The FT reported yesterday (and I missed it then) that:
Lord Turner, the departing chairman of the Financial Services Authority has defended financing government spending by printing money arguing that, within limits, it “absolutely, definitively [does] not” lead to inflation.
Speaking before a farewell speech in London on Wednesday, Lord Turner, who applied unsuccessfully to be the next Bank of England governor, called for “intellectual clarity” in economic policy, including breaking a taboo that permanently printing money to pay for government services is always bad.
“I accept entirely that this is a very dangerous thing to let out of the bag, that this is a medicine in small quantities but a poison in large quantities but that there exist some circumstances, in which it is appropriate to take that risk,” he told the Financial Times.
Spot on. He's absolutely right.
The government has now printed £375 billion of quantitative easing cash. It's done that for three reasons. First to keep liquidity in the banking system when banks were refusing to create enough money to keep the economy going, because bank lending is the only conventional way we make money at present.
Second, to keep government debt down. As I have argued, because QE means that £375 billion of government debt is now owned by the Bank of England which is in turn owned by the government this debt has effectively been cancelled. That also means that despite the claims made to justify austerity national debt is actually less than 50% of GDP right now.
Thirdly, I'm afraid this was also done to boost bank balance sheets - because they took significant profit on this. That's shocking, but true. We could have nationalised a number of banks for less than the sum we gave them via the QE programme.
Now there have been consequences. We know there has been speculation in commodities and that has impacted inflation. And there has been an asset price bubble that I think will shortly lead to a stock exchange crash - because nothing justifies the current global stock market pricing and it is bound to fall soon as a result: we're just sitting and waiting for that one to happen now.
But there has not been domestic inflation bar the impact of these schemes: £375 billion of cash has been absorbed by the economy without problem. And I do not foresee a problem arising either: this debt has been bought and has for all practical purposes gone for good. QE is not a reversible programme. No government is ever going to sell this debt again. As a programme this episode is complete.
But it leaves a legacy. The legacy is unreformed and strengthened banks. we need stronger banks, but not ones that did so behind a charade that was actually state subsidy translated into private gain for a few.
And it leaves a legacy of asset price speculation that is indicative of all that was wrong in the UK economy before 2008. That again is unfortunate. For both these reasons I can't suggest more QE.
But I wouldn't anyway, because some time ago I suggested we should move to a programme of Green Quantitative Easing. I argued in that report that:
a. The government would need to invest directly in new infrastructure for the UK.
b. The government needs to invest in the UK economy, in conjunction with the private sector, working through a new National Investment Bank;
c. The government must liberate local authorities to partner with the private sector to green their local economies for the benefit of their own communities, and it can do this by providing a capital fund for them to use in the form of equity that bears the residual risks in such projects.
I stand by that. In fact, I think it now a given that everyone from Boris Johnson leftwards thinks infrastructure investment is vital, even if when I wrote the Green Quantitative Easing report almost no one agreed. And we now know we can do this by printing money. We don't need austerity elsewhere to invest: when we have 2.5 million unemployed and millions more underemployed all we need is the pump priming mechanism to put these people to work. Green QE delivered through a national investment bank, capitalised by newly printed money in the form of debt issued to the Bank of England is exactly that.
And it would pay for itself. The IMF's realisation that the multiplier effect of investment - at maybe 1.7 - is the evidence of that. Such money printing generates vastly more income than the sum printed - which in turn more than pays for interest on the debt.
It's time to get going with this. The UK needs the investment It needs the jobs. It needs to end the absurd narrative of austerity. It needs to get out of a black hole. We printed vast amounts of cash to save the banks. Now we need to do it again to save everyone else.
Adair Turner is right, and a welcome convert.
Now, when will others believe we're right?
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As long as we’ve had fiat currency there’s never been any problem with creating new money providing it was used proportionately to create wealth. Fiat currency being worth what people think it is, if it’s created and used to build needed infrastructure, schools, hospitals and train surgeons and teachers, people will respect it. Oddly, if they respect what’s done with it enough, it might be worth more in international terms than it was before. Consequently I’d suggest there’s no need to create it as debt at all. Just create it and use it wisely.
The debt hasn’t been cancelled at all. It is still a debt, and it is still a burden. It’s just owed to the Bank of England rather than a pension fund, other banks, private investors etc.
What’s more, it’s likely it will increase the national debt as the Treasury indemnifies the Bank of England against losses, covered by borrowing no doubt. If they don’t hold the bonds till maturity they’ll almost certainly make a loss as they’ve bought much of the gilts at record high prices. Selling them at a loss may be the only way to keep a lid on future inflation.
The Bank of England and the Treasure are skating on very thin ice.
Utter nonsense – they can be held forever or cancelled now and it makes no odds – if your right hand owes your left hand money and they bath bank in the same account whether or not the debt is paid is of no consequence
They thought that in Weimar Germany too, and Hungary, Zimbabwe, Austria…
If it was as simple as just waving away the debt, don’t you think they’d do it? The only reason markets will lend us £120billion each year is that they have confidence that we won’t default, which the government printing money to cancel its own debt is. The pound would be wiped out overnight, and inflation would be rampant. It won’t be the rich with their assets in gold and foreign currencies or politicians with index linked pensions that would lose out.
I agree we need new infrastructure and investing in green technology will create jobs; but this idea that we can have a free lunch is dangerous as history has proven time and again.
Have you no faith in the power of democracy to create balance?
They can’t be cancelled – the government owes the money to the BoE and the BoE owes it to the banking sector. The debt is still there, it has merely changed form from gilts to reserves. Over time the government will effectively pay the private sector back by accepting the reserves it created back as payment of tax liabilities.
and as for the banks making money, gilts are bought in exchange for reserves (both assets). No bank would want to sell gilts earning 4% to get reserves earning 0.5%. QE involves a transfer of value from the private sector to the government and not the other way round. The government saves £13bn in interest payments that otherwise would have gone into the private sector.
What the BoE owes banks has nothing to do with the gilts
Get on and accept the money to buy the gilts was ‘printed’
They are unrelated issues
Go and learn the realities of money please
Only come back when you have
As for your other claims – please, politely, don’t be stupid. No one was forced to be involved in QE. It was done for profit
Politely, stop the crap
For someone who is an accountant and comments on economic matters, you seem to know very little about how the banking system works. Instead of suggesting that commentators on here go and learn the realities of money, I suggest you go and do some reading instead of constantly making a fool of yourself on here. Maybe there is clue in the fact that Tom is only one of several people on here pointing out that you are wrong on how quantitative easing works and the relationship between the central bank, the banking system and the government. Perhaps you need to refresh your knowledge of double entry accounting.
Ah, but I have
That’s why I’m right
There are only a few wise economists who really understand money. I suspect you don’t. One who did was the second greatest economist of the last century (J. K Galbraith) who said:
The process by which banks create money is so simple that the mind is repelled
(John K. Galbraith, in “Money: Whence it came, where it went”, p. 29.)
He was right, because it’s true: the process is so simple that we’re repelled by it
That’s why you won;t accept my logic
It comes ouf of thin air
Until you accept that you can’t see that gilts can evaporate too
I do wish people would actually learn a little about what went on in the Weimar before citing it at every opportunity as THE argument against printing money. Having done some reading on the subject I’d suggest the inflation was created deliberately. This could have been for several reasons. One might have been that when the dust had settled Germany had no national debt left and could start again with a clean slate. Another reason might have been that foreign bankers could and did buy up useful chunks of Germany’s assets on the cheap using foreign currency. That would intimate that Reichstag President Haventein, the man who for many at the time inexplicably kept his thumb on the printing button when the damage being done to the economy was plain to all (shades of Osborne there), one would have to believe he was part of something approaching an international banking conspiracy. Pish and tosh, you might have said to that back in those days.
Not now though, not after the Libor revelations.
Another reason might well have been Havenstein, with others, wanted to make it plain to the victorious Allies the only way Germany could pay back the ruinous reparations demanded of it was to devalue its currency to the point where it was worthless.
We weren’t there. We don’t know. Perhaps we should keep in mind that we don’t really know what went on back then and not keep endlessly trotting it out as the definitive argument against money creation, something high street banks do routinely every time they pretend to make a ‘loan’.
If I have understood one of the basic tenets of MMT (Modern Monetary Theory?) correctly, then provided you have control of your own currency and your debts are only denominated in your own currency then “printing money in moderation” isn’t a problem. The hyperinflation spectre doesn’t raise its head.
I understood that the problem with Weimar Germany was that its debt were in foreign currency being the onerous reparations forced on Germany following the Treaty of Versailles following the end of World War 1.
http://mikenormaneconomics.blogspot.co.uk/2012/10/joseph-laliberte-hyperinflation-in.html
You are right
When QE takes place, either at BoE or The Fed, the decision is not taken by The Treasury or the Court of Directors but approval will have been sought from BIS and the world’s senior international bankers, who also have a major control of international markets.
They can choose to write off the debt if they wish, or make the terms more onerous – they are not under the control of any legal system.
Respectfully – I think that is conspiracy theory
It is not easy to acquire knowledge of the workings of BIS, I appreciate that. Through your accounting analysis of QE and BoE, Richard, I think you have arrived at the correct conclusion by other means and the debt can simply be written off, though we are still at the mercy of how “the markets” interpret our actions. We are saying the same thing from a slightly different viewpoint.
Evidence?
Richard,
Politically it’s a nice rhetoric, but unfortunately you are incorrect about QE boosting bank’s balance sheets and bank’s profiting from QE
1. On the eve of QE commencing, in December 2008, banks only owned around 4% of issued government debt, which at the time equated to around £26bn(i). At Q1 2012 banks held around £116bn of government debt – which equated to about 9% of all Gov Debt (ii). So in the period where the bank of england purchased £375bn of government debt in the secondary markets, banks holding of gov debt actually increased by £90bn (so whatever the gross purchases and sales were between banks and the BOE and banks and treasury on a net level banks have bought 90bn more than they had originally). If you look at the percentage holdings of the different ownership categories of gov debt at december 2008 and apply those percentage holdings to the level of outstanding debt now, and then compare that with the actual split of holdings of gov debt now, what you’ll find is the bulk of the selling/reduction in holdings has come from overseas central banks and insurance companies/hedge funds. Page 203 of the BOE’s quarterly bulletin confirms this point if you’re interested in the detail(iii)
2. Notwithstanding above, QE itself does not boost anyones balance sheet – all it does is exchange one highly liquid asset (gilts) for another highly liquid asset (cash)
3. The impact of (2) however is that the holders of Gov debt who sell to BOE under QE give up an asset that paid between roughly 2-4% yield along with potential capital gains (as demand for gilts has rose over that period, pushing down market yields/pushing up market values) and in return they receive an asset (cash) which pays next to no interest and no opportunity of capital gains (this is why central banks of both the UK and US have made record profits in recent years)
I would be interested though if you could lay out your theoretical reasoning and empirical evidence for the claim that bank profits & balance sheets have been boosted by QE – i mean it (QE specifically) hasn’t even boosted bank liquidity as the stats tell us that during the period of QE banks have increased their holding of gov debt, not reduced it
Don’t get me wrong, i’m not criticising your analysis of this from the right – i’m probably far far to the left of you politically, but I hate this kind of sloppy analysis from the left that makes it look like it doesn’t really know what it’s talking about, which allows pro-austerity and the right in general to cast doubt over everything that gets said
—–
(i) – http://www.dmo.gov.uk/documentview.aspx?docname=publications/quarterly/jan-mar09.pdf&page=Quarterly_Review
(ii) – http://www.dmo.gov.uk/documentview.aspx?docname=publications/quarterly/apr-jun12.pdf&page=Quarterly_Review
(iii) – http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/qb110301.pdf – (“Before asset purchases began, the main holders of gilts were UK non-bank financial institutions and overseas investors.At the end of 2008, UK banks held only about 4% of the total stock of gilts, and these tended to be shorter-maturity ones. As Chart 2 shows, the banking sector actually increased its holdings of gilts during the period that the Bank was conducting asset purchases, suggesting that the main impact was to reduce the gilt holdings of the non-bank private sector relative to what would otherwise have happened.)
The answer is very simple and is in appendix 2 here
http://www.financeforthefuture.com/GreenQuEasing.pdf
poor answer, the gilts would have been carried at market value in the first place, selling them does not create a gain that would be recognised through P&L it merely crystalises a previously unrealised one (something that could have happened regardless of who the gilts were sold to)
that explanation seems to suggest that the act of the BOE buying gilts in the secondary market actually increases their market value which is simplistic nonsense. That appendix also does not pay attention to the fact that the selling party gives up an income stream of around 2-4% on the gilt, plus the prospect of future capital gains – which if you discount all that to present value would likely be higher than any unrealised gain that gets crystalised on the sale of a gilt where it’s market value is higher than its nominal value
but that aside, you’ve ignored my point that it wasn’t banks who were involved in most of the QE transactions in the first place – as
Your claim on carrying value os not true under much of IFRS – sorry
Treasury people agreed with that analysis
Informal Subsumption is perfectly right in his analysis . Under IFRS, any gilts that were not going to be held to maturity would have been carried at market value and hence there would be no profit or loss impact.
And if treasury people agreed with that, then no wonder the economy is a mess.
That is not true under IFRS
It is vastly more nuanced than that, as Tom Bush has shown
Simplistic solutions are not an explanation here
actually worded some of that badly, clearly the BOE being a purchaser in the market can push the prices up due to demand, but the act of purchase at any point in time doesn’t create a gain, it merely crystalises a previously unrealised gain
and i didn’t finish my last sentence, which was to point out that banks were not the main party (on a net basis ) to the whole QE shebang
Sorry Richard, but you’re not making much sense or effort to defend your claims
(if banks were carrying the gilts as part of their trading portfolio they would be marked to market if that was what your comment above referred to (although given the banks only owned such a small amount of outstanding gov debt it’s pretty immaterial either way), if it wasn’t that it was referring to can you expand on it a bit more as it doesn’t make much sense how you worded it)
anyway, the main point of my initial post was that over the whole period of QE, 91% to 96% of UK Gov debt has been owned by parties that are not commercial banks – so how can anyone claim that banks were the major beneficiary of QE?
my reason for picking this up is because there is this big thing on the left these days that it’s just banks that are the underlying problem, and all that needs to happen is to ‘sort out the banks’ and everything will be OK – which is simplistic superficial vulgar political economy, the underlying problem is capitalist social relations, of which banks are a mere symptom/manifestation off – this constant focus on banks deflects from what the real underlying problems in the way our society is organised are
Respectfully, we’re going to have to agree to differ
When you don’t comply with the moderation policy of this blog `i am not inclined to debate
In the meantime I’m satisfied that, for example, Prof Richard Werner who invented QE, is happy with my analysis
Sorry is the moderation policy of this blog ‘I must agree with Richard at all times’?
Banks only held 4% of UK gilts on the eve of QE commencing in early 2009, so whatever uplift in gilt market values that has come around by QE (of which it’s impossible to actually split out), roughly 96% of that did not flow to commercial banks
That you’re not prepared to look at or discuss the evidence (from the bank of england’s own figures) and instead focus on shutting down the discussion doesn’t say much for your desire to actually discover what is going on around us – loosen up and take constructive criticism as it’s intended and we might all learn something
I’ve previously had a lot of respect for you and your work but your dogmatic response to something you have simply got wrong is somewhat bewildering
Many notable economists agree with my logic
You don’t
That does not make it wrong. It means you disagree
Being rude does not help
And not disclosing a real identity does offend the moderation policy