where you have responsible leaders able to bind their constituents to their decision, where that organisation is conjoint with an automatic scale of wages or arrangements for avoiding a deadlock by means of arbitration, there you have a healthy bargaining which increases the competitive power of the industry, enforces a progressive standard of life and the productive scale, and continually weaves capital and labour more closely together. But where you have what we call sweated trades, you have no organisation, no parity of bargaining, the good employer is undercut by the bad, and the bad employer is undercut by the worst; the worker, whose whole livelihood depends upon the industry, is undersold by the worker who only takes the trade up as a second string, his feebleness and ignorance generally renders the worker an easy prey to the tyranny; of the masters and middle-men, only a step higher up the ladder than the worker, and held in the same relentless grip of forces—where those conditions prevail you have not a condition of progress, but a condition of progressive degeneration.”

      For many employees, there is no powerful organisation on their side, so such decisions of government are necessary, a much better situation than the one you would prefer where a good employer is undercut by a bad employer and a bad employer is undercut by a worse employer and, as a taxpayer, I am expected to pick up the bill to subsidise the poverty wages of both of them.

    2. Mitchel
      October 26, 2021

      Look at the long term deal China signed with the US last week for LNG-20 year contracts for c5 tonnes pa of gas;more than double the current level of US exports and so large the Americans won’t have sufficient export infrastructure in place until mid 2023 to hit that rate.

      Also at the end of last week,Russia’s Gazprom agreed the route with the government of Mongolia for Power of Siberia II gas pipeline which will have even more capacity than Power of Siberia I(c1.3x).The significance of PoS II is that it takes gas from the western gas reserves that currently supply Europe to China (and beyond) via Mongolia(originally it was going to be Xinjiang but the Chinese changed their minds and now want a more southerly route).Those Europeans without long term contracts with Russia will be in an even more precarious position if their non-fossil fuel initiatives fail or are significantly delayed.

  6. Margaretbj.
    October 26, 2021

    Ok ,so more money will chase the same volume of goods giving the goods more of a rarity factor,but this will be adjusted as more people have a share of the new money and spending will be on alternative products , perhaps less expensive but still part of the whole volume?

    1. Margaretbj.
      October 26, 2021

      We saw this in the sudden rise of pound shops etc.

      1. No Longer Anonymous
        October 26, 2021

        Where you can buy a packet of (say) five door stops that don’t work for £1 instead of one door stop for £5 that does. And the local hardware shop has to sell them too as the locals refuse to pay £5 for a door stop, even if it does work !

        I took a boat on top of my car for 150 miles for my lad last weekend. No way was I going to use the straps on offer in the pound shop – so paid £12 for the same in the local builder’s merchants. At least if they failed I could say to the magistrate that I honestly believed them to be of suitable quality, I would suggest that paying a pound for such an item and causing someone’s death with it would be evidence enough for a prosecution.

        All Pound Shops do is shrink-flate and the same trick is now being done with E10 petrol.

    2. Peter2
      October 26, 2021

      Might the volume of goods increase as demand rises?

  7. Sea_Warrior
    October 26, 2021

    And because the government has decided to award the unskilled and marginally-productive a near 7% pay-rise. And what will that do for Immigration?
    I’ll start running down my premium bonds next month. I am no longer prepared to see my money’s value being destroyed by your clown-colleagues in No 10 and No 11.

    1. alan jutson
      October 26, 2021

      Moving those on the lowest pay upwards, puts pressure on all wage scales above them.
      Internal pay scales have evolved over the years, many are not perfect, but by and large they usually reflect skill and responsibility within a workplace, start messing with an internal pay scale with outside government actions, and you risk upsetting the balance of differentials.

      1. No Longer Anonymous
        October 26, 2021

        True enough.

        My highly educated and skilled wife took a job as an office manager (well below her level) but found that she was only being paid 20p per hour more than the cleaner. She’s a system analyst by profession and is able to manage their computer systems too.

        When she said that she was looking for another job the boss said “You’ll find that your pay is standard for office managers in this area.” to which she replied “Oh. I’m not looking for office manager… I’m looking to be a cleaner !”

      2. Mark B
        October 26, 2021


        One man’s pay rise is another man’s price increase. So goes the saying, and it is true.

        The minimum wage increase is a cost that will have to be passed on. The problem is, will the market stand it ?

    2. IanT
      October 26, 2021

      I’m afraid the odds of winning even a small amount were very poor anyway SW – even without inflation.

  8. GilesB
    October 26, 2021

    To refinance existing debt as it falls due, the government should be issuing thirty year inflation-linked bonds, up to 50% of total Government debt.

    Yes, it will tie the hands of future governments to keep the lid on inflation. Which would be a good thing.

    1. Leslie Singleton
      October 26, 2021

      Dear Giles–For my money, inflation-linked bonds are self perpetuating and the last thing we need. We should do our best to annihilate inflation. Nobody said it would be easy but the 2% target should go for a start. 2% compounded over 30 years (Why thirty or is that where the long grass is?) is a lot. A lifetime ago The Times published a letter of mine I headed Martian Marbles just as a rocket (Mariner?) was about to hit Mars. In it I asked whether, if the Martians used Marbles as money and they had only so many Marbles, inflation on Mars was impossible–My sign-off asked Economists to answer “Yes or No”. Back then addresses were published and I received any number of letters to my home address, plus some published, saying literally and simply “Yes or No”. Velocity and all that. God only knows what Velocity is in these electronic times or how one can measure it. God Bless economists.

  9. Newmania
    October 26, 2021

    Oh oh …Redders see inflation coming and wants to establish an alibi – well if I wasn`t worried before I am now.

    1. Nottingham Lad Himself
      October 26, 2021

      Well, their determination to pump up ever further the residential property bubble, with ever laxer credit, zero interest, and all the rest might, just be feeding through a tad, I think.

      1. No Longer Anonymous
        October 26, 2021

        And property inflation DOES affect those with assets adversely … if they have kids who are desperate to get on the housing ladder.

    2. Narrow Shoulders
      October 26, 2021


  10. Richard1
    October 26, 2021

    The BoE should stop, not wait for the US and the EU. In the US the Fed seems to be hand in glove with Biden’s crazy spending plans.

    In the EU if the ECB stops buying up substantially all of the issuance eg. by Italy does anyone really think investors will freely buy Italian govt bonds at the same yield as German? I don’t see how the eurozone can ever stop QE. We should nevertheless stop and be thankful we aren’t part of that slow motion train wreck.

  11. Nig l
    October 26, 2021

    Central Banks. No mention of our government’s role then. Billions ‘thrown away’ at the NHS, public sector wage rises. Minimum wage etc

  12. Donna
    October 26, 2021

    Johnson and Sunak are deliberately stoking inflation. They are taking us back to the 1970s.

    Traditionally, it is Labour Governments who wreck the economy. I suppose it’s novel to have one which calls itself Conservative doing it.

    1. Nottingham Lad Himself
      October 26, 2021

      Historical fact would contradict your premise, Donna.

  13. Roy Grainger
    October 26, 2021

    I suppose some policy makers look at Japan where decades of ultra-low interest rates and money creation seem to have had no impact on inflation at all. Why ? Did any economic model predict that outcome ?

    1. No Longer Anonymous
      October 26, 2021

      Low and managed population.

      They are getting through the demographic bulge like we should have. Instead of importing uneducated people to create “growth” who are going to grow old and get ill too.

  14. acorn
    October 26, 2021

    Milton Friedman said, “Inflation is always and everywhere a monetary phenomenon.” In other words, inflation occurs because there is too much money available to buy the same amount of goods and services produced in the economy. The “quantity theory of money,” He implied, that the velocity of circulation was constant. He convinced Thatcher and Reagan, the rest is history.

    MV = PQ. If the money velocity is considered constant; and, the money supply (M) increases at a faster rate than real economic output (Q), the price level (P) must increase to make up the difference.

    According to the Monetarists, inflation in the U.S. should have been about 31 percent per year between 2008 and 2013, when the money supply grew at an average pace of 33 percent per year and output grew at an average pace just below 2 percent. Inflation remained persistently low (below 2 percent) during that period.

    The velocity of circulation never has been constant If for some reason the money velocity declines rapidly – like it has done since the 2008 crash, during an expansionary monetary policy period, it can offset the increase in money supply and even lead to deflation instead of inflation. A situation made much worse for the UK by Osborne austerity.

    There is an excellent 11 minute teaching video from the Federal Reserve Bank of St. Louis that explains MV=PQ. https://www.stlouisfed.org/education/feducation-video-series/episode-1-money-and-inflation

    1. Nottingham Lad Himself
      October 26, 2021

      “Inflation” has only remained “low” in economies such as the UK because the costs of anything worth having – a decent place to live and free time (yes) – are not included in the basket.

      Now do the sums with those in it.

      1. Peter2
        October 27, 2021

        How on Earth do you accurately put a value on free time?

    2. formula57
      October 26, 2021

      The U.S. official inflation measures are criticized though for badly understating the true position by failing to properly account for housing costs, medical expenses, and education fees. Then there is the rampant asset price inflation which we can all see but that the Federal Reserve persistently ignores, perhaps because it has caused it. The Fed. does of course have extensive form in blowing asset bubbles, failing to take policy action in a timely manner, and being surprised by the next recession.

  15. Nota#
    October 26, 2021

    Printing money is the sleight of hand required by Governments that are in neglect and bankrupt of ideas on how to fulfil their duties.

  16. Nota#
    October 26, 2021

    Equally damaging to ‘printing money’ is the undermining of democracy and the point of the HoC by the continual drip feed to the Media of the announcements in the Budget. We now don’t need a Budget Day

    A Government where ‘ego’ has become endemic and is always put before logic, facts, sensibilities and the economy. The constant ‘look at me’ of the ‘grandstanding’ is disgusting and insulting. We are supposed to have a parliamentary democracy with an executive holding it to account, not a Primadonna Dictatorship that’s makes its own system up as it goes along. It would appear that most MP’s in the House of Commons don’t realize it is they that are complicit in causing the break up of Society.

    Look around, if the leadership can create rules and systems on the fly, break conventions – then why cant everyone else? Its not a stretch to suggest XR, Insulate B’s, Stabbings, Shootings you name it all lead by the common decency and disdain shown by those that represent us to the power we have awarded them.

  17. No Longer Anonymous
    October 26, 2021

    Inflation does no harm to those without assets ? WHAAAT ???

    My kids can’t afford the type of home that a milkman used to take for granted. One is a doctor and one is a research Chemist.

    And as one with an asset I’ll have to find the funding to get them out of the clutches of landlords… as well as find the money for a heat pump.

    It’s all very well Joanna Lumley lecturing us on cutting back on the BBC this morning (it’s already well underway in the real world, didn’t you notice, Joanna) but if the UK can be put up as a test of lead-by-example then I want to see celebrities leading by very real example and being properly poor all of the time and for all to see.

    My carbon footprint is a darn sight lower than yours, Joanna ! And a darn sight lower than the Attenborough dynasty who filled the sea with plastic dinosaur toys.

  18. alan jutson
    October 26, 2021

    How well I still remember a Harold Wilson Quote after a devaluation.

    “The Pound in your pocket, is still worth a Pound”

    Indeed that was true, but it bought less, a typical Political statement the time, as much as many are now.

    I wonder what calculated surprises Wednesday will bring.

  19. Iain Moore
    October 26, 2021

    Quantitative easing was probably the worst thing that could had ever happened, its crack cocaine for politicians , an addiction they can never shake or want to shake, and just as crack cocaine kills its addict, and so will quantitative easing kill us.

  20. John Miller
    October 26, 2021

    The inflation genie is out of the bottle and is being nurtured by the mad Democrats in the USA. Couple this with Carrie’s nookie protected ideas on “Green” and we’re heading for big trouble.

  21. Newmania
    October 26, 2021

    Sir John has been a great cheerleader for increasing debt to increase to 100% of GDP . A mere 1% interest rates rise costs £25 billion. As he belatedly sees the danger of inflation ( and hence rate rises ) would Sir John wish to comment on the wisdom of acquiring this debt, whilst erecting trade barriers between our largest markets and suppliers ?

    Would he accept that he has taken considerable risks with ordinary people`s money and lives ?

    Reply Wrong again. Our debt is not 100% of GDP because we have bought in so much of it. I am right to warn you cannot go on doing that after lockdown.

  22. Derek Henry
    October 26, 2021

    Morning John,

    My view is you are nearly right please let me try and explain myself for the spirit of debate.

    First point I would like to make is bank lending can be inflationary if excessive. Their are many examples of this. But in the main when you study inflationary episodes since the world left the gold standard and fixed exchange rates. Inflation episodes were caused by

    1. Borrowing in a foreign currency ( Weimar, Venezula, Argentina)

    2. Supply side shocks ( virus, Weimar, Zimbabwe)

    3. Excessive bank lending ( Clinton budget surpluses, 2008)

    It is a very rare event when countries over spend what skills and real resources they have available. Most countries have unemployment is a case in point. They are all over taxed for The size of government they have. Skills and real resources are sitting idle because of the taxes and are not being used at their full capacity. So this has never happened in the UK in the last several decades and very rare elsewhere.

    The second point I would like to make John please if I may to encourage debate. Is how inflation is analysed.

    The equation MV = Py

    Money growth = inflation view.

    Where M is equal to the supply of money,

    V the velocity of money (or the average number of times each £ is spent),

    P the average price of goods and services,

    and y the total quantity of all goods and services sold during the time period in question.

    Which is not the least bit controversial. No economist disagrees with the basic equation MV=Py.

    The debates arise when additional assumptions are made regarding the nature of the individual variables.

    M: That which is money is easily defined and identified and only the central bank can affect it’s supply, which it can do with autonomy and precision.

    V: The velocity of money is related to people’s habits and the structure of the financial system. It is, therefore, relatively constant.

    P: The economy is so competitive that neither firms nor workers are free to change what they charge for their goods and services without there having been a change in the underlying forces driving supply and demand in their market.

    y: The economy automatically tends towards full employment and thus y (the existing volume of goods and services) is as large as it can be at any given moment (although it grows over time).

    Not only are some of the assumptions questionable, they are downright inconsistent.

    Take example y. One need only look out the window to see that it is not currently at the full-employment and therefore maximum level.

    There is a great deal of evidence that the velocity of money IS NOT constant. As one would expect, it tends to decline when people do, in fact, want to hold more cash.

    The financial sector can create and destroy money without direct action by the central bank. Every time a loan is made, the supply of money increases. The bank is creating money out of thin air, with only a fraction of the total necessary to have already been in the vault as reserves. And when loans are repaid or there are defaults, the supply of money contracts. Hence, the private sector has a great deal of control over M. We no longer live in a Bailey and brothers. George Bailey wonderful life.

    How is it that the BOE increases the money supply? Remember that Friedman used a helicopter–indeed, he had to, for there was no other way to make the example work.

    This wasn’t just a simplifying device, it was critical, for it allowed the central bank to raise the money supply despite the wishes of the public. However, that can’t happen in the real world because the actual mechanisms available are BOE purchases of government debt from the public, BOE loans to banks through the discount window, or BOE adjustment of reserve requirements so that the banks can make more loans from the same volume of deposits.

    All of these can raise M, but, not a single solitary one of them can occur without the conscious and voluntary cooperation of a private sector agent. You cannot force anyone to sell a government bond in exchange for new cash; you cannot force a private bank to accept a loan from the BOE; and private banks cannot force their customers to accept loans. Supplying money is like supplying haircuts: you can’t do it unless a corresponding demand exists.

    The bottom line is that the “money growth==>inflation” view makes perfect sense in some alternate universe where all those assumptions regarding the variables DO hold, but not here, not in the UK today.

    There’s no reason to throw the baby out with the bath water, so let’s retain the equation. However, we need new assumptions with respect to M, V, P, and y:

    M: A precise definition and identification of money is elusive in a modern, credit-money economy, and its volume can change either with or without direct central bank intervention. In addition, the monetary authority cannot raise the supply of money without the cooperation of the private sector. Because central banks almost always target interest rates (the price of holding cash) rather than the quantity of money, they tend to simply accommodate demands from banks. When private banks communicate that they need more reserves for loans and offer government debt to the BOE, the BOE buys it. It’s the private sector that is in the driver’s seat in this respect, not the central bank. The central bank’s impact is indirect and heavily dependent on what the rest of the economy is willing to do (which is, incidentally, why all the QE and QE II money is just sitting in bank vaults).

    V: The velocity of money is, indeed, related to people’s behaviour and the structure of the financial system, but there are discernable patterns. It is not constant even over the short run.

    P: While it is true that factors like production bottlenecks can be a source of price movements, the economy is not so competitive that there are not firms or workers who find themselves able to manipulate the prices and wages they charge. The most important inflationary episode in recent history was the direct result of a cartel, i.e., OPEC, flexing its muscle. Asset price bubbles can also cause price increases (as they are now). The key here, however, is that P CAN be the initiating factor–in fact, it has to be, since M can’t.

    y: The economy can and does come to rest at less-than-full employment. Hence, while it is possible for y to be at its maximum, it most certainly does not have to be.

    I would argue this is how it really works, at least until the BOE starts using helicopters for monetary policy.

    Thanks John for allowing a different view point.

  23. ukretired123
    October 26, 2021

    The money printing drunkenness excess creates slowly but surely an apparent mirage of an invisible huge debt balloon hovering over us all. The cumulative build-up is akin to cloud formation that is until it becomes storm force and unleashes untold misery on all.
    Whilst we can rationalise the need for money printing in exceptional times it is unsustainable to continue without a parallel expansion in the real economy and productivity.
    It must be very frustrating for those like Sir John who see this but are ignored. The govt get away with it because it is another invisible problem at this point in time.
    Boom and bust – Remember Gordon told us he got rid of it!

  24. Denis Cooper
    October 26, 2021

    We’re still in a pandemic and it’s too soon to revert to normal thinking on this. The government shut down large parts of the economy and temporarily deprived people of their normal livelihoods and the alternatives were for the government to do nothing more about it and just let people spend whatever savings they had, and then sell whatever they had for whatever they could get, and then fall back on private charity or starve in the streets, or for the government to give them money for not working. Plus there were the costs of the government measures to control the disease. Money borrowed from private investors will have to be repaid as promised, and on time, while that borrowed from the Bank of England will also have to be repaid unless Parliament amends the relevant law, but with the government effectively empowered to roll its debt over indefinitely if it so chooses. We came out of both world wars with massive government debts which were cleared over subsequent decades, with the burden of repayments gradually diminishing in real terms, and that is what I expect will happen when we finally come out of the pandemic.

  25. J Bush
    October 26, 2021

    Coupled with the change from E5 to the less economic E10, I see the price of petrol and diesel is also rising weekly. In my neck of the woods it is shunting toward £1.50 a litre, that’s over £6.00 for a gallon of fuel!

    I feel very sorry for those who have to travel any distance to work. Not that the likes of Sunak and Johnson give a s**t about those who pay their salaries, perks and pensions.

  26. X-Tory
    October 26, 2021

    The BoE is warning that inflation might rise to 5%, but are their forecasts any more reliable than those of the useless OBR? Inflation did NOT increase in September (compared to August), and what inflation there is is due to just THREE items: fuel, energy and used cars.

    While I’m not particularly worried about inflation, I AM worried about the government’s preference to increase taxes rather than rely on more growth to boost their revenues.

  27. paul
    October 26, 2021

    The inflation that you are seeing is all government lead. They want you to switch over to using electric and to stop eating meat which leads to the prices going up, if I said next week that was opening 4 new gas fields and 4 new oil fields along more with more cattle and pigs the prices would go down overnight, money printing lead to asset inflation ie companies assets and house prices, they also like a big rise in inflation after wasting alot of money to make the debt look smaller than it is on a per centage bases. While they sit back eating t- bone steaks and driving 15 to gallon cars, while they tell you to drive electric cars and to eat bugs and plant base foods, they will keep puting the prices up till that all you can afford or go without.

  28. glen cullen
    October 26, 2021

    James Cleverly Foreign Office Minister confirmed this morning that we’re giving Afghanistan £286 million, they kicked us out…why are we giving them any tax-payers money. Let their rich likeminded neighbouring countries help them
    No wonder this countries finances are in a mess

    1. alan jutson
      October 26, 2021

      Not heard this yet, but if true (no surprise if it is) this must make those who served in Afghanistan cry their bloody eyes out.
      Why on earth did we go there in the first place, when we could have paid the Taliban to sort out the terrorists at the time.
      Does the government really think that by giving the Taliban £ millions now, they will actually spend it on the welfare of its Citizens.

    2. Stephen Reay
      October 26, 2021

      This government would rather bank roll the terrorist taliban than let the over sixties but less than 66 year old people have free nhs prescriptions. It is truly shocking that they take this line. We don’t hear any mp’s condemning the over sixtes paying for prescriptions, yet how many times have we heard that mp’s work to make peoples lives better,don’t you believe it. The money will end up in the talibans back pockets.

  29. Nota#
    October 26, 2021

    Terrorism – ‘the unlawful use of violence and intimidation, especially against civilians, in the pursuit of political aims.’

    Tomorrow Wednesday 27th – the Terrorist are threatening once again to close the M25 and it will be your fault if it affects you – You have been Warned!

    Government Green Homes Grant
    If you’re a homeowner or residential landlord you can use a Green Home. Government(if truth was allowed, it means the taxpayer) will contribution of £5,000 Grant voucher towards the cost of installing energy efficient improvements to your home. – That includes insulation.
    If you, or someone in your household, receives certain benefits, your voucher may cover up to 100% of the cost of your chosen improvements. The maximum overall government(taxpayer) contribution is £10,000.

    So what are these Terrorists after? – disruption, follow this Government look at me ‘ego’. The Government refuses to challenge the claims made by these terrorists – logic is it is part of their(Governments) game plan to frighten everyone into funding their new religion.

  30. Nota#
    October 26, 2021

    Its half term, COP26, the kids are joining in with the WFH civil servants, teachers and the imported EU greta-gang to maximize the Terrorist disruption to those that work to pay their wages and benefits.

    Only in the UK… It shows how this Government is creating their new cult by deliberately and maliciously destroying society and livelihoods. They are perusing a don’t care attitude, not standing up for those that elected them. While at the same time exporting jobs, wealth, safety and security so as to cause greater ‘World Climate Change’ for our imported goods

    The brain isn’t engaged with duty or the deed.

  31. Denis Cooper
    October 26, 2021

    Off topic, and hot off the press, but not new as they keep saying it:


    “There is no alternative to the NI protocol, says Michelle O’Neill”

    The government should demonstrate that there is an alternative:


    “Further to which, JR, please could you and likeminded colleagues press Boris Johnson and Lord Frost to crack on and (at least) publish drafts of the new UK legislation envisaged in the Command Paper?


    It is more than two months since Lord Frost said he was ready to bring in that UK legislation, designed to provide an alternative system of protection of the EU’s Single Market, so why not get on and do it?”

  32. No Longer Anonymous
    October 26, 2021

    The tax (incl VAT) on a litre of E10 is 81.64p.

    The supplier’s cost is 41.79p.

    Pump price is £1.43 a litre in places.

    Most commenters would have it that the tax on fuel @£1.43 a litre at the pump is, therefore, running at around 56%.

    It isn’t. It’s much more like 190% over the supplier cost !!! (I don’t know what the retailer/transport charges are per litre.)

    1. glen cullen
      October 26, 2021

      All governments taxation policies on fuel have been a disgrace and are clearly ‘robin-hood taxes’

  33. hefner
    October 26, 2021

    ‘The Government plans to restrict the use of judicial review in an obvious attempt to avoid accountability . Such attempts to consolidate power are profoundly un-conservative and forget that, in a society governed by the rule of law, the Government does not always get its way’…. ‘The 2019 Conservative Manifesto promised “access to justice for ordinary people” and to “ensure that judicial review is available to protect the rights of individuals against an overbearing state”. But proposals to restrict the use of judicial review do the exact opposite of that.’
    David Davis, 25/10/2022, Guardian ‘Be warned: this government is robbing you of the right to challenge the state’.

    So, Sir John, will you stand up, be counted and support your colleague David Davis?

    1. Peter2
      October 26, 2021

      Judicial review is being exploited by pressure groups (often using legal aid or crowd funding) to hassle the elected government.
      It needs to be curtailed.

      1. hefner
        October 27, 2021

        As exploited by people like David Davis?

        Please tell me: What is wrong with legal aid, which helps impecunious people to possibly get a redress from such more powerful and richer institutions as the State? And with crowdfunding, which shows that a large number of individuals feel concerned enough to contribute to some expenses related a topics of importance to them (isn’t it like the lobbying that, say, the fossil fuel companies are presently doing to be heard by and possibly influence the outcome of COP26? Isn’t it what one does when becoming a subscribing member of a political party?)
        Isn’t that democracy in action?
        Please, as a democrat, give detailed reasons why you consider legal aid and crowdfunding to be so pernicious you want to curtail them. Thanks in advance.

        1. Peter2
          October 27, 2021

          Well there are exceptions hef
          But my general point is still valid.
          I didn’t say I wanted to scrap judicial review.
          Just that I think it needs modifications.
          I think that Parliament is supreme not the Courts.

          1. hefner
            October 28, 2021

            So no reasons, just the usual blabbering that Parliament is supreme. What would happen if Parliament were to become like, say, the equivalent of the Reichstag after 1933? Would you not be happy to have strong Courts to prevent such a take-over?

          2. Peter2
            October 28, 2021

            Obviously you didn’t read my post properly heff in your rush to stalk me.
            I actually said that I thought the system needs reform not abolishing so your unlikely scenario would be covered.
            Why is saying Parliament is supreme” blabbering”?
            How very strange you are

      2. hefner
        October 28, 2021

        You originally did not say ‘the system needs reform’ you said ‘it needs to be curtailed’.
        From now on I’ll let you troll me to your heart’s content. You are not worth the ‘decent debate’ you claim to want.

        1. Peter2
          October 28, 2021

          Peddantic as ever heffy
          I didn’t ever say it should be abolished.
          Therefore reformed or curtailed judicial review would still be available in your fantasy situation.
          Is that decent debate by your very particular standards?

  34. Denis Cooper
    October 26, 2021

    Off topic, again, but very important for anybody who is planning to move to Northern Ireland:


    “You can get relief from customs charges due on personal belongings, when moving your home to Northern Ireland from Great Britain (England, Scotland and Wales).

    Moving your personal belongings to Northern Ireland

    If you are personally moving your own personal belongings, you are able to make a declaration by conduct. When you arrive at the point of exit from Great Britain, you can do this by:

    walking through a customs control point (this can be a green channel signed ‘nothing to declare’) with the goods, if you’re an individual on foot

    driving (or being driven) past a customs control point with the goods inside your vehicle, if you’re in a vehicle

    continuing your onward journey, if there are no customs control points

    When you arrive in Northern Ireland, go through the ‘green channel’ at your port of entry or, where a green channel does not exist, drive across the boundary of the port … ”

    Etc etc etc.

  35. Lindsay McDougall
    October 26, 2021

    I have been absent for a couple of weeks due to a computer hardware glitch. It’s good to be back, even if others are not so pleased.
    It is not true to say that those without assets were done no harm by the increase in asset prices. House prices are among the more important asset prices. In the mid 1990s, the ratio of house prices to incomes was just under three; now it is up to eight. It has meant that the rich have got richer at the expense of the aspiring working and middle classes. It is now commonplace for people to reach age 40 without being able to buy their own home.
    The year that the damage started in earnest was 2001. During the 20 years since, base rate (under BoE control forsooth) has been too low except in one year, 2008.
    There is a way of restoring sensible control of the money supply. It is to target an inflation rate (2% if you like but I would prefer zero) but to include a measure of asset prices (houses, art, fine wines, gold, silver, vintage motor cars etc) in the inflation index used. If a sensible inflation index is used, it doesn’t particularly matter if it is the Treasury or the BoE that determines base rates.
    We need to halve the median house price to income ratio over a longish period in order to avoid too much disruption, including negative equity and repossessions.
    Would higher interest rates help pensioners, possibly at the expense of the working population. Yes, but we could always compensate by getting rid of the absurd triple lock. Really, we are badly governed these days, and the main opposition parties would be worse. If people want a bit of common sense, they should follow Richard Tice, Nigel Farage, Liam Halligan and Max Keiser.

  36. Lindsay McDougall
    October 26, 2021

    For the benefit of your younger readers, I present some old politics. At Epiphany 1958, the three Treasury ministers – Messrs Thorneycroft, Powell and Birch – resigned when the cabinet approved a public expenditure total that was (in their opinion) £50 MILLION too high. In Geoffrey Howe’s 1980 budget, public expenditure was reduced by £4 BILLION, income tax was reduced by a similar amount and indirect taxation was increased by a similar amount. Fast forward to 2021 and the Chancellor is praised for keeping borrowing down to £20 BILLION in a single month.
    So what?
    (1) The pound has been not so much debased as totally debauched.
    (2) Many politicians have no sense of shame.
    (3) Epiphany 1958 was not a ‘little local difficulty’. It was when the rot set in.

  37. Original Richard
    October 27, 2021

    Doesn’t the Government want inflation in order to inflate away our £2.2 trillion national debt?

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