If you want to know the difference between quantitative easing and People's Quantitative Easing, and why they might be used, the few minutes spent watching Paul Mason's video on the subject may be well spent.
What may not be so well spent is the money printed to fund the quantitative easing programmes of the world. Maybe $5 trillion has been or is being committed to such programmes: £375 billion has been in the UK and €1 trillion is ongoing in the EU. But as Stephen D Williamson of the Federal Bank of St Louis (which is a major player on banking issues) has noted in a recent research paper. He says (amongst other things):
[T]here is no work, to my knowledge, that establishes a link from QE to the ultimate goals of the Fed inflation and real economic activity.
Which is pretty damning. As is:
Indeed, casual evidence suggests that QE has been ineffective in increasing inflation. For example, in spite of massive central bank asset purchases in the U.S., the Fed is currently falling short of its 2% inflation target. Further, Switzerland and Japan, which have balance sheets that are much larger than that of the U.S., relative to GDP, have been experiencing very low inflation or deflation.
In that case blow the theory that Williamson spends time discussing, at the level of the 'bleeding obvious' QE does not seem to be delivering.
It does seem likely that QE has had impact to me. These impacts are almost entirely in asset price inflation, whether of gilts, equities, housing, land more generally, but not now of commodities, where the impact looks to have been short lived. So, QE has inflated the parts of the economy where wealth divides already exist. But it has not delivered real economic activity or inflation although these were its goals.
What is more, we do not have inflation in the UK as yet, and are still suffering the slowest economic recovery ever, whilst I argue that the assumptions inherent in George Osborne's growth forecasts are so absurd we're not going to see his plans realised in his political lifetime.
So, we need another plan: a plan that injects real economic activity and money into the real economy. Tax cuts could do that, but are hard to reverse. They are also really hard to target on growth. Borrowing could do that but the cost is greater than bank base rate. People's QE is targeted and the cheapest money available in an era of very low bank rate (which will continue, whatever the hawks say). And that's why it is relevant, on the agenda, and will be needed.
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In one sense your argument that the BoE orginal QE programme cancelled out a substantial part of the government “deficit” is the equivalent of the jubilee cancellation of debt of ancient times. Effectively the QE cancelling out was of “hoarding,” that gilts debt money really being the abstract representation of “human effort” or rather that potential to use effort to transform resources into the goods and services we all need. So the BoE QE programme monetised or “jubilee-ised” gilts debt a silly work-around in NeoLibera terms if you understand your MMT. In the same way People’s QE deploying a National Investment Bank is a work-around to engage in much needed Keysnesian stimulus to overcome a “hoarding” and “debt-deleveraging” state of mind arising from the Great Recession’s twin causes, government surpluses and fraudulent house price bubbles.
We need to consider this apparently compelling argument for PQE in the context of what we know – or can be almost certain of. For example, in the absence of something totally unexpected happening, Jeremy Corbyn will be confirmed as the leader of the Labour Party on 12 Sep. and, to a considerable extent, the policies which he has advanced during his campaign (in particular, PQE) will become Labour Party policy. Again, in the absence of something totally unexpected happening, the next general election will not take place until May 2020 and there is every likelihood that George Osborne’s current economic policies will fail and modifications will be required. Richard has highlighted that these policies are based on assumptions and projections about future household, business and foreign purchaser behaviour that are simply unreal and unachievable.
The economic policies being pursued by other EU member states, in particular, those in the Euro Area, are based on assumptions and projections that are only marginally less unreal and unachievable. The slight difference is that Germany and the economies in its orbit have developed a capability to establish and maintain a trade surplus with its global, non-EU, trading partners. But this superior performance of their export sectors is being achieved by supressing and repressing the non-tradeable sectors in their economies and by extracting cross-subsidies from these sectors for the export sector. This is unsustainable in the medium to longer term.
However, these arrangements are politically favourable within the current electoral cycle for the centre-right hegemony that dominates the EU’s political landscape and for the corporate capitalists, the hedge and private equity fund operators and the wealthy individuals who have suborned these politicians. And, while his opponents struggle to conceal their aching to be suborned, Jeremy Corbyn has the potential to muster the democratic force to overthrow the peculiarly British manifestation of this centre-right hegemony. The opposition of the corporate capitalists, the hedge and private equity fund operators and wealthy individuals, of the armies of well-heeled advisors and lackeys they retain and of the politicians and ‘public servants’ they have suborned will be ferocious. He will need allies in other EU member-states. Unfortunately, the traditional centre-left parties there have been as suborned and as emasculated as Labour was prior to Jeremy Corbyn’s emergence. There is no sign, and little prospect, of the rejuvenation that is evident in Britain. Those outside and to the left of the traditional centre-left parties repel more voters than they attract.
I would dearly love to see a Corbyn-led Labour party change the political weather, but I fear that his policy platform is a curate’s egg and while containing much that is badly required it also includes elements that are dangerous and poisonous — and lacks other elements. It will require a mix of compelling, relevant and achievable policies and concerted effort to overcome the current cohesion of the greedy, the selfish, the ‘I’m alright, Jack’ merchants, the rent capturers and the abusers of economic power and their effective majority political representation in Parliament by the Tories (not to mention their media cheerleaders). I fear that his policy platform falls far short of what is required.
Part of me thinks that QE was to some extent necessary, or at least that at the height of the crisis it was right not to go all Austrian and allow the economy to sink and rise again all by itself. That it has been ineffective at producing some inflation doesn’t mean it didn’t prevent more deflation. Who knows?
However, in my mind it ultimately ended up as a welfare payment to the well off, those who own financial assets or property. Also to those whose careers were saved by underpinning the finance industry. It bugs me that this aspect is overlooked by those who complain most about welfare transfers to the poor.
Anyway, regardless, may I ask a simple, perhaps stupid, question? What exactly is the transmission mechanism of conventional QE?
The Bank creates a pound of new money. That pound is used to buy an existing gilt from a bank. The bank is supposed to lend that pound or buy a more risky asset. Asset Managers sell those riskier assets to the banks and buy more risky assets, whose prices are being driven up, and so on. Yes / no?
Furthermore, banks are hardwired to lend disproportionately to property.
As you are an accountant: What is the accounting entry at national level for the newly created pound? What is credited and what is debited? How does it appear on the national balance sheet?
Dr Asset
Cr cash
Dr cash
Cr bank reserves held with central bank
To me what is more telling are the entries in private banks’ books as banks need reserves in order to settle up with each other daily so the reserves extant is always positive. Also remember we are only guatanteed 80k of our bank deposits if the bank goes bust.
Govt sector
Cr Reserves account of private bank Currency.
Private bank
Dr Reserves asset. NB this is a currency asset
Cr Bank deposits. NB This is a private bank IOU
Business or household
Dr Bank deposit, NB This is a private bank IOU
If they issue a bond for the deficit
All the above would disappear except for a Gov liability for the bond and a bond asset for business or household which I would consider currency.
Not sure of the other side of the Gov books entry or the other side of the business or household entry. Some income and expenditure account I suppose but Gov liabilities will always = Net financial assets in non-gov.
Let me think about
After a long debate just ended I am not into double entry at this moment
As I understand PQE is just doing the first part without issuing the bond.
In other words PQE is just doing what all government soverign in their own currency do anyway.
QE is simply the reverse of the second part. The difference between QE and PQE is that the bank deposits end up with the former bondholder rather than advancing public purpose.
Was QE about encouraging more private bank lending or just an exercise to improve the private banks’ balance sheets? The latter I think because private banks do not lend reserves.
It was claimed to be about promoting lending
The evidence is it was not
Sorry to bang on but I might as well complete the entries.
Taxation is a total reverse of the first part.
As bank reserves are always positive, there is always some ‘printed money’ in the system i.e. not drained by tax or borrowing. There has to be otherwise the private banks could not function. They can’t settle up everyday using their own IOUs.
Most financial transactions take place using private bank IOUs that are created by bank lending. In the banks’s books the asset of loan and the liability of bank deposits (no currency involved) which is the major part of the money supply rises and falls with the level of loans outstanding. Any financial derivatives likewise. They net to zero which is why the source of Net financial Assets in GBP comes from one place and one place only. That is outstanding government liabilities. Currency. (Cash plus Reserves plus the national debt.)
Talking of plans, Richard, and linking that to Paul Mason’s excellent video on QE/PQE, George Monbiot’s article on Corbyn and Labour’s chances of winning the next election is an excellent read, not least for its critique of new Labour. As he notes:
‘Tony Blair won three elections, but in doing so he made future Labour victories less likely. By adopting conservative values, conservative framing and conservative language, he shifted the nation to the right, even when he pursued leftwing policies such as the minimum wage, tax credits and freedom of information. You can sustain policies without values for a while but then, like plants without soil, the movement wilts and dies.’
http://www.theguardian.com/commentisfree/2015/aug/18/jeremy-corbyn-rivals-chase-impossible-dream
This is, of course, a point you’ve raised and has been discussed on this blog for many years: unsurprisingly given values (and evidence) based policies/politics has been an underpinning feature of your work. But I have to say that I do have an issue with yet another commentator dismissing the idea of a Corbyn government in 2020 so easily. While I accept all of the arguments for the impact of boundary changes, recapturing the Scots vote, and so on, it seem to me that the argument proceeds from there on the assumption that the current Tory government will have the most magical, issue free and economically successful term in office that any government can possibly wish for.
This is, of course, nonsense. Leaving aside discussion of the shit that will hit the fan in the run-up to and – even more so – after the EU referendum, as you routinely point out, the economic assumptions on which Osborne’s economic policy is built are just plain daft. That means there’ll need to be a constant revision of economic policy as goals/outcomes are repeatedly missed and the economic recovery remains weak (in other words, by 2020 we’ll have had ten years of economic mismanagement by Tory governments of one form or another).
Again, leaving aside the potential for another banking/financial crisis given that we’re now heading back down the casino capitalism road, if we look across so many other policy areas we see major issues emerging. Given the lag between policy formulation, implementation and outcomes the previous government were lucky in largely avoiding having to deal with the impacts and consequences (both planned and unintended) of a raft of what were frequently very badly thought through policies. What’s happening within the NHS is the most obvious example, with housing policy also a shambles (e.g. fewer houses built last year than in the final year of the previous Labour government). But two stories at the weekend illustrate other much less reported but nonetheless highly problematic policy issues that are going to have to be dealt with. One relates to the fact that child mental health services are now overwhelmed. And the second to the soaring cost of student accommodation (just at the time the government abolishes the maintenance grant). To this we can add the brewing scandal of benefit sanctions which will now become evident thanks to the efforts of those people who have forced the DWP into a situation where it must report these in a more representative, meaningful way.
These are just illustrations of much wider problems, the scale and scope of which is far greater than most people appreciate, I think. Consequently, looking across a whole range of policy domains – from pensions to the environment, roads to rail – there are major issues emerging, almost all of which relate back to the policies of the previous, Tory led, government.
So, without a previous Labour government to blame for all the woes about to befall it we do need to factor in to any discussion of future governments – whether Corbyn led or not – that the honeymoon period for the current government will end very soon, and what follows is likely to be very messy.
Ivan
Agreed
I have a feeling I am going to be as boring as Danny Alexander in talking about the mess inherited from the previous government one day
Richard
From what I see and know of you, Richard, you’d never be as boring as Danny Alexander, even if you talked about these issue until the cows came home 🙂
Phew
They have destroyed our fantastic NHS and now they wish to Frack the hell out of us, sorry for being uncouth. But some little old ladies up hear have got their dander up!
Up here, see what happen to my grammar when I get mad, sorry if I am totally up the creek on this blog.
Richard
Seeing as you are sharing a stage with Bill Mitchell on Thursday 27 August, I’m sure you will want to read his superb (as usual) blog about PQE published online today.
http://bilbo.economicoutlook.net/blog/?p=31626
Keep up the good work.
Thanks
There’s a purple quantitative easing to the north of No Can Do……
There you have it – for me anyway – in one small sentence in Bill’s conclusion:
‘In fact, all spending — non-government or government — carries an inflation risk.’
This would also apply to the mortgage and credit card debt issued by the banks.
So why do ‘they’ keep banging on about PQE being inflationary whilst remaining quiet about the inflationary tendencies of credit and mortgages?
There can only be one reason: because the Banks want to be the dominant issuers of money (in the form of credit) in the economic system because debt is a fantastic income stream – especially for investors who could have paid decent wages for the firms they finance but choose instead to press for lower wages and then encourage people to go into debt to make up for the shortfall. The proper wages that could be paid are used as a loan pool instead. Could it be that simple? Maybe so. Either way it is a pretty sick way to distribute money in a supposedly modern society.
It’s nothing short of slavery.
If you spend £10 from a piggy bank it could generate inflation.
Just an observation really. Is there any difference between Green QE and People’s QE? We know that JC’s brother Piers is a prominent Climate Denialist. Does that feed through into JC’s policies at all?
That I know there is no difference between GQE and PQE
But please don’t judge a man by his brother
My brothers would certainly not appreciate being judged against me
And why should they?
I don’t know Richard.
The Logical Fallacy of Guilt by Association seems to be all the rage at the moment.
It looks like a way of keeping Jeremy from talking about the policies.
I have already been accused of being guilty of association and of being ‘a very dangerous man’ for knowing Jeremy Corbyn
It’s all very sad
Someone’s getting the wind up over Jeremy. They seem to be dredging up every Palestinian activist he might ever have shared a platform with to prove, by association, that he is antisemitic. Disgraceful smears on BBC news tonight.
This is what happens
The implication is clear: dialogue is apparently dangerous
Since, as a Quaker, I belong to a faith organisation that has often been the conduit for the most dangerous of conversations I find that very sad
Well, as a taxpayer, I am standing up and saying, No more. Every problem since 2009, ends up being dumped on taxpayers—banks gambling with derivatives –do they have to pay–lose, of course not. All bailouts are done to –you guessed it –taxpayers (remind me, what am I missing here? We are not responsible for the acts of others–or has the law been turned on its head? Every one of these so-called trade agreements have only one target to sue for any corporate cost of doing business—ie laws changed for environmental or reg changes to assist small businesses—sue taxpayers. That now includes CETA, TPP, TIPP, TTIP, TISA–ENOUGH ! See bilaterals.org
Future bank debts –all have put in ‘bailouts’, bail-ins, safe harbors making banking stupidity taxpayers fault….Biggest welfare recipients corporations –In Canada that means 695 billion dollars in deferred loans, grants, tax cuts, lower rates since the 70’s—-for what of any value in exchange –nothing…enough
Standard QE works, if it works at all, via the wealth effect. You remove from circulation income generating assets and replace them with non-income generating assets.
That causes a portfolio effect amongst all other income generating assets and the prices go up as people chase yield.
People feel richer and so borrow more and spend more.
But it is important to note that all monetary policy effects work by attempting to increase the level of private debt in the economy – even though that is highly dynamically unstable and our levels are already pretty massive.
Direct spending by government is more like equity in its nature and therefore isn’t as hard a taskmaster as private debt. By its nature it is less unstable and can absorb income variations much better than private debt.
The comparison with equity is vital, but hard to make. Most people do not get it
I have not succeeded in framing that one as yet
How about the missing entries in my double entry above ?
Cries out to me as Equity of the State held as an asset by the people.
Peter Drucker (for those who are old enough) said: “If you want something new, you have to stop doing something old”.
Now there are two threads to this discussion. The one is the continuing macro-speak occasionally embellished with accountant-speak about the need for something new, i.e. PQE. The other is captured in the anguished cries from margsview, Pilgrim Slight Return, Sylvia Dobson, Paul Hunt et al, who saying let’s stop doing some of this crap! These pleas, for some reason, are not responded to. Perhaps in the lofty heights of the economic empathy is, like oxygen at altitude, missing?
Let’s look at some of the please STOPs: The NHS is in a shocking state, especially morale. It is over-managed, over-governed, while under-staffed and very badly run. How do we stop this rout?
The real customers of the government are the big corporates, with subsidies, tax-breaks and now, unbelievably, being handed £32 billion of taxpayer assets through George’ privatisation lunacy. In the decommissioning of the North Sea the oil majors are whining about the impact of the costs on their ability to carry out exploration; but the taxpayer is picking up over half of that. And yet, in 2010, In 2010, the top four oil companies spent 60 percent of their profits on dividends and stock repurchases, and just 18 percent on exploration. In other words, the companies spent 3.3 times as much on dividends and stock buybacks as they did on exploration in 2010. That amounts to $18.5 billion.
We are being taken to the cleaners. How do we stop this?
Headlines like “Firm lays off 500 workers. Share price soars” are common currency. The hegemony of the hedge funds, banks who own utilities, and large shareholders is destroying sustainable companies and jobs. How do we stop this?
Let’s have some balance and a bit more thinking on how to prevent this vandalism. In the end, correction is much more costly that prevention, and this nation state is in great danger.
Agreed
Sorry, I am finite so cannot pick up everything: others can run this debate here though, if they wish
I accept all you say
Richard,
Thanks
Have a worthwhile meeting in Nottingham. Sorry I will not see you – which is probably a relief for you.
Thanks
And not sure why I would wish to miss you!