This is in the Guardian this afternoon:
In a world where the cult of austerity and balanced budgets dominate politics, it would be all too easy for sustainability funding to get lost. That, however, would be a disaster, not just for our long-term future but also for the current economic situation and government finances. Yet there is an option attracting increasing attention that might address all these issues simultaneously; the use of green quantitative easing (GQE).
The article is by me. Can I suggest taking a look?
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Why stop at printing money just for Green energy projects? If QE has no side-effects, as you suggest, we could get rid of all fossil fuel energy in the UK. We could also engage in a huge program of house building and infrastructure building. We could spend as much as we wanted on the NHS and schools, and the military could have its funding increased dramatically. Pensions could be much larger. So could foreign aid.
Where’s the catch?
Full employment is the catch
QE is neutral until full employment
Then it is not
What do you define as full employment?
When people have the jobs they want for the hours they want in the contractual type they want
We have 4 million or so now working short hours or not at all and in self employment or zero hours right now who want full time employment
We have a long way to go
That’s not a very useable definition of full employment – I’d like an incredibly well paid job with low hours and complete job security – but I don’t have one.
Economists use a percentage based description for full and under employment. On a similar basis can I ask the same question – what percentage unemployment and underemployment would be considered “full” employment??
Why is that more meaningful?
All it means data can be manipulated
Your employment definition is meaningless as it has no baseline. Of course everyone would like the jobs they want, for the hours they want, with the contractual type they want. You simply can’t measure it in any meaningful way.
Ignoring that fallacy for a moment, what would happen when everyone gets what you desire for them? People will simply want better terms…..till everyone is earning as much as Wayne Rooney.
And again, why stop there?
You’ve missed what is a fundamental flaw in your GQE argument. Even if this QE doesn’t affect inflation directly until you have full employment, full employment itself causes wage increases which will again drive inflation.
I have to also say that you don’t seem to grasp how QE works. It’s not “money out of thin air” as you are swapping long term liabilities (debt) for short term liabilities (cash). The net affect to the asset/liability statement is zero. What you are suggesting is that you can increase the asset side of the statement *without* creating more liabilities, and without any inflation side effects. QE doesn’t work by pouring “new” money into an economy. It works by lowering long term borrowing costs in the liability swap described above, which reduces the risk free rate of return – with the idea that M4 money velocity (and with it investment and demand) increases. You can argue it’s effectiveness, but it certainly isn’t what you are suggesting – which is money printing Zimbabwe style.
I am sorry: you are clearly an exponent of the ‘argument in extremis’
I long ago gave up arguing with those who pursue such futile discourse
And as for QE – I think it is Richard Werner and the BoE who would say you have very clearly missed the point. Fir example, the BoE explicitly calls it money printing. And if you do not realise it – that is exactly what private banks do – but I do very much doubt you do realise it
I think it would be wise of you to go and actually read a little about QE. In Prof Werner’s own words:
http://www.res.org.uk/view/art5jul13features.html
“Monetarists, such as Peter Morgan or Alan Meltzer, likewise argued that a lack of bank credit was not a problem and ‘quantitative easing’ in the form of credit creation was not needed. Instead, they argued, an expansion in bank reserves at the central bank would do the job. But massive reserve expansions failed to make any impact and due to stagnating bank credit, economic growth remained well below its potential for most of the following decade and a half.”
“I warned during the 1990s that fiscal expansion funded by bond issuance was likely to crowd out private demand, that the expansion of bank reserves would have no impact as idle reserves do not translate into bank credit growth when banks are risk-averse”
Most importantly:
“While my recommendations were not heeded, the label I used caught on. Critics from both the Keynesian and monetarist camps began to redefine QE as an expansion in bank reserves – despite the fact that I had been arguing that such a policy would not work. A new name for an old policy was only likely to cause confusion.”
The policy you are labelling “Green QE” is not QE – it is simply money printing, which is the most basic form of monetarism.
Richard Werner has endorsed Green QE
He is not of the opinion that simply buying gilts is QE
He thinks QE should replace bank created money to fund real economic activity = which is why he is now proposing local banks to support local economic activity
Green QE is another ay not to expand bank reserves but actually create that real economic activity
And sure, it is about money creation. But we need money in the system and banks are not creating it. So we have weak economies, low pay, and are now heading for the danger of deflation
Werner does support Green QE. Which is a bit odd really, given that it is pure monetarism, or printing money, which he attacks so much in the link I posted above.
Or suggests you have not understood him by reading a piece in isolation
I’ve read quite a few pieces now. He attacks pure monetarism in his mid 90’s stuff, then in the Green QE stuff put out in 2012 seems to have lost his aversion to monetarism.
As Keynes once said, when circumstances change wise men change their minds
Fools don’t, of course
What an interesting exchange. It’s amazing the extent to which basic Keynes has been forgotten.
I’m sorry but I can’t remember the source*, but I saw a piece recently which said that the generation who ran the war effort in WW2 discovered – by actually doing it in real life – that everything they’d been told in the 1930s about the nature of money was wrong, and that if you concentrated on getting real things right – the employment of people and equipment to produce output, you could just print the money you needed to lubricate the system.
It was only when that generation retired or died off that anyone would listen to the priests of the Chicago school religion.
*It may have been Piketty
green QE is based on that reality
Is there a practical successful model on which you and your Green QE are basing your ideas or are they entirely theoretical?
Theoretical except in the fact that this is how all money works
Are you opposed to innovation?
As opposed to the multiple examples of “bank-saving” QE working wonderfully well for the affected economies and societies as a whole? Conjured up on the back of a theoretical fag-packet, imposed by diktat and subject to debate only amongst the “elite”, of course.
No, but I do have issue with hubris. So you’re telling us that you and your associates have developed this theory (you acknowledge it is theoretical) that nobody has ever tried to put into practice before. And of course you do not wish to take it around the academic community because, well because. Do I have thay about right?
If the academic community want to engage with it they’re welcome
Richard Werner has
He has changed economics
The rest of the academic community shunned him
And the reason why? The academic community is now very heavily biased towards sustaining already developed ideas. That is what peer review does and the need to reference existing work does: new ideas are unwelcome
That’s why we changed tax from outside the tax and academic communities (you can’t deny it: the OECD says we did now) and we’ll do the same elsewhere
Ironman
I’ve been watching the effects of neo-liberal economic ‘theory’ since I left comprehensive school some 30 years ago.
As another dissident economist called Steve Keen (read ‘Debunking Economics) has pointed out, a lot of neo-lib stuff is pure theory – even idealism – consider for example the wisdom of markets making bubbles impossible for example or how packaging CDO’s up in tranches spreads the risk and reduces it. All part of the neo-lib narrative. To be frank, these theories have not worked. At all.
As the Queen asked – why did no economist see the crash coming (well Keen did, as well as Werner and a few others who were seen as cranks in the run up to 2008).
The crisis in economics is so serious that even students are questioning the validity of the curricula they are being taught and paying top dollar for at our best universities. Modern economics has become obsessed with trying to predict what will happen. In actual fact – like most real sciences – it can only really attempt to explain what it observes after the fact.
The neo-lib way has become orthodox – yet we now know it does not work. The crux of the crisis is that now, we don’t know what to do – well, the politicians don’t know what to do that’s for sure. Big finance wants things to remain the same.
At the moment we are locked into stasis because although we are told how the world works by neo-lib orthodoxy, there is cognitive dissonance caused by what we are actually experiencing. The neo-lib promises have simply not been realised for the majority (although a minority have done very well).
The only thing that can really break this stasis is to try something new and Richard’s ‘green’ QE is worth a punt.
I must agree, it is novel. Lending money directly to fund infrastructure.
But. But: It is better to give it to the banks isn’t it. Then they can use it to buy [worthless] assets, like more house-lending debt.
After all, they did that in the 2008 crash…and look where it got us. Oh, wait!
Guernsey in the early 19th century.
I may have been done in Canada with the Social Credit people in the 20th century but not sure of that.
Well, having read your reasoned and we’ll merited denunciation of the academic world (you’ll need to forgive my reluctance to use the word ‘community’) I must unreservedly withdraw my suggestion of hubris. There is no doubt your ideas will one day be lauded in every institution that presently derides yoy. Remember Richard, every visionary was first laughed at.
I wish I trusted the sincerity of your comment
But your last comment is true
I find ironman’s sarcastic tone utterly disgusting and redolent of the hubris he was inveighing against above. neo-liberalism is riding high at present laying waste to everything it touches and swinging us back to the 19th Century as described by Marx. people like Ironman have no historical nous.
Let’s remember the words of Roosevelt:
“Unhappy events…have re-taught us two simple truths about the liberty of a democratic people. This first truth is that the liberty of a democracy is not safe if the people tolerate the growth of private power to a point where it comes stronger than their democratic state itself. That in its essence is fascism — ownership of government by an individual, by a group.” (1938)
Fascism is corporatism
I think it’s time the Courageous State ran and hid behind the delete button again Richard. Mustn’t embarrass itself in front of its followers.
Your detailed description (unsupported by any evidence of course) of Richard Werner’s views on QE is so enlightening. Also surprising, given that on 5 January you declared unable to offer any comment on Richard Werner’s views on…QE as you hadn’t read that aspect. You called that “wise”.
Before you start claiming support, even from those “shunned” by their peers, would it not be wise to read up more fully?
I said he has said ported Green QE
He has
I commented on what I knew
I have no read everything Richard has written
You show yourself to be an inconsistent pedant
I see Tim Worstall was invoking belief in the ‘magic money tree’ in your Guardian article. I think ‘Ironman’ and other critics feel that finding one fault or controversial point in your thesis invalidates all the rest of what you say. They can then pretend ‘there is no alternative’ to their point of view and, ‘they are the people who know best’.
At the risk of repeating myself, Thomas Kuhn said that paradigm shifts occur when the ‘Old Guard’ retire or die off. New understandings will be resisted-espcially in election years. Green QE would help in so many ways.
Those who deny the magic money tree does not exist simply will not accept that cash is created by:
Dr Loan Account
Cr Current Account
That’s it
The magic money tree is just accounting
Richard:
Do you accept that Cash is simply a short term government liability?
No, because it never need be paid
Go and ask for your fiver to be paid and you’ll be given a fiver
How is that a liability?
Money gets value because it can be used in settlement of debt but is it short term government debt? No, because it is used to settle short term debt and so any such definition is circular
In which case money is something different: it may be money
So cash isn’t a liability? In that case, are you saying debt isn’t either? After all, the government can simply hand me new debt in exchange for old debt, just as they hand me new cash for old cash as in your example.
They do hand out new debt in exchange for old
That’s how the national debt rolls over
But the national debt is not money
Money cancels the national debt in QE
You haven’t answered the question: is debt a liability?
You can issue new debt to replace old debt, via the exchange medium of cash. So the two are exchange equivalent.
You then say debt is not money, but you can use money to cancel debt. Which is a ludicrous direct contradiction of yourself.
You are also quite wrong when you say QE can cancel debt. To cancel the debt you would have to print new money – via the monetarist printing press.
Debt is a liability: of course
You can substitute debt for debt
And debt can be bought and sold for cash
And money gets its value from the fact that it represents debt
But does that mean money is debt? Well yes, but if so of a unique form that can only be settled using itself. No other debt can be settled in that way
So money is a distinct form of debt if you wish
A distinct form only settled using itself and so best called money
But QE can and does cancel debt. It reverse the double entry of money creation. So it cancels debt. Money is however printed in the process – but money need not be repaid whereas there is at least a notion that government debt is
So the new debt – if you insist it is debt – is not repayable, carries no coupon and may be used as money, which debt is not
So sure QE creates money – I never said it did not
But it also cancels debt – because money is the only debt settled using itself
“A distinct form only settled using itself and so best called money”
This might be true when paying for groceries, but is categorically nonsense in the land of finance. If a financial house needs to deliver “money” for a margin call, for example, the can deliver cash or other high rated securities like government debt interchangeably.
Indeed, cash and highly rated government debt are treated identically at custody accounts. They are completely interchangeable.
You are also totally tying yourself in knots over QE and the accounting thereof. The only way in can CANCEL debt is via printing money – monetarism – which is what you are trying to do with Green QE, in effect not QE at all.
Let me explain the process of QE, step by step:
1. Government issues debt, receives cash from market. Balance sheet neutral.
2. BoE repurchases debt from market with cash created by accounting change on balance sheet. Balance sheet neutral (debt now asset of BoE, cash liability).
Debt then matures on BoE balance sheet. Three mechanisms exist to settle the transaction. Regardless of the mechanism, the bond redeems and the BoE is owed cash by government (otherwise it’s balance sheet would not be whole). The question is where the government finds this cash.
1. Cash to do this is funded by issuing a new bond. BoE balance sheet neutral (asset out, cash in), government has net issued debt.
2. Cash is found from existing government revenues. BoE balance sheet neutral, government issues no new debt but takes M0 money out of circulation, essentially reversing the original QE.
3. Cash is newly minted by government to redeem bond. BoE balance sheet is neutral, but government has printed new M0 money to repay debt.
What you are suggesting is option 3 above. Which is monetarism pure and simple. You can repay all the government debt at a stroke by printing new money to do so, but this is not what is typically described by QE, and is nor is it without consequence.
When have I ever said it is not printing money?
I am saying that Green QE spends that into the economy in a way QE does not
You are a very confused person who is wasting a lot of my time with nonsense, misreading and pedantry. And since I have not got time to waste I thank you for your contribution and this debate is closed
I’m afraid I think the only person who is confused is you. You might want to consider reading the very same BoE report you linked to above. Specifically on page 11 we have a lovely diagram showing the effect of QE on balance sheets, and the section below detailing misconceptions about QE. I quote:
“Why the extra reserves are not free money [for banks]”
Your version of “QE” is pure monetarism. Printing new cash and spending it. QE as currently employed by the BoE at the moment does not cancel debt, and nor does it create new “free” money out of thin air which can be used to build infrastructure.
For someone proposing this Green QE idea and claiming to be an economist and accountant, I am truly disturbed at the lack of basic understanding of economics, finance and accounting you show here – you can’t even get a basic asset/liability statement correct.
The BoE QE programme is new money
The BoE says it is
People like Adair Turner and Martin Wolf agree it is
And banks have certainly benefited from it being just that
I accept the evidence, the evidence of those who know what they are talking about, and not your misconceptions and failed dogma
The BoE says the QE program increases base money supply.
It does not make us more wealthy as a nation, because QE doesn’t affect the balance of the asset/liability statement. As such it can’t be used to pay down the national debt or go on an infrastructure spending binge – which you are suggesting can be done for free.
I ask again (though am less and less hopeful for a relevant answer). if what you say regarding QE can be done, with no cost, why hasn’t it?
You are wrong: it does pay down the national debt
Adair Turner would agree with me
QE debt is monetised
Wow Richard, what a tangent to shoot along!
“Dr Loan Account
Cr Current Account
That’s it
The magic money tree is just accounting”
That’s it? Really? We live in a era of free banking do we? I’m beginning to see why you dislike peer review so much.
No it is you who is being absurd
The Bank of England has confirmed I am exactly right with the above
And you want to disagree with them?
Feel free
I’m happy to be right – money is made out of thin air
If money is made out of thin air, are there are no negative consequences to doing so, why hasn’t it been done already?
I’m guessing you will avoid this question.
Make too much and you get inflation when there is full employment
But this is always the problem: all money is made this way
And every loan by a commercial bank is money made out of thin air
Don’t you realise that?
I see we are back to the full employment meme. You argued earlier though that full employment is when everyone has the job they want, at the pay they want with the conditions they want. Given that this description of full employment has no upper bound, I ask again: why has your version of QE not been utilised for massive spending on just about everything, given there would be no downside economically and massive upside for the country and the politicians in charge at the time?
Commercial banks don’t make MONEY out of thin air. They extend CREDIT – which can be created, though not out of thin air. Banking is about maturity transformation. You take short term funding from cash/money markets, and extend credit as a loan. M0 money supply doesn’t change by doing this, but M4 does.
Don’t you realise that?
You misrepresent my view of full employment
State created money has not been sued as I propose because for 35 years it has been said that the state is not compotent to back winners – even when it is clear most winners are state backed. That dogma has prevented beneficial action
Commercial banks do make money out of thin air. http://www.sciencedirect.com/science/article/pii/S1057521914001070 and see this http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf
In the modern economy, most money takes the form of bank
deposits. But how those bank deposits are created is often
misunderstood: the principal way is through commercial
banks making loans. Whenever a bank makes a loan, it
simultaneously creates a matching deposit in the
borrower’s bank account, thereby creating new money.
That’s the BoE confirming exactly what I am saying
Your theory of intermediation is completely false
You clearly haven’t read what I wrote, nor understand this difference between credit and money.
As Richard Werner also says, banks create CREDIT, not money. The BoE piece looks like it was written to appeal to the less well informed, given they also interchangeably use money and credit, though they do differentiate between broad money (mostly credit) and base money.
I can’t quite tell, but you seem to believe that banks creating “money” is also creating new assets (in the form of money/cash) when in reality a loan is asset/liability neutral for both the bank and the borrower. The bank can extend this credit by borrowing from other sources (money markets, BoE window etc) and the amount they can ultimately lend is constrained by a combination of interest rates, cash management by the central bank and regulatory capital requirements.
The bank makes it’s profit by charging a spread over it’s risk free rate of interest to the borrower, the borrower benefits by investing/purchasing something with a rate of return higher than his cost of borrowing.
Velocity of money increases through credit, broad money supply increases, but there is no intrinsic net creation of value.
This is pretty basic economics. If I lend you money, you aren’t any richer. You have more money in your pocket, potentially to buy something with, but you still owe me that money. For someone professing to be an economics expert, you don’t seem very well informed of A-level economics.
I spent lunch time teaching A level economics students
They sure as heck did not understand money
But nor do you
As I say, the debate is closed: I have made my point and you very clearly still think banks are intermediaries from the comments made above which shows you have not the first idea what Werner and the BoE were saying about money creation – on which issue the BoE view accords with mine and resoundingly rejects your view above which is quite consistent with economics text books, which the BoE go out of their way to stress are wrong
I suggest you read, a lot, before calling again
If you haven’t you will be deleted
I pity those A-level students then…
You seem to misunderstand credit and cash – and view credit creation (which banks can do out of “thin air” within limits) to asset or value creation, when it is not.
You then take this “money out of thin air” idea, apply it to government using QE (incorrectly) and then say we can use this process to create money to pay for physical assets ad infinitum.
As I say, your basic understanding of finance lets you down, but nor can you answer the simple logical question – which you keep studiously avoiding – if this process was so easy, why has it not been done before to build infrastructure or cancel debt? Answer me that simple question, please do!
I have answered this question in a blog this morning
A few quotes to assuage the wrathful incomprehension of Ironman and PCC:
Reginald McKenna (ex-chancellor 1928): “I’m afraid that the ordinary citizen will not like to be told that the Banks or the Bank of England can create and destroy money.”
J K Galbraith: ” The process by which money is created is so simple the mind is repelled.”
Mervyn King: “Of all the ways of organising banking, the worst is the one we have today.”
Not the way you’ve described it, not at all. I had thought you might have rushed your comment and missed big pieces. It seems though you are happy to leave “That’s it” as it is. Oh dear oh dear.
Tell me what there is to add
The description is technically complete
A bank loan is nothing but an amount, say £1000, written in both the asset and liability columns and backed only by the borrowers and the banks promise to pay. In other words, bank loans, or 97% of all money, is simply created out of nothing and is effectively backed by nothing but fresh air.
Well, for a start you can acknowledge that you’re now talking about a commercial bank advancing a loan to a customer; not a central bank. Next you can look at what happens when the loan is drawn down. Because so far nothing has happened.
There is no difference in the money creation process
Yes, once the customer spends the loan money, the bank has to find that money, but as deposits and withdrawals are coming in all the time, the difference is usually netted out.
Banks that have small balances to make up can borrow on the interbank market or from the central bank.
As regsrds QE, yes – money (created from nothing or simply printed up, is simply swapped for a bond that is worth the same amount. The difference here is, rather than money going going towards speculation, as most of it does, it will be used in the real economy for much-needed development.
And inflation is the last thing we should be worried about. Inflation is often a sign of a economy that is moving in the right direction.
Would you like to give us the name of the school that allowed you to pass on your ignorance to 6th formers?
PAC has it exactly right. The Green QE group is fatally undermined by the shocking ignorance of its biggest celebrity. And of course your intellectual cowardice will ensure you now go straight to the delete button again. Your are a charlatan Richard.
No, I won’t share the school’s name with someone who writes abusive comments
As for your other comments, I note you application to be deleted again and will be happy to oblige. Those who can only abuse really don’t deserve to appear here