There's a lot of debate on quantitative easing going on right now. It's being seen as the magic bullet that might revive the Eurozone.
It might. And it might not. QE was invented by Prof Richard Werner of my alma mater, Southampton University. The aim, as I see it, was threefold.
First it was to create money when private banks - to whom the task is usually devolved - will not. So it is about providing the liquidity that is essential if an economy is to function properly.
Second, it is about keeping interest rates low. This reinforces central bank policy and provides economic stimulus (it is hoped) because low interest rates should mean more consumer spending and higher investment by business, which along with net exporters and government activity are the drivers of an economy.
Third, QE effectively cancels debt. As Richard Werner has argued - using the case of debts issued in 1914 by the Bank of England to replace German assets on the balance sheets of UK banks that would have otherwise been insolvent - the Bank of England (or any other central bank) does not have to do anything to effectively achieve this cancellation - the process of doing nothing has that effect. But, and this is important, the effect could be (and ha been, although denied) that a government can spend without relying on tax revenue and still in effect balance its books by printing the money that the economy both wants and needs so creating the economic activity of which the economy is capable without in effect borrowing, so undermining the small minded argument that the government must pay with taxes for all it does. And this subversive element is what offends those who want to apply a 'household economy' approach to government funding so that its actions are constrained and its possibilities are limited.
The fear is, of course, inflation. And the evidence at present (and I accept, nothing lasts forever) is that this will not happen precisely because commercial banks are not producing money, which is why there is a need for QE in the first place.
I think QE is a powerful economic tool. Those who are deriding it as some sort of voodoo are showing they do not understand money creation, the macroeconomics of government funding or inflation come to that, let alone the relationship between central bank and Treasuries.
Equally, QE can be heavily abused. So far QE has been inflationary - but not in ways most people have perceived - because it has fuelled asset price inflation. That's the absurdly over-valued stock market, housing prices and was commodities until the US and Saudi decided to crash oil prices to spite Russia. So the benefit has gone to a very few.
But that need not be the case. This is a perversion of QE. QE need not be based solely on buying sovereign debt. It could be used to buy other debt to be sued for specific purposes - such as infrastructure and housing spending. There is absolutely no reason why not. Then it becomes what I Green QE - for which term I can claim some credit. It is not the case that QE must boost banking or create asset price inflation; it could just as easily create real economic activity, as good bank lending can also do.
But that depends on us having renewed confidence in the ability of governments to pick winners.
Winners like housing.
And transport infrastructure.
And ending PFI.
And creating green energy.
And investing in new technologies like tidal energy.
Things that all seem desperately unlikely to fail in other words.
A willingness to embrace Green QE will, I am confident, become a very clear political dividing line in due course around which debate will really flow. It is going to be one of the key questions on how we build the future we want.
It's why the voodoo commentary on QE now has also to be called out, because that is simply about denying real economic choice and opportunity, and that is very definitely wrong.
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You are spot on Richard. It is the ONLY solution to ridding us all of the un-necessary debt in the financial system: national debt directly and corporate/private debt indirectly. Money is the essential oil that allows economies to function and the fuel that drives them forward. It MUST be supplied debt-free in the appropriate volume by the state – with a fiscal brake to prevent electoral bribery! Too little causes over-whelming debt, recession and deflationary depression; too much causes inflation and monetary collapse. It’s the amount that’s important!
Early rounds of QE also I believe stopped panic amongst account holders when Gordon Brown got it going. There may have been severe social unrest had people not been able to get their money simply because the credit crunch just stopped the banking system dead.
However, later rounds of QE just seemed to help banks settle their own balances – it was like spreading out asphalt to re-tarmac a road without thinking about how deep some of the potholes were beforehand – and some of them were very deep indeed; in other words QE may have just replaced bank losses. And of course – the rich still got their money back and the financial sector still got its bonuses.
As long as a new way of delivering QE – including Green QE – is enacted I will always support it. But we must be wary of the fact that the same old QE will just make the rich even more richer and able to tip the scales in their favour even more than it already has done.
BTW – I’d rather see a debt jubilee as put forward by economist Steve Keen – either with or without the sort of QE you talk of Richard.
Not only will this actually get rid of any debt but also the notion that we are in debt which is used by the Tories et al to constantly scare the population to death about the alternatives.
A debt write off will also signify to the banks that their stupid lending policies will have to be reformed because we will not bail them out again. I did actually find myself agreeing with American republicans who argued that those banks that had over-leveraged themselves should have been allowed to fail.
And the CEO’s of those banks should have gone to jail.
These actions would be in my opinion be the correct exercise of government power.
I am not keen on debt jubilees
Why favour those only in debt?
Why promote consumption when we need investment?
Both are illogical
Well, I said that a jubilee could happen with or without QE so if it is with that’s fine with me. Those in debt can be released from it to spend again perhaps using the correct incentives (for Green technology for example)?
Having just watched the Princes of the Yen video my admiration for Richard Werner is immense. I have heard him speak a couple of times at LVT events and didn’t reckon him then. I think I must have been asleep. I heard him mentioned on the telly a while back as starting up a community bank in So’ton.
He is starting a bank
here’s Werner’s view of what he means by QE (he coined the term in Japanese(!) and then claimed it was both misinterpreted and miss-applied):
“I suggested in numerous publications that the central bank purchase non-performing assets from the banks to clean up their balance sheets, that the successful system of ‘guidance’ of bank credit should be re-introduced, that capital adequacy rules should be loosened not tightened, and that the government could kick-start bank credit creation and thus trigger a rapid recovery by stopping the issuance of bonds and instead entering into loan contracts with the commercial banks ”
I personally can’t get my head around this but it appears significantly different to what happened!
Massively different
Richard is familiar with my Green QE ideas
“The central bank should purchase non – performing assets to clean their balance sheets… that capital adequacy rules should be loosened; not tightened”.
Does that meet with your approval Richard?
Oh just delete, do not allow yourself to be undressed in public.
I have not proposed that
So I have no need to respond to it
The first lesson of economics is that there is no free lunch. What are the costs of Green QE?
About thee same as QE = nothing
That’s because money is made out if thin air
And the resources to be used are idle right now
Firstly, obviously, not all the resources are idle right now. Just to give one example, there is a shortage of bricks right now. If you want to build something those bricks being used will either delay or stop another project. Such opportunity costs would extend all the way through any project because capital is non homogeneous and always scarce. And secondly, even if resources are idle that doesn’t mean there is not a cost to using them, since we always want available resources on standby and available. Idleness is an important economic concept.
Bricks are not the only building medium
And maybe we need to move on
But I am aware idleness is an important concept. It is the main tool to keep wages low. No doubt that explains your desire for it
Obviously bricks are not the only thing. But if you looked at any project you would see scarce resources with competing demands. Project managers, engineers, etc etc. Green QE must take such resources from competing projects.
So we create demand for more qualified people
Great!
We might import a few for a while
@James g
What I think you mean is that some excess capital is necessary, like school places and hospital beds. Capital requires maintenance and replacement. Idleness of labour and usable/productive land represents a permanent loss to production.
Correct
So you have no opinion? You’re usually so very quick on your blog to shoot down opinions you think are stupid. So strange you don’t wish to comment on this. Actually, not strange at all. “The Courageous State” is irony.
It’s an aspect to Richard’s work to which I have not given much thought
So I did not comment
I’d call that wise
But I am aware that you would not credit me with that quality
I’d call that weasel! You son’t need to give much thought to most comments before you are screaming “neoliberal” or “fascist”. You go to conferences and tweet your instant opinions throughout; yet here…
It is clear that his ideas on QE directly support the shareholders and large depositors. And you don’t have an opinion on that?
What you say is not clear
And I have not read the original
So I have appropriately reserved comment
QE essentially swaps one form of credit for another. Modern money is undated Treasury credit (returnable in payment for taxation) which is created by the Central Bank as fiscal agent and annotated in a Memorandum account. The relationship between the Treasury and the Central Bank (where there is one – in Hong Kong there is none) is not – as is widely assumed – a debtor/creditor relationship.
Moreover, the relationship in respect of demand deposits – ie money we have in current accounts and which banks have in reserve accounts – is not a debtor/creditor relationship either, although term deposits and loans are accounts payable and receivable to and from private banks. In my analysis – and Richard, for whom I have the greatest respect, has not refuted this in our friendly correspondence – banks essentially act as fiscal sub agent for the Treasury in terms of money creation.
So where I differ from Richard is that in my view modern money is NOT destroyed when bank loans are repaid. Only the Central bank can destroy modern money, whether created publicly or privately.
But back to QE.
QE is an asset swap. It is a swap of undated Treasury credit (modern money) for dated Treasury credit – ie ‘stock’. Treasury loan stock (gilts being short for gilt-edged stock) is not and never has been ‘debt’. It is akin to Preference Shares in UK Incorporated. When the National Debt is ‘paid down’ then the country’s productive base (or the productive base of another country) is being liquidated.
This is the reality of national accounting: ‘National Debt’ is and always has been a monstrous lie.
The reality remains self evident in our language to this day: the ‘tax return’ was the accounting event when the stock portion of a split tally was physically returned to the Treasury’s Exchequer for cancellation against the tax obligation. The ‘Rate of Return’ is not (although it may be a fixed rate) a rate of interest on debt: it is simply the rate over time at which stock is returnable to the issuer, and of course the very name ‘stock’ derives from the creditor’s portion of the split tally stick accounting record. Note here that there were two types of tally – proof of value transfer (memorandum tally) and promise of value transfer (loan tally).
So back to green QE.
Yes indeed, local Treasury Branches (as was briefly the case in Alberta in the 30s and the US with President Lincoln’s ‘greenbacks’) may indeed spend necessary credit into existence, but could do so managed by banking service providers who are themselves under the supervision of a monetary authority.
Personally I think it’s completely possible (and I am prototyping this) for credit to be created directly ‘Peer to Peer’ and ‘Peer to Asset’ within suitable associative protocols, but that is another story.
Chris
We agree: banks operate under licence
The rest I am just too tired to think about but I think we are largely in agreement
Richard