One of the arguments used by those who say that People's Quantitative Easing is not needed is that if it were necessary to invest in social housing, infrastructure, and other socially necessary facilities then the market would provide. Let me take Robert Peston as typical of this genre when he said:
[Richard Murphy] clarifies that the debt to be acquired by the Bank of England would be issued by a new state-owned investment bank, whose role would be to finance housing, transport, and so on.
But I am not sure the existence of this new public-sector bank significantly helps his cause.
Because there would be widespread concerns that the Bank of England would be indirectly financing white elephants via this investment bank — and would, as I mentioned earlier, be throwing good money after bad.
Or to put it another way, quantitative easing for people makes good economic sense only if you believe that a state investment bank would make viable investments that the private sector refuses to make.
His implicit assumptions are:
1) If these investments are not being funded by the market they are of no use
2) The market is capable of assessing this usefulness
3) They're not happening so it must follow that right now they are not needed.
Then I read what Gillian Tett has to say in the FT yesterday, where she noted:
[T]hese days, it seems that a subtle – and largely unnoticed – shift is under way in how American companies are placing their spare funds. To understand this, take a look at a survey recently released by the Association of Financial Professionals on the behaviour of corporate treasurers. This analysis starts by highlighting a point that is well known: namely that holdings of corporate cash have recently swelled, because company profits have surged, but investment has remained relatively low.
The AFP reports, for example, that 31 per cent of treasurers said that their cash balances rose last year, while 46 per cent reported that they were unchanged, and most treasurers expect this pattern to continue. Little wonder, then, that economists estimate that there is between $1tn and $2tn of unused firepower now sitting on corporate balance sheets.
Now I am assuming:
1) That these companies approximate to the market: they have decided to withhold this money because they think it rational to do so and their shareholders have not stopped them doing so by demanding dividend payments instead (although I would argue that is irrational of them);
2) These companies are not investing in public infrastructure: in the USA and UK the need for such investment is massive but it is not happening;
3) These actions are unrelated: there is no link at all between the corporate decision to hoard cash and the process by which investment decisions on public and social infrastructure are made barring the fact that these companies are overloading the banking system with deposits, which helps keep rates low.
Now, Robert Peston and I have made different assumptions. The question is which is more useful? Is he right that because corporate treasurers in the UK and US will not fund social housing there is no need for that housing, or am I right to suggest that they have never once thought it their job to do such a thing, and the state has to create the mechanism to make sure such investment happens?
I'd venture to suggest I am right, and that I would also be right in saying that a great many of those who argue that People's QE is not needed subscribe to what I might call the Peston line. How might I summarise that line? It is that 'the market knows best'.
I venture to suggest that is nonsense for three reasons.
First, markets don't consider social returns.
Second, as a result they don't invest for social purpose.
Third, worse than that, they don't even consider shareholders and their return or they would not be sitting on up to $2 trillion in cash for no good reason whatsoever, messing up the balance in the banking system in the process and so suggesting alternative funding mechanisms must be created if social purpose is to be achieved.
That's People's Quantitative Easing, of course: the way in which the Bank of England can help the government correct for the wholly irrational behaviour of the markets right now.
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Richard,
Another tack would be to suggest to doubters that most of the money from PQE would come back in taxes anyway.
For example if the Government just created £100 million for a rail electrification project probably at least half of that would be spent on wages and salaries. So straightaway £17 million would come back as income taxes and NI contributions. The remainder would be spent and respent and come back as more income tax, more NI , more VAT, more alcohol taxes. The other half would be spent on raw materials,construction contracts, new rolling stock etc. Again money comes back in income taxes, corporation taxes, VAT, etc
By the time the project is finished I’d expect pretty much all of it to have come back as taxes as the original £100 million was spent and respent in the economy. It would be interesting if some professional economists would have a try at quantifying this more precisely.
The $100 will probably a loan to railtrack anyway so as railtrack service the debt over the years and even pay it off the “taxpayer” should come out well ahead on the deal.
I’m not sure if MMT purists would approve of quite putting it like that but politically it could be a good sell.
I think MMT would be quite happy with that
This is the multiplier in action
The market has never been free and has always needed regulating to service the wider population. We live in an era rampant greed and this greed blinds people from believing there is another way. The market is manipulated for the very few, for the markets own good it needs PQE as it will damage itself taking the course it is at the moment, like an out of control motor with insufficient current( torque) to give it purpose, otherwise it just spins up and burns out.
One problem with PQE is that it’s illegal under EU law.
What’s the plan to get around that?
Should we even be in the EU?
Mark Carney and Mario Draghi both agree it is entirely possible
Possible is not the same as legal. (It’s not the same as “desirable” either).
Under EU rules, PQE is illegal.
That’s the point.
The President of the EU’s Investment Plan behaves like PQE, in part
And the ECB is looking at PQE style arrangements
Your objection is pure farce: the EU has a habit of permitting what is needed
PQE is
I don’t think it’s farcial to point out that PQE is illegal.
You may right in saying that the EU would allow it, though that isn’t certain.
However it’s still illegal as things stand.
This is the last time I say it: it is not illegal
The EU has said so
“The EU has said so”
Do you have a source?
I have linked to Mario Draghi and Mark Carney saying so several times
And you are wasting my time
So that’s the end of this debate
But this government will not use PQE, as another commenter said their aim regardless of how things pan out is to concentrate the wealth to the wealthy. Keeping the city of London and its cross rail and maybe the garden bridge and more follies whilst cancelling our northern rail improvements shows the agenda of the London elite. We have to be business savvy, Italy has small bespoke setups, we can do that with encouragement and financial help. As Warren Buffet said ‘it’s a class war and the rich are winning’ or something similar.
I can’t believe I said something economic, does it make sense, I know what I mean.
It made sense
£3b – which then became £9b – of public money was poured into the Olympic project, but this employed very few UK people.
So something needs to happen alongside this money creation so that it has the all-round effect of not only producing housing and infrastructure, but also jobs for people here. Because otherwise it will only simultaneously increase the need for housing and infrastructure, as people come into the country for the jobs that are created. Been on the London tube lately?
Something you need to face up to Richard to have credibility.
You are well aware I know of this issue Linda
So?
Mention PQE and it won’t be long before Zimbabwe and the Weimar Republic will be used as examples of why it’s not a good idea! That’s OTT but nevertheless the objection of possible inflation needs to be addressed.
PQE could possibly cause inflation. All government deficit spending ,as with all spending, carries an inflationary potential .
Deficit spending is necessary to keep the economy functioning when users of the currency wish to save some of it. Those who doubt that might just like to consider the very simple economy of a baby sitting circle. If everyone in the circle readily spent a token and received a night’s baby sitting in equal measure to their willingness to do a night’s baby sitting to receive a token, there’d be no problem at all. But, say, for whatever reason, some of the sitters decided to accumulate tokens. Fairly quickly there would be a shortage and the system would not function. There would be a demand, from those without tokens, that the baby sitting council should issue extra ones. Those with a stockpile of tokens would object, saying the “printing” of new tokens would devalue their existing tokens.
If the hoarders lent the tokens back to the council they could be pacified with some reward. Just as lenders of pounds to the government are pacified with a reward of extra pounds. But if the hoarders of the tokens saved them in a piggy bank and refused to lend them back, all the council could do would be to create new tokens and inject them into the system. This would be the equivalent of PQE.
Is one method more or less inflationary than the other? There’s not much in it. Arguably PQE would be less inflationary because there are no extra rewards needed. If the issuing of new tokens, by either method, was just enough to restart the system, not too much and not too little, then neither method would be inflationary.
So who are the hoarders in the real economy? The central banks of the big exporters are the biggest. The big exporters don’t want to spend all they earn by selling goods and services into the British economy. So they buy Govt bonds and so effectively lend back their surplus tokens, or ££. The wealthy are the other ‘culprits’. They tend to accumulate more ££ than they need.
But what if not everyone recycled their extra tokens back through the banking system? Suppose they kept suitcases full of cash in safes or bank deposit boxes? The government can’t borrow those back. All they can do is create some new tokens. PQE in other words.
The government can’t know just how fast money is moving or if lots of it is being stored this way. All it can do is monitor inflation. If it is engaging in PQE and inflation starts to be a problem it needs to back off. Alternatively if it’s not a problem it can do a bit more. The govt needs to be careful, but shouldn’t be so scared of the idea that it doesn’t even try it out.
I’m puzzled and disappointed by Pestons comments as his other writing suggests that he is not unaware of the failings of the ‘market’. Or perhaps we should be more specific – by ‘market’ I think we are referring to that unholy alliance between financial institutions and corporations under which they are managed solely for value extraction for the benefit of those institutions and their clients. I don’t think that is the ‘market’ as say Adam Smith would have recognised it. In fact I think he would have been sceptical if not highly critical.
The evidence that this version of the ‘market’ has little or no interest in medium/long term investment, be it in physical or human infrastructure is all around us and overwhelming. From rail or energy, to pharmaceuticals, or housing or the training of both staff and managers. The recent figures on the massive reduction of the proportion of profits being invested is yet more evidence.
Some years ago, in Singapore, I heard Lee Kuan Yew talk about how the Goverment was investing in a new terminal and runway at the airport as it was totally unrealistic to expect private funding to take the 25 year view needed, and the future success of Singapore depended on it.
Sorry Mr Peston, but if you truly believe that only the ‘Market’ can and should make these investments, that’s an ideological flight in the face of the contradictory evidence. You’d have more of a case if you suggested that the bulk of today’s short-termist politicians seem unable to take these kind of decisions. But then we are back to the ‘Courageous State’. (I wonder what he thinks of that!?)
Peston says
“Because there would be widespread concerns that the Bank of England would be indirectly financing white elephants via this investment bank — and would, as I mentioned earlier, be throwing good money after bad.”
He has completely lost the plot if he thinks green infrastructure (he makes no comment on the fact that this is already subsidised by the way), social housing (ditto) and transport infrastructure (ditto) are white elephants.
In suggesting they are he thinks we are already throwing good money after bad, so he needs to say why it is wrong now to start with.
Then, and only then, might he be believable on why more of it – and this time virtually for free – would be wrong in the future.
As you say Richard, markets don’t consider social returns. That is why we elect govenments!
The 2012 Olympics show the folly of spending ‘public’ money on projects lobbied for by governments, in turn lobbied for by the private sector. The whole mantra of ‘this private investment is good for the economy of this area’ has been disproved multiple times as most of the money that flows ‘into’ an area quickly flows outwards and upwards from the people who live in that area. Most of the money spent on the Olympics went to private contractors, most of the profit will by now have found its way into the hands of the private sector in mortgage payments, taxes, business rates, tax dodging, corporate profits of businesses based outside the area. Much of the money has been shifted off-shore, to the extent that an austerity battered council, Newham, ended up lending £40m of their money for the ‘transformation’ of the Olympic Stadium for a football team, part of a sport that is awash with billions but does not invest in public infrastructure that helps it towards such profits, whilst Newham Council attempt to sell off the Sweets Way estate to for the profit of private developers. That was not a democratic way of spending the national commonwealth and cannot equate to PQE. It should not be hard for PQE to gain popular traction in our hearts and minds; the entire situation that the world finds itself in at the moment is by letting markets rule and then bailing them out with public money to no effect. Our everyday, worsening and tragic experience of life is fall-out from that undemocratic use of the national wealth for private profit; there is growing surge of rebellion against that. I don’t know how much credibility anyone can wring out of that other than continuing to lie and scapegoat the poorest among us. PQE should be a truly democratic process, using our money for what the majority want it to be used for, free of lobbyist influence, free from market influence, free from corporate controlling and controlled media influence.
The market never gets it wrong, it always allocates capital in the most efficient way possible. You only have to look at private healthcare in the US to see how it outcompetes the nationalised healthcare system in the UK.
Consider also, the glittering jewels of free market dynamics, like Savings & Loan, Long Term Capital Management, Enron, Dot com bubble, CDO’s, Lehmans, Bear Stearns, Northern Rock, RBS, Global financial crash 2008.
The outcome is that nobody is in need of housing, or food banks, or well paid jobs, the market is working efficiently to meet the needs of the people.
And finally climate change, the existential threat to humanity – i dread to think where CO2 emissions would be without private wealth’s well financed campaigns to lobby government to reduce reliance on coal, gas & oil.
Lets leave it to the market to decide eh?
Perhaps we should be using the term`hoarder` more frequently than `saver` – at least to make people consider a new perspective.
Seems like saver:hoarder is like enterprise:capitalism or social drinking:alcoholism, a small widespread amount is good for society but going too far leads to trouble.
The assumption Preston appears to make about investments not being made because they are of no use seems somewhat disingenuous when it is common knowledge that a lot of that accumulated surplus being held on balance sheets (which are largely down to global imbalances) has tended to go back into the financial system in order to fuel asset bubbles rather than meaningful investment in production with positive rather than negative feedback multipliers.
This is a matter of deliberate choice on the part of those in the private sector, and their bought and paid for supporters amongst elected politicians and the commentariat class like Peston), where the option of choice is to chase the spectacular short term returns. The kind of investment required on alleviate the housing shortage and crumbling infrastructures of the Anglo Saxon economies is simply not considered profitable enough by these decision makers. In effect the much lauded private sector, which according to its paid mouthpieces can never ever do any wrong or be wrong, having completely buggered up the global economy and not being satisfied with being the recipient’s of the largest public bail out in history out and creating a moral hazard have gone into a sulk and decided to have and investment strike.
The nonsense being generated by certain politicians and the usual selected media mouthpieces about PQE needs to be turned back onto them to justify why it is, in the face of all the evidence against, that the mechanisms they are dieing in a ditch for are fit for service. They need to be put on the spot and be made to defend their corner.