I was talking with Danny Blanchflower about quantitative easing today. He drew my attention to this letter (of which I reproduce part):
I gather that this authorisation was repeated by George Osborne and is still in force.
So, let's cut to the quick. First, there was no reason why QE had to buy gilts. In fact £1 billion was used for other assets, and then Mervyn King brought a halt to that (I understand). But quite specifically, that was the Bank not following Treasury guidelines.
Second, note the Treasury was firmly in command of this process, authorising what could be purchased. The Bank could merely suggest.
Third, the Bank was indemnified for losses.
Fourth, the condition was that the assets had to be capable of sale at investment grade in normal times (which we still do not have: we still have 0.5% interest rates with no sign of a change in prospect now, I suggest).
So, first of all, unless you can argue that the bonds issued by a new National Investment Bank would not carry investment grade status now I think we can say three further things.
First, People's Quantitative Easing is not only legal, it has already (subject to National Investment Bank bonds being sold by tender into the market in the first instance, as I have always said is necessary) already been authorised.
Second, the idea that the Bank of England already had any independence on this issue is a total fiction.
Third, when and if the market returns to whatever normal might now be defined to be because these bonds will still exist (I have never said otherwise, although people like Chris Giles in the FT claimed I had presuming (probably in accounting ignorance) that de facto cancelation by consolidation is the same is legal cancellation, which it is not) then they could still be sold, which is the Treasury requirement for acceptability.
So, all the legal and structural arguments for People's Quantitative Easing fall away: it is already authorised and legal.
So now the question is, why not do it? We still have no effective monetary policy in the UK and no chance of it in the foreseeable future: what might be considered 'normal interest rates' are likely to be a very long way off. In that case what is the reason for not doing QE assuming, as is true that we have a) unemployment b) low productivity and so c) under-usage of capacity which only needs the availability of credit (which is, note, the reason for QE) to bring it into use?
And why not also do it when a) we have increased market uncertainty b) a threat to export growth as a result of the China crash and c) a significant new risk of deflation which we need to do at all costs?
And finally, right across the country - in every constituency - I guarantee projects that are 'shovel ready' can be found. If I put out the appeal to local authorities and health authorities I think we can be sure they could line up with:
- Extensions that are needed
- Repairs needing doing
- Insulation projects
- Small road schemes
- Local transport infrastructure improvements
- Bandwidth improvements
- Houses needing building
- PFI projects they would love to drop
- New schools
- GP surgeries
And then ask universities and you'd get:
- Capital for research projects and joint ventures
- New applied research e.g. on renewables
And if you want to be really broad minded:
- Create a small business venture capital fund.
Why not do all that now, when it is legal, authorised and could be managed by a new Nation al Investment Bank under existing BoE authority from the Treasury right now.
I really want to know why not.
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It’s encouraging but I’d be inclined to wait to see what Frances Coppola says before throwing my hat in the air. Oh, and in this to and fro of can we, can’t we, one name continues to seem conspicuous by its absence. Why aren’t we asking Professor Werner – that would be this Professor Werner http://www.res.org.uk/view/art5jul13features.html – if he has any input here?
Would be interesting to see what Richard said
I have not seen him for nearly a year
Phew, I’m glad a paragraph above clarified one thing for me. Any NIB bonds bought by the Bank as part of a (P)QE programme must already have been held by the private sector. That’s what I understood but had mistakenly assumed the Bank would buy these bonds at new issue.
I promise I’ve got the legalities right
” The government will indemnify the Bank…..”
Telling statement. It shows you who is in charge. The decision to issue currency, in other words spend, lies with the government and it can never run out.
Well done for highlighting this issue Richard. It’s about time the lies about state solvency were exposed.
On the subject of what the EU does and doesn’t allow, would Article 123 prohibit Treasury-issued Bradburys, do we think? I can’t see that it would from looking at it but I suppose there may be something tucked away elsewhere which would… anyone?
“The government will indemnify the bank” cue Blue and Red Tories to launch their never ending circular argument – the government will get the money from the tax-payers – but where do the tax-payers get their money from – well the private banks of course – but all loans spent into the economy are refluxed by taxation and repayment of principal plus interest and why can’t government create money from nothing using the same credit/debt relation as the private banks – dunno will have to think about these ideas but if they did it will definitely cause hyper-inflation anyway – so why don’t the private banks cause hyper-inflation – they don’t – sure? – etc. etc. etc.
Priivate loans are refluxed by repayment of those loans. Bank deposits disappear. The main part of the money supply.
Govt spending is refluxed by taxation with the remainder voluntarily swapped for government bonds save outstanding reserves. Bank deposits and reserves disappear.
Govt transactions with non-Govt always involve reserves, in and out and the quantity of outstanding reserves is always positive.
Cash + reserves + Govt bonds = currency in issue = net financial assets in non govt or net savings.
The other thing to note is that the BOE accommodates the desire for reserves or govt bonds. As part of its day to day monetary operations it will buy or sell govt bonds on demand and is always holding a significant proportion of the so-called debt.
I assume ‘shovel ready’ means ‘existing projects’ which are already underway, In this case, it is unlikely any local authority could accept funding of this kind unless it came pretty much with no strings attached.
If that’s the deal, then yes please, we will never say no to no-strings money!
For new projects, we don’t have ‘shovel ready’ anything. The concept doesn’t exist in our world.
You’d need some kind of application process, with project approvals, grant agreements drafted and approved internally, then agreed with each local authority (can this be done in less than 6 months?), then the procurement process (9 months as an absolute minimum for fairly simple tenders, given there will be a lot of interest for the low level work such as household repairs etc.). Plus the quality assurance – there are cowboys out there, and they don’t carry a sign saying so.
For a substantial project, you’d need at least a year, assuming nothing went wrong, and you didn’t need a lot of consultation etc.
Do you expect the money will come to us with clawback conditions? If so, that’s a bit on the nose and some local Councils would regard it as a showstopper.
Tell me a better way to get the economy going again
Stop sitting at your desk and saying ‘no way’
Then I’ll be impressed
Richard, I hardly think pointing out genuine practical problems counts as mindlessly saying “no”.
Adrian points out genuine issues with the lead in time for major projects. I’ve seen small housing schemes (5 units) take six years to get through planning -TPO’s, wildlife surveys etc. And this is before you even get to procurement of building services.
I’m working with a 15k unit regional RSL at the moment, and cash for development is their smallest problem. Like all RSLs they run a margin of 35 or so percent.
Their grief is working with the state, either via planning or because of regulation, charity commission rules, HMRC VAT and component accounting changes.
The same problem is seen at my other principal client, a G15 landlord based in London. It’s not the economics that ruins social housing, it’s the state!
I note all you say
And I also suggest that this is an occasional risk and other parts of PQE – the insulation and broadband implementation that I have, for example, suggested is the start point for this programme for precisely the reasons you note – are not impacted
So I am sorry that you are putting up political and not real objections because I have already dealt with the objections you raise
Richard, you’ve asked why not do all those things now? How much of the work on your list would be completed by currently unemployed or under employed workers? Which, is I assume, the entire purpose of the proposal. And, with respect to other resources, what would be the effect of these projects competing for such resources from other existing or would be projects? What analysis do you have which considers these things? As an economist, on what are you basing your judgement that this will be the effect? Because the answer to why not do it, is the opportunity cost of doing it. In particular diverting scarce resources from profitable private projects to potential political white elephant projects. Which could have the opposite effect you intend – harming the sort of positive economic activity we want to encourage. Of course, this may not happen. It could be that these projects completely employ unemployed people and only use resources which are idle. Although anyone looking for a good builder or skilled tradesman might be sceptical about whether this is possible. But how do you know either way?
I am very confident that the skills needed will be recruited
That’s what demand does
And a good training programme assists
Competing for resources with the private sector is a mistake in my view. Govt needs to fill the output gap by employing those whom the private sector do not want. It can effectively set a decent minimum living wage for the private sector to hire off though and it should offer a job to anyone willing to turn up for work. There is plenty of work needing to be done that requires minimal training. River bank flood prevention and control comes to mind but Govt needs to fill the output gap not compete for resources. That way lies inflation.
I would agree with that issue on river banks
But I am not convinced we need to assume the private sector has the answer and the state fills the gaps
And right now only deflation is likely
Demand also increases prices for the factors of production. But you have argued PQE won’t be inflationary.
I have said it may bring us to inflation target at some time
Please get things right
What do you base your confidence on? Empirical studies, analysis, economic models/theories? I’m sure these will be the first questions put if PQE looks likely.
All of them
And sound judgement
Thanks for clarifying. So when you wrote a post entitled ‘PQE won’t be inflationary’ you actually mean it will be inflationary, but will bring us up to the inflation target and no more.
It could be inflationary – all injections into the economy are
BUT it may also not be. That depends on, for example, the amount claimed back via tax
Your logic that there is a binary relationship is just wrong
Are tax increases part of the PQE proposal? Surely ‘all things being equal’ PQE is inflationary? The fact that other factors in the economy may act in the other direction doesn’t change the principle. I don’t understand how you can draw any conclusions about any economic proposal unless you apply the logic of holding everything else constant, and if you do this for PQE it is obviously inflationary, so why not just say so?
Why should I hold all else constant?
That is not how the world works
And I refuse to accept that it is the job of the state to fill in the private sector when the private sector does not and cannot meet some very real needs
So of course I can build tax into the equation to balance it if I want to
If you don’t hold things constant, you cannot know the effects of economic proposals precisely because the world is complex. This is the very nature of economic theory. If I bought a share today, and the price of the shares fell, can I conclude the effect of me buying pushed down the price? No. The opposite occured despite overall the price falling from other factors. So you should, if you want to be known as an economist, which you seem to imply, be able and willing to explain the effects of your proposals, not simply what may happen overall to the economy.
That sort of economic theory is total and utter bunkum: the sort that failed to notice 2008 and said we wouldn’t have another crisis any time soon
It relies on a world that is rational and where all relationships can be expressed mathematically
It is fantasy, at best.
So what is economics, and how is an economist any different from any other pundit?
Economics is about the choices we make on the allocation of resources
But it has to recognise that choice is made by prejudiced, irrational human beings on the basis of incomplete data or it is of no use at all
Assuming otherwise is as useful as building a new town on an internet simulation game and claiming you have solved the housing problem
Fair point. Any government should have the right to divert resources to advance social purpose as part of its public sector role. When it comes to fine-tuning the economy at or close to full employment though it will need a counter cyclical tool at its disposal. The Job Guarantee scheme does that. In other words it would be a permanent fiscal policy.
This whole notion of ‘competing with the private sector’ or ‘diverting resources’ appears to imply some sort of ‘crowding out’ theory.
For the most part there can be no competition with, or diversion of, resources while there is still unemployment and spare capacity in the economy.
Crowding out can only apply in situations where virtually all capacity is being used. Then you will have a zero sum game where one sector can only expand at expense of another.
Exceptions to this could apply in instances where there are specific shortages of skills or materials in certain areas. Should that be the case it is something that would need to be identified and verified.
It should not be the subject of loose assumptions or speculative guess work.
I agree with you re crowding out
I hoped I had made that clear
You probably had made it clear, Richard. I was responding to the comments of one or two others that may not have picked up on that.
Richard
I’ve noticed you & your commenters often talk about filling skills needs by “training”. Do you understand how long it takes to acquire some of the skills you’re referring to? Have you, yourself, ever tried acquiring one of these sort of skills. Building roads & bridges – the actual physical building part – isn’t something simple, like becoming an accountant. Where it’s all in the book & you can hack the job with the ink on your charter certificate still wet. The “training” bit is just the preparatory stage to acquiring a great deal of practical experience. I’d suggest you do something something like a training course on operating a JCB & then see how long it takes you to achieve the work & quality rates of a skilled operator. Come back in a few years & let us know how you got on.
And as I have made clear you start in that case with things that take less time and training to get going
Of course I am aware of lead times.
I am also aware of under capacity
And I am aware that when needed we can import critical skills to get people here to work
I am under no illusions at all
BUT the OBR forecast £50 billion investment capacity in the UK right now that I think will not happen. I believe them and plan to make sure it is used. My logic is well founded
Richard,
I note that the lead-times have been discussed, and as you say above- you’ve selected quick-start projects to commence PQE work. One follow on question, though-
It’s long been an observed fact in construction (although I’ve also seen it in other industries) that a large scale programme of works across the nation (think Decent Homes work in social housing) leads to inflation within that sector.
House bricks regularly undergo massive price increases when planning laws change, or when economic circumstances favour building. Ditto for the wages of bricks and other skilled workers.
How would one proof any large scale, centrally mandated set of works (even those with short lead times) from rapidly exhausting funds allocated to them?
Construction is a small part of the total economy
And we can import if need be
I’d also hope we’ll be doing some serious thinking about new techniques. Are we really beholden to bricks now?
And if some wages rise – thank goodness for that. We need people earning money. That’s how the multiplier works
I can’t work out your last question
I hope I’m replying in sequence here… if the price of house bricks does go up, hopefully that might encourage exploration of alternatives like hemp bricks and hempcrete, which are showing great promise in testing in Scotland. If we’re going to be breaking down traditional restrictive barriers we might as well go for a few more while we’re at it 🙂
“Stop sitting at your desk and saying ‘no way’ Then I’ll be impressed”
“Please get things right”
“All of them And sound judgement”.
Seems to me that your rudeness and arrogance stems from your inability to answer basic questions.
I have answered the questions
I was bored with someone repeating his point for the twentieth time when I had already dealt with it
And for the record, I agree: I do not suffer repetitive bores gladly. Why should I when they only seek to waste my time?
First, People’s Quantitative Easing is not only legal, it has already (subject to National Investment Bank bonds being sold by tender into the market in the first instance, as I have always said is necessary) already been authorised.
Sorry but I am not understanding this. So if the National Investment Bank sells bonds to the market first, those bonds are purchased with already created “money” but not newly created “money”. If they are then subsequently purchased from the market, does that not mean that the newly created money will end up in the hands of the more wealthy investor? I just got a bit lost.
If you write a cheque and it clears through a bank it does not end up in the hands of the wealthy – it goes to the intended recipient. So too with PQE, It would go to the NIB via a bank
BUT I accepot the new funds would end up deposited in Bank of England central reserves – the lowest paid debt in the government (and which can be interest free)
On the subject of where the money’s going, isn’t it all eventually going to end up with the banks, already the villains of the piece? The extra money sloshing around in the economy will no doubt encourage the banks to offer cheap loans with the ultimate aim of wealth extraction, getting the new money out of circulation here and into their virtual vaults in some distant haven. I know bank regulation is on your to do list. Will that include making the banking system full reserve or something similar? If not, how are we going to stop this very worthy boost to the economy from being transient and ultimately benefiting the banks?
The money is spent on new infrastructure
It will of course end up in banks
But not owned by banks, unlike QE
Banks own the title to money deposited with them so it would indeed be owned by them. I agree it’s not owned by them in the same sense as the money from the earlier reserve expansion version of QE implemented which resulted in the banks getting rid of a load of useless paper from their accounts and their reserves expanding at the BofE. However, if money’s deposited with a bank of the ordinary high-street variety, the bank then owns it. Very handy for a bail-in, it occurs to me, for which the legislation already exists I remind you.
Why did we have tally sticks? According to Prof Werner it was to enable the expansion of the economy without incurring more debt. This was back in the 12th century so clearly someone understood the perils of banking and money back then. It was an alternative to money. a very necessary one. It seems to me we’re continuing to make the banks more powerful then we are, making our own situation worse, in the long term if not the short, because we’re still using money to trade with. To properly free ourselves from the banksters, we need to be paying for things with an alternative to money, like the scrip they used at Worgl or the tally sticks mentioned earlier. The QE you envisage will help to get us over this bump in the road but we really need to get on another road entirely, one where wealth created enriches the community and stays within it. Perhaps some electronic version of the tally stick can be found. One live in hope! 🙂
“BUT I accept the new funds would end up deposited in Bank of England central reserves — the lowest paid debt in the government (and which can be interest free)”
You seem to have changed your tune from this ( http://www.taxresearch.org.uk/Blog/2015/08/10/labour-could-not-have-in-any-way-caused-a-crash-by-overspending/comment-page-1/#comment-731369 ): “There are two types of money; Government created and bank created; PQE is government created money; Interest will not be paid on government created money”
You are totally shameless. You arrogantly dismiss your critics without engaging with the detail of their arguments, and then quietly shift your story without a trace of contrition. You seem to treat economic debate more as some kind of personal competition than an objective process to establish the most beneficial policy.
Anyway, now that you have apparently accepted that PQE is effectively a BoE reserves funded long-term investment programme, you need to consider whether it is wise to fund such long-term investments at a floating interest rate (ie the BoE repo rate) at a time when long-term interest rates are at historic lows, or whether it would better to just leave the (presumably fixed interest) National Investment Bank bonds in the market without the BoE buying them. Alternatively, if you think that you can simply not pay any interest on these reserves, you need to consider whether that will prove inflationary if economic activity picks up (which is of course the point of PQE) and interest rates generally rise.
In my view, PQE is a con. If you believe that we need public sector investment, then pay for it straightforwardly and honestly as general government expenditure funded by gilts borrowing or taxation. For the Green Party, my advice is to fund any such expenditure from inheritance tax and LVT, as Chris Giles suggests.
Not shameless at all
Willing to listen
And also willing to note the rate of interest on reserves can be 0% – as Adair Turner has pointed out,mas I have argued
So thanks for your abuse, but it comes to now’t
And as for inflation : impossible until such time as we have full employment
Finally, if you note the 2015 Green Party manifesto you may note some influence from me, including on LVT and IHT: I have no hesitation in endorsing both
Why don’t you stop the abuse?
You are avoiding the issue.
When you say “inflation : impossible until such time as we have full employment”, it begs the question what you do when there IS full employment, especially when that is what PQE is designed to contribute towards.
As I have been saying to you all along, unless you accept inflation (which would be high given that the additional reserves created under PQE would be of the order of a hundred billion pounds or more), you have to pay a market rate on interest on the reserves funding for the PQE, and it is that which makes PQE a floating-rate funded investment scheme, which seems unwise when (I presume that) its investments are typically long term and duration-matching long-term debt funding is historically cheap.
Like my colleagues in the Green Party, you are making the mistake of basing economic policy on the basis of what you want to believe rather than rigorous analysis, and as the Green Party leadership found at the general election, while such policy proposals may go down well with your own supporters, they get humiliatingly dismantled when they come under closer scrutiny – eg from the IFS – as campaign pledges.
Tim
You stop PQE when you are approaching full employment. That is why, as I have argued, it has to be granular i.e. Smaller projects
And I repeat: there is no reason to pay interest on reserve funds. We do: Adair Turner has confirmed that is choice, and not required
I have thought this through
Oh, and the IFS, the neoliberal organisation whose boss who has just written a Telegraph post calling for cuts in real civil service pay? You call them objective? Come on…
Sorry, you are still not getting it.
Stopping taking on new PQE projects as you reach full employment does not deal with the stock of projects, and hence of reserve funding, that you have already built up.
Yes, you can just not pay interest on reserves, but then, at full employment, they would be the classic “hot potato” that bids up prices. When reserves did not pay interest, the stock of reserves was tiny (in fact the point of paying interest on reserves, which the BoE introduced well before the financial crisis, was to allow a large increase in the stock of reserves to be held – because this made management of money market interest rates easier – without generating inflation).
I have also heard the “neoliberal” jibe about the IFS from Green Party members before! What matters is not what you and your supporters like to believe, but how analysts like the IFS, and therefore their opinion of your policy proposals, is perceived, and I don’t think that you would deny that, rightly or wrongly, IFS fiscal commentary is generally highly respected. They did not do the Green Party any favours during the general election campaign by describing our fiscal plans as dependent on a “magic money tree”.
Do you understand that Magic Money Tree is a spin on Modern Monetary Theory?
So the IFS do not get sectoral balances
And I reiterate: I have dealt with your other points in my opinion
Your reiteration of them changes nothing
I don’t think you have escaped from the corner I have steered you into: if and when the economy reaches full employment, you either have to pay a near-market floating interest rate (like the BoE repo rate) for your PQE reserves funding, or pay nothing and accept a few years of very high inflation (or some combination of the two if you try to pay a substantially below-market rate of interest on the PQE funding).
Anyway, I think that will be clear enough to your readers for them to make their own minds up, so I will leave it at that.
Of course I do not have to accept inflation
That’s utter nonsense
Even if you were right on interest (and you’re not) do you honestly think that could induce inflation?
If it did that would be easily solved: a special higher tax rate on the interest paid would soon solve that
Wow, that is interesting!
You don’t believe that a block of several hundred billion pounds worth of zero interest reserves at a time of full employment, which would normally be associated with the existence of profitable alternative investments that could be readily purchased with the reserves, would be inflationary.
But if it is, “a special higher tax rate on the interest paid”, which would of course amount to paying a less-than-market rate of interest (or conceivably no interest at all if you tax away all the interest paid) “would soon solve that”. This is a significant aspect of the PQE plan that I had not heard before, and I think you should share with those who are interested in the plan.
I suggest you start reading MMT
I have read MMT; in fact I have Randall Wray’s book.
As I dare say Richard Wilson will confirm, MMT would say that, if the government spends an amount of base money into existence that threatens to be inflationary, the government can withdraw the excess by taxation. This MMT idea may be what you have in mind, but that is not what you are proposing — you are proposing to tax only the interest paid on the reserves. If you tax back the reserves created by PQE, the reserves creation and withdrawal net out, and PQE basically becomes a tax-financed investment programme.
I made a point made by Abba Lerner in response to a very particular comment by you – to deal with people who make comments of the sort you do on interest on gov’t debt crushing the economy
Read functional finance
I fully understand the rest
It’s pretty clear you don’t
It is hard for your readers to be convinced that you do understand, or even for them to be clear about what you are proposing when you avoid engaging with the substance of the points I am making and just try to fob me off with glib remarks or imprecise references.
(1) Are you arguing that a block of several hundred billion pounds worth of zero interest reserves at a time of full employment, which would normally be associated with the existence of profitable alternative investments that could be readily purchased with the reserves, would not be inflationary? Because clearly, if you are not arguing that, you need to have a solution to deal with that problem if PQE works (ie restores full employment).
(2) Assuming that taxing interest is that solution, what is the scope of that tax? Is the tax levied on just the interest paid on the reserves paid out when buying the National Investment Bank bonds, and if so, are you suggesting taxing back the entire amount of interest? Or do you have in mind a wider tax on interest generally?
Tim
You are making the sort of nonsensical assumptions that I refer to here
http://www.taxresearch.org.uk/Blog/2015/08/28/frances-coppolas-snake-oil-of-conventional-macroeconomics/
When you want to discuss the real world let me know
In the meantime enjoy living in your make believe world of full employment and I will deal with the realities
Please do not waste my time again
I could almost say the same on behalf of the greens, I suspect
How about a few more Dinorwigs (Electric Mountains)?
This would help balance demand and allow more renewables to be integrated. Reduced energy imports would offset some of the lower purchasing power effects of the QE money.