The personal website of Andrew Sinclair

Here you will find my blog, photographs, travel diaries, technical articles and my Iran travel guide.

And some finance/economics articles:

The Supply of Money

How much money do you think is "created" in the UK economy each year?

And of this amount, what proportion is "created" by private organisations?

You probably think that the amount of money created is approximately the same as the rate of inflation, and that all of that money is created by the Government, obviously private organisations can't create money, that would be illegal!

Well, think again...

The answer to the first question is 13%.....

...and the second is 97%.

That's right, there is 13% more money in circulation in the UK this year than what there was this time last year, and of that extra money, only 3% of it was created by the Government.

According to the quantity theory of money, the expansion of the money supply leads to more money chasing the same amount of goods and thus to inflation. So if the money supply is increasing by 12% per year, then how come inflation is around 3% per year? What is happening to that excess money that is being created?

In theory it should be causing prices to rise by approximately the same amount. The economy should, in theory, absord the excess money in the form of price increases.

So, if this excess money is not being reflected in the inflation figures then where is it going? And secondly, where does it actually come from and how does it end up in the UK economy?

When I find out the answers to these questions I will post them here...