From blog here to the lead Guardian letter for tomorrow's paper:
In your editorial (26 September) on John McDonnell's proposal that PFI contracts be bought back by a future Labour government you suggest that any such action might be constrained by the need to persuade the financial markets to continue to lend the government money. This was an error on your part: this constraint does not exist.
Firstly that is because no government has to borrow. Quantitative easing proved that. In the UK the government (via the Bank of England) has done £435bn of QE, with the result that the government owns nearly a quarter of its own debt now, effectively cancelling it and all the interest payments due on it in the process. What this means is that another £58bn of QE could be used to cover capital costs of PFI without any difficulty. The remaining cost of buying out the service element may be little more and since QE debt carries no interest cost, there may be precisely no cost at all to buying these PFI contracts back into government control as a result. This was precisely the basis of People's QE, which I created in 2010 and which was one of the platforms on which Jeremy Corbyn was elected Labour leader two years ago. In that case the idea that we are beholden to the bond market “confidence fairy” (as Paul Krugman so aptly named it) when proposing such a move is just nonsense. The fact is that if bond markets are truculent any government can just work around them.
Second, your editorial also ignores the fact that there is enormous demand for government debt from the growing number of relatively (and I stress relatively) wealthy retirees needing a secure home for their money. The enormous cash piles of multinational corporations only adds to this demand. That demand proves that in fact those buying government debt are not doing the government a favour: it is instead doing them a favour by providing them with the secure savings opportunity that they crave.
People's QE was one of the core pillars of Corbynomics and can deliver the end goal of cancelling PFI. It is time for it to re-emerge centre stage and see off once and for all the interminable questions of how PFI repurchasing and other infrastructure investment will be paid for.
Professor Richard Murphy
Professor of Practice in International Political Economy,
Department of International Politics, School of Arts and Social Sciences, City, University of London
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Good one Richard. It’ll be interesting to read the comments. As Eric Morecombe would say: “Get out of that. You can’t can you?” But the trolls will try.
I never read the comments in the Guardian
They should carry a government health warning
I’ve had a look there. The others letters on that topic are sympathetic and there is no comments section. Well and good then.
Excellent stuff (almost hilarious – sorry, it is so obvious to those that have some understanding).
When the formerly radical Manchester ‘Guardian’ has lost the plot you have to shout very loudly…
I appreciate your forthright approach and want this discussion to happen – any chance of Labour returning to PQE instead of bonds approach?
Are there downsides to PQE or inherent risks?
People always want to cite 1930s Germany and inflation – so what’s the counter argument?
When there is less than full employment there is no risk of creating inflation by using PQE
And £435 billion shows that the risk is negligible – unless you also choose to exit the EU
The counter argument is sound modern tax systems, better economic data, and no debt obligation in a foreign currency all mean there is no risk
Germany collapsed under the burden of trying to pay an externally imposed debt due for no gain
PQE makes its won means of generating return for the economy
There is no comparison
@Sean,
“People always want to cite 1930s Germany and inflation — so what’s the counter argument?”
The Weimar Republic and Zimbabwe have effectively become the Godwin’s Law of economic debate. Anyone who cites them has already lost the argument.
The circumstances of both the Weimar Republic and Zimbabwe were extreme and totally different to a normal Western nation today. In general they do not they not make for useful comparison. Monetary financing can create additional demand (purchasing power) in the economy. Industry responds by producing more goods to meet demand. In the case of Weimar their economy was seriously weakened by WW1 and reparations demands from the allies. They just didn’t have the capacity to meet an extreme boost in demand. Zimbabwe never really had that capacity.
In a normal industrial economy that problem does not apply especially when it is operating below capacity as ours are now. We have the means to meet demand. Any an increase an inflation that might result would be proportionate. A moderate use of monetary financing (through a program such as PQE) would, at worst, result in a moderate increase in inflation.
Read ‘The Magic of Money’ by the man they called ‘Hitler’s banker’, Hjalmar Horace Greeley Schacht. To counter hyperinflation of the Papiermark they printed a load more money, calling it the Rentenmark and suggesting it was backed with the mortgage value of Germany’s agricultural and business-owned land, a confidence trick IMO but then, all money arguably is. Later, they pulled a bit of a switcheroo (technical term) and substituted the Rentenmark with the newly printed and gold-backed Reichsmark. If you want an example closer to home, research the Bradbury pound. The takeaway is that printing money ain’t necessarily a a bad thing, and it no more automatically leads to hyperinflation than hitting the weights now and then automatically leads to you looking like Arnie.
Bill
I think your reasoning needs to be a little more sophisticated than that
Richard
Hi Richard,
Glad this is all getting publicly discussed. Is it worth talking about the issue of non payment of tax on the profits of the companies involved? It was mentioned in the Guardian in passing. I know the main point is the ability to buy back but it is also an interesting angle. Could the government not also do something useful, immediate and targeted at companies which benefit from PFI contracts related to tax haven usage? And is there no implication in terms of the buy back costs in terms of this history of harmful tax avoidance? Maybe its irrelevant to this discussion but it bugs me that this is just accepted as the way it is and not expanded upon!
Claire
It is hard to prove the non-payment of tax – partly because PFIs are debt laden from offshore to extract profit
This may rebound badly on the companies involved….it will reduce their values
You say the risk is negligible ‘unless you choose to exit the EU’.
Surely you must be aware we have made that choice to exit the EU, which suggests that the risk is anything but negligible…
That risk is now reality
I was referring to the inflation it did create
That may also be a one off event
That depends on Tory negotiating skills
[…] And now it’s time top clear up the mess. […]
Sorry about the language Richard but well fucking done.
I wish you’d been on Radio 4 last night too.
I despair.
Richard, might I check my understand of how PQE would work in this instance? I think I understand the basics of conventional QE in which the BOE creates money then swaps it for a gilt, but when buying PFI contracts, does it go like this?
1. BOE creates the money
2. BOE buys the ‘asset’ held by the owners of PFI, which represents the income stream payable by the govt (I’m not sure what form this asset takes).
3. Government continues to pay the PFI contract, now held by the BOE which returns the money paid to govt
Thanks!
So the PFI is then cancelled
There is no reason for it
Richard
Have you read the response, in The Guardian on Wednesday, from Martin Wheatcroft (Author of Simply UK Government Finances 2017-18) to your lead letter on Monday?
He says that you are mistaken to claim that “QE debt carries no interest cost” and that you should know better.
Perhaps it deserves a reply?
Best regards
The reply has been published tonight
I will blog it soon