The British economy over the last 30 years has been accompanied by major fluctuations in monetary growth according to a new survey. The survey concludes the problem lies in the banking industry. What is notable is that there are new market trends that have been created as a result of the ailing economy.
The new survey hints at a shift in philosophies regarding investment methods. One example it provides is an emerging industry that investors worldwide have grabbed hold of by the millions. This is Internet gaming. With the use of new software, it is now possible to scan prices globally in seconds and uncover risk-free betting opportunities which provide guaranteed returns of as much as 12% per month. Using software like one called ArbAlarm, ordinary people can now easily profit from this unique method of investment. Aware of this trend, the UK government recently announced through the Treasury that the profits made from sports arbitrage trading will continue to remain free of all tax. This includes income tax and capital gains tax on all profits.
In an interview, former City trader Rajeev Shah, author of ‘Sports-Arbitrage – How To Place Riskless Bets & Create Tax-Free Investments’ explained that an arbitrage occurs when different bookmakers’ prices on the same events overlap. In these cases, it is possible to bet on all of the outcomes in that event in such a way as to be guaranteed a total return which is greater than the total outlay. The mathematics of this type of trade are precise & the resultant profits are free of all risk.
The money supply is just one of a range of variables which the Monetary Policy Committee considers when thinking about interest rates. And it doesn’t seem to be a very important one at that. Some argue that this explains why the MPC missed the warnings of higher inflation. Similarly, is it now missing monetary warnings of recession ahead?
In response to recent turmoil, banks have moved activities on to their balance sheet, which means they now have more explicit liabilities to be included in the money supply measure.
Equally, they have outstanding lending commitments to a number of borrowers and in the most part they have honored these. As they have lent, so the recipients of the loans have deposited the money and so the money supply has expanded. And since many other sources of finance have closed, borrowers have turned to the banks for funding. Yet this will not necessarily continue. Banks have severely cut lending practices in the US and we may be next.
The current epidemic of property losses are super-charged, because they reduce bank capital and thereby impair the banks’ ability to lend. House prices fell by 32pc in real terms in the mid 1970s but because of rampant inflation this drop was achieved with hardly any fall in nominal prices. For banks this difference is critical, because bank liabilities are in nominal terms.
Whether a cutback in bank lending results in serious damage to the economy depends upon what the bank credit is financing. If it is financing financial activity, such as management buyouts, then the impact on aggregate demand may be minimal. Asset prices may be lower, and that would have some indirect impact on spending, but the direct connections would be weak.
By contrast, if it finances consumer spending or purchases of plant and machinery, or holdings of stocks, or covers running losses while businesses expand or cope with a downturn, then the real economic impact will be direct.
The banking system is the engine of the economy. Never forget that the Great Depression in America was associated with a collapse of bank lending and the money supply.
Even non-monetarists should be watching the money and banking numbers like a hawk. And if the growth of bank credit slows substantially, let alone contracts, then you should be on guard for an even worse recession than currently looks likely.
Tags: UK News