Both of these examples result in an increased in measured deposits at banks, but neither presages more nominal spending. 9  G Ryle “The Concept of Mind” London (1949) Hutchinson. Ryle was criticising as incoherent a dualist view of mind and body in which the mind is instrumental in determining action but is wholly distinct from the physical realm. BIS Review 73/2007  5  We need to start as the Governor has said by trying to distinguish supply shocks from demand shocks. 10 Where growth in money is driven by the wish of consumers or companies to increase their holdings of money for a given level of spending, there need be no effect on nominal GDP or inflation. As I have discussed there is clear evidence of changes in demand of that sort in the financial sector. But that is not the whole story. So have there been increases in supply of money and if so how will they feed through into the economy? What does a supply shock look like? It is easiest to visualise in a closed economy in which the money supply is mainly notes issued by the monetary authorities. One can imagine then a direct increase in supply – a helicopter drop of extra notes. In that world people would really find themselves with extra cash in their pockets and would be expected to go out and spend some or all of it.
Second the growing importance of bonuses in the financial sector can make it harder to interpret statistics on earnings. City bonuses are generally paid at the start of the year. As Chart 10 shows this leads to big peaks and troughs. At times when changes in earnings growth are of great interest, as they have been in recent months, it is difficult to identify the underlying path. The difficulty is partly a technical issue of how to smooth out the monthly variations. Do we spread the bonuses backwards over the last 12 months on the grounds that they are deferred pay conditional on profits in that period (with the consequence that you don’t know the true earnings figure for any month until over a year later)? Do you spread them forward because they will tend to be spent over the coming year? Or do you do a bit of both? To that uncertainty we can add the fact that there several different measures of earnings growth including two – the AWE and AEI – which are telling a somewhat different tale. 7 There is also a more conceptual challenge. Are bonuses to be treated as part of the cost of labour or are they a form of profit sharing? The economic implications may be quite different. In practice they are probably a bit of both; bonuses are much higher when profits are good, but they are unlikely to disappear entirely in tough times (witness the concept of the “guaranteed bonus”).