Quantitative easing is the same process whether used to buy conventional government gilts and other financial assets (the process known as quantitative easing to date from which the main beneficiaries are the financial services sector) or the bonds issued by a national investment bank (People's Quantitative Easing) that uses its funding to create investment in the real economy. In either case the government creates money out of thin air (as all banks do every day, day in and day out whenever they agree to create a loan) and uses it to buy the debt created by the government or one of its entities.
In the US more than $4.5 trillion of quantitative easing purchases have taken place.
In Japan it is more than US$1 trillion.
In the UK £375 billion.
In the EU it will be more than €1 trillion.
And Yvette Cooper is sure it will all have to be repaid. Every penny of it, apparently. That is what she is saying of People's Quantitative Easing (the scale of which will be modest compared to the above) and implies the same must be true of conventional QE in that case.
Let me assure her then, none of these sums will ever be repaid.
And we have worldwide 0% inflation, or thereabouts despite the markets knowing that.
It is true there is some growth right now: the US looks a bit like the real thing. The UK looks like an extended housing bubble. The EU and Japan just dream of it.
All told though the consequence is that not only has no QE been repaid, but the chance it ever will be is remote, in the extreme. Because repaying it would mean that the deficits that have been funded by QE (because that is what it has done) would actually have to be paid for out of higher taxes or by all investment funds being directed to government bonds, and not to create new investment but just to reshape the Bank of England balance sheet. Both actions would have a profound impact on the economy: they would create a massively negative environment in which growth would become a distant memory, there would a shortage of government created money to underpin credit in the economy, and there would most likely be heavy deflation - exactly what QE was meant to prevent. No government of any persuasion is ever going to pursue such a policy: it would be economic suicide.
So let's be clear about three things:
a) QE has not created inflation, try as people might to suggest it has
b) QE has delivered modest growth, but not universally
c) QE will forever remain on central bank balance sheets, never to be unwound.
The chance that Yvette Cooper is right that People's Quantitative Easing would have to be repaid is so remote that no-one, anywhere, need ever worry about it. In fact, all they should worry about is that someone in such authority thinks it might be wise to even countenance such a thing. I am deeply baffled as to why she should. The harm from doing so would be enormous.
So shall we move on?
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“QE will forever remain on central bank balance sheets” – really?
Is it not the case that interest due on the gilts held by the BoE is currently not being paid? (Or equivalently being paid with the BoE remitting these payments back to the treasury?) Will not the same happen with maturity payments i.e. BoE will not request that the treasury make the maturity payments?
This will obviously make a hole in the BoE balance sheet, but I struggle to see what relevance the net asset position of the central bank has for the conduct of monetary policy anyway.
Interest is not in effect being paid
The assets are being replaced on maturity I.e, QE is ongoing
Regardless of interest being paid, it’s still interesting to claim that the bonds will constantly be replaced forever, and therefore that the balance sheet will never shrink. I think I agree, but I’m still trying to fill in the logic.
What would be the impact if, instead of replacing the assets on maturity, some of the money was invested in PQE? I believe that there are significant trenches (£10b to £20B) maturing from time to time. Would this be a way to:-
a) Make PQE easier to understand for reactionaries such as Yvette Cooper
b) Prove PQE’s worth on a piecemeal basis.
I could see this as an effective way to make the argument clearer using specific real world examples. For example if say £20B was to mature on 31st Dec 2015, you could pose the question to Yvette and other doubters:- What should the BoE do on 31st Dec 2015? Should the BoE create £20B of money to buy gilts from financial institutions or should it create £20B of money to buy housing bonds to build 150,000 social homes?
Oddly, when reading the FT yesterday afternoon I had exactly the same thought
There is a blog coming later
Great minds and all that
Doh! I think I got that wrong!
“What should the BoE do on 31st Dec 2015? Should the BoE create £20B of money to buy gilts from financial institutions or should it create £20B of money to buy housing bonds to build 150,000 social homes?”
Should read-
What should the BoE do on 31st Dec 2015? Should the BoE reinvest the £20B back into gilts (by purchasing them from financial institutions) or should it use the £20B to buy housing bonds to build 150,000 social homes?
“This will obviously make a hole in the BoE balance sheet”
Well no it doesn’t. If you look at the BoE’s balance sheet it balances exactly. Its annual report lists assets of £408.492 billion and liabilities of exactly the same amount. Yes, the bank has a liability of the cash it has issued. It also has an asset in the gilts it holds. It could sell them to private buyers if it wished and was truly independent. (But of course we know it isn’t so it won’t do that)
The question of QE generally illustrates that we all need to have a good think about what money is. It’s all just an IOU of govt. Gilts are IOUs with some small level of interest attached issued by Treasury. Pounds (cash) are IOUs with traditionally no interest attached (although the BoE does now pay some small amount on reserve accounts).
So in it’s narrowest sense QE is just an asset swap. In a wider sense it’s the central bank providing more easily spendable IOUs (cash) to Treasury in exchange for slightly less spendable IOUs (gilts).
Regarding UK treasury instruments owned by the BoE after QE — is it expected that the payments due on these will be made?
Presumably a hypothetical National Investment Bank that had issued bonds bought by the BoE under PQE would also be expected to make payments on those to the BoE?
I imagine that the NIB would lend to the government, allowing investment in projects. In future in economic good times, the government would use (and maybe increase) taxation to damp appropriate things down and pay back the NIB. The NIB could then pay back the BoE on the bond’s coupons.
Presumably the NIB would have the option to roll over it’s debt to the BoE.
… there definitely seems to be a need for significant consideration with choosing quantities of investment and appropriate moments to pay back. Still — this is stuff that happens now anyway, and probably in an ad-hoc and less controllable way, albeit, one regulated by the mythical “invisible hand”.
Effectively the interest has been cancelled
The government has saved £50+ billion
Who sys there is no magic money tree?
There is a money tree, it is called metaphorically now the printing press.
But it is definitely not magic. The passing of accounting entries cannot make every person in the UK £1000 better off in real terms. The cost is still being paid but is out of sight. The mistake is to assume that which is unseen does not exist.
But the cost of not printing money is the resources – that’s people – who cannot work as a result
Do you want us to choose unemployment to pander to your money paranoia?
Thank you, thank you, thank you. And thank you. And yes to the final point.
Richard, I totally agree, but I think you could distil this a little further into a shorter rebuttal of Cooper’s claims re PQE, and I think that would be worth doing to help counter her arguments. In politics short soundbites require concise rebuttals, otherwise the detail can get drowned out.
I would just query one point.. It seems to me that the way that QE has been implemented in the UK has fuelled speculation and asset bubbles, and in that sense, it may have been inflationary in some specific areas if not overall, such as in house prices. That’s not to say that PQE comes with an inflationary risk, used prudently I don’t believe it does, but I don’t think it can be said that QE has created no inflation.
First noted
Second agreed, often, on this blog
on the subject of making PQE easier to understand, could it be said that ‘vanilla’ QE has created a massive inbalance in who has all the cash (the 1% who hoard it in the form of shares, property, etc or squander it on hyper-cars, bling, etc), and that PQE is a way of redistributing some of that cash to ordinary people?
Don’t they just sell the bonds back to the market to cancel the QE cash.
That reverses the initial purchase.
As a neo-liberal wheeze it is quite staggering.
When do you think that cash might be available without causing economic harm?
Even John Redwood has suggested that we can “Cancel the debt as we owe it to ourselves, creating an accounting transaction to sort out the Bank of England balance sheet when this happens”
Extraordinary that someone as right wing as he is is happy to do a bit of creative accounting as long as there is now real public purpose to it! His comment is an admission that the scope for things is rather wider than neo-liberalism suggests -all gamesmanship. This is also an open admission that the BoE ‘independence’ is a pure chimera.
If I give you an IOU for a fiver.
Then I take the IOU off you by giving you a fiver.
What is the status of the IOU ?
The creative accounting is already being done by keeping the IOU alive.
Richard, here’s the response I got from one person (name withheld) on Facebook, regarding PQE and “helicopter money”, when I queried the correspondent’s equating of one with the other.
“For the reasons I stated. The original helicopter money was dropped into the laps of individuals to provide a short term consumer boom. PQE differs only in the respect of where the money goes, which is into infrastructure and so on. To coin a phrase, same arse, different cheek. The net effect is the same, pump newly created money into an economy and the economy keeps the same value, but the amount if money increases. That has the effect of decreasing the value of the money and increasing the cost of goods and services. In the Corbyn model this is supposed to be partially offset by increased productivity, which it will. The problem lies in whether that will be enough to counter currency devaluation. The answer is, we don’t know. What we do know is borrowing doesn’t have this effect. So, it is a safer option.”
I hardly think applying money to infrastructure need, as opposed to handing it over to individuals is “To coin a phrase, same arse, different cheek”.
And there’s the same old “monetarist” claim (just like early Thatcher and the money supply, where, in Neil Kinnock’s memorable phrase “there’s a greater correlation between the incidence of typhoid in Aberdeen, than between the money supply and inflation”) that this will lead to the devaluation of money, and thus to inflation.
I’d be interested in your response.
Andrew
In part my two blogs this morning are a direct response to what you posed when making this comment yesterday
At a functional financing level PQE and QE are very similar
BUT one (QE) is actually wholly ineffective monetary policy and PQE is effective fiscal policy that might also deliver the inflation that monetary policy has so spectacularly failed to supply
I agree, and that was the unstated intention by the `independent` BoE (and Treasury) from the outset.
Now, how to play that card for PQE by making it clear that PQE is as safe as QE!
Here is an excellent idea from Robert Reich, Professor of Public Policy at the University of California at Berkley of how to raise money / fund a citizens wage.
http://www.socialeurope.eu/2015/09/labor-day-2028/
Off topic, but thought you / Jeremy Corbyn might find it interesting
“Quantitative easing is the same process whether used to buy conventional government gilts and other financial assets (the process known as quantitative easing to date from which the main beneficiaries are the financial services sector) or the bonds issued by a national investment bank (People’s Quantitative Easing”
Sorry, Richard, you’ve lost me there. Surely, QE can be unwound, whereas your PQE cannot? With QE, the BoE can tighten (or loosen) the money supply by buying or selling those gilts to control inflation. With PQE, you can only reduce or increase inflation by raising or lowering taxes.
If I’ve missed something, please lighten my darkness. I am here to learn from you.
Any bond can be sold (although none of any sort ever will be) and since PQE is bond buying it could, of course, be unwound
Why do you think not?
Errr…well, to this bear of little economic brain:- your PQE seems to me to be simply printing money. And, I understand, money-printing = inflation. So, as a pensioner on a fixed income, how will your prescription help me?
$6.5 trillion is not enough QE to create inflation
Why do you think the financially identical tiny PQE will do what QE has failed to deliver when that has been its aim?
@Roger,
I’d just make the point that all money is “printed” -if we understand that term to include created in a computer or stamped from cheap metal. So we shouldn’t be discussing ‘if’ but ‘how much’. Too much spending (either govt or non-govt) = too much inflation. Too little = too much recession and unemployment.
Please see the evidence that this view is very largely just wrong published on the blog this morning
You are the slave of long defunct economic thinking
Richard, if I may try to make a counter argument.
You are espousing the inherent limitations of seeing economics at an aggregate level and not at the level at which it impacts ordinary people. Maybe a real example would help explain…
Let’s say Roger on his fixed income wants to repair his garden wall. He also wants to buy a new TV. He goes to buy bricks but there is increased demand because the local authority has received PQE money to build some houses. The bricks cost him more than they would have done had PQE not been launched. Now, at the same time, the Chinese factory lowers its prices of TVs, and Roger spends less than he would have done a year ago. When the boffins calculate the inflation rate they find that overall ‘prices have not increased’.
Now, is it a correct statement to say PQE hasn’t resulted in Roger paying more for the things he has bought?
Might I ask the glaringly obvious question, which is ‘so what’?
So what? I thought the job of economists was to explain the implication and impact of economic policies. If Roger has to pay more for bricks as a result, the so what is he has to pay more. So what if someone has to pay a bedroom tax following change of policy, so what if energy companies charge more. Etc.
Political economists definitely do ‘so what?’
@ James g,
You’re making the assumption that the supply of bricks is at its saturation point. In other words an increase in demand won’t increase the supply but it will increase the price.
That may be true, at times, when the economy is zipping along nicely but if that were the case we wouldn’t be advocating the need for PQE !
Richard, you appear to contradict yourself. You say that QE prevents deflation, but also that it has not caused inflation. Which is it, it can’t be both.
Or do you mean it has caused inflation, but not enough to push the inflation figure above 0%? You need to be clear.
Of itself it seems very largely inflation neutral
That has been my point
Please clarify. If it is neutral, how has it stopped deflation? It must be inflationary in that case.
You do realise you can’t assess the effect of one factor by looking at the aggregate result of many factors, right?
I have already done this
James g,
Anything that stimulates the economy and leads to extra spending has the potential to cause inflation. The Lawson credit boom of the late 80’s led to inflation hitting double figures for example.
It would help if QE was clearly defined. In its narrowest sense it’s just an asset swap. The BoE swaps cash for bonds. There’s no reason to think that to be inflationary. It just leads to an increased demand for bonds which reduces their yield and so reduces long term interest rates. In a wider sense its the central bank providing cash to the Treasury, by proxy, in exchange for bonds. When that cash is spent it is just as potentially inflationary as any other spending.
But we need that spending. Spending = Incomes. To the penny!
If I may respond to your points…
QE is not ‘just’ an asset swap. If I have an apple and you have a pear and we swap, the economy hasn’t changed except ownership. The effect of QE is more money in private hands. As prices are measured in miney, this has a real impact.
My question is has QE led to inflation? Not, does it have the potential. Richard I think, is pointing to the net aggregated rise in the price of a basket of goods to imply it has not. My point is that this is incorrect logic. QE may have been inflationary even if the inflation figure is minus. It seems this rather obvious point escapes people.
Further, spending does not equal income except nominally. If you and I spend our lives buying and selling each others existing possessions we are not generating an income for ourselves. Production generates an income in real terms. Which is why Says Law is important and why the focus on money obscures economic reality.
I will publish a blog in this issue soon…
@Jamesg,
I think your mistake is to take a too narrow view on the question of what money is. If you were to give me £10000 in my bank account to settle a debt, say, I’d be quite happy. If you said you didn’t have any money but offered me a car worth the same I’d be quite disgruntled -unless I actually wanted the car. I’d have the hassle of finding a buyer, doing all the paperwork for the transfer etc. That would be in effect a form of barter.
But if you were to offer me £10000 in government bonds I might think that a little unusual but I’d just pay them into my bank and they’d be instantly convertible to cash. Government spending and spending at a higher level in commerce, is often on the basis of bond transfers. Govt bonds are functionally the equivalent of cash. They are just IOUs with a bit of interest added. Cash has no added interest.
So does swapping cash for bonds, or vice versa create inflation? I’d say not. But creating the cash (say as a form of PQE) or creating bonds (as happens all the time) can be inflationary IF overdone.
Another mistake is to say that inflation is caused by ‘too much money chasing too few goods’ then forget all about the ‘too few goods’ side of the equation. If a little bit of PQE creates extra goods and services in the same proportion to the extra spending it generates then there’s no effect on inflation.
I agree that too much focus on money can obscure reality. The reality is that we all do have to live within our means. There are only so many people available to work in the factories, work in the schools, hospitals, on our transport system etc etc. We can’t have everything we might want. But, if there are unemployed resources (including people) then that must indicate we are living below our means. Mustn’t it?
as i understand it, QE causes inflation in the price of things that recipients of QE cash buy; so far that cash has remained in the upper echelons of society so we have seen inflation (and many would say bubbles) in the price of shares, London properties, art, hyper-cars, etc.
the main recipients of PQE would be the general public via infrastructure investment and so this would likely some cause inflation in the price of things ordinary people buy, but right now that would be no bad thing: many items are currently at risk of deflation (due to falling oil prices, China’s currency devaluation, etc), much of this new cash will end up back with the Gov. via taxes and so find it’s way to other areas (NHS, etc), Gov. debt’s will be deflated, etc. and if inflation did get too high, you can simply stop the PQE.
Broadly right
A blog is coming…
“… My point is that this is incorrect logic. QE may have been inflationary even if the inflation figure is minus. It seems this rather obvious point escapes people.” It doesn’t escape people, they think `so what` or `good` [on the basis that without QE there would have been deflation].
I agree that it’s hard to see the expansion in central bank balance sheets being unwound in the foreseeable future but that doesn’t mean that a further expansion will be justified in 2020. It will depend on economic and monetary conditions at that time.
This need not rule out PQE (BoE buying NIB bonds) even when monetary conditions do not warrant BoE balance sheet expansion. If necessary the BoE could offset the expansion implied by NIB bond purchase by selling back to the market some of the assets bought under conventional QE. In effect this would retrospectively convert standard QE into PQE.
Recognising this option is important. As long as the BoE balance sheet remains sizable, the case for BoE purchase of NIB bonds does not depend on short term monetary conditions. Instead it rests on the need for public investment and the reduced cost of enabling this through PQE. Fully offsetting NIB bond puchases would indeed ‘crowd out’ the private sector through downward pressure on existing asset values, which orthodox economics worries would reduce private investment. But the evidence of recent years is that conventional QE has done more to stimulate speculation and conspicuous consumption and I’m quite prepared to lose that to buiid homes and create jobs.
“Fully offsetting NIB bond puchases would indeed ‘crowd out’ the private sector through downward pressure on existing asset values”
Not really. It depends upon the level of animal spirits and exuberance. If there is an investment boom going on it will continue regardless of the level of term interest rates. Interest rates have to go up an awful long way before the brakes start to work, and then you start to damage other bits of the economy.
There’s not really any justification for doing things indirectly when you can do things directly instead. Spend the money, tax the money.
And there is huge debate about the effect of asset prices. Some argue high asset prices, and therefore lower yields, is suppressing investment. Some argue lower asset prices, and higher yields suppress investment. Nobody has a damn clue really about how the distribution, effect or direction of interest rate manipulation. It’s highly dynamic and uncertain.
Why this obsession with doing things in a complex manner when you can do it simply. Create the money when you want to stimulate. Destroy the money when you want to apply the brakes. All preferably via automatic stabiliser arrangements like ‘shovel ready projects’.
Yes I acknowledged that private spending could be ‘crowded out’ in certain circumstances but then disputed the orthodox assumption that this would mainly fall on private investment. I could have been more precise and restricted this rebuttal to productive investment. If using land for high density affordable housing ‘crowds out’ its availability for luxury accommodation, we should still proceed.
‘Create the money when you want to stimulate. Destroy the money when you want to apply the brakes.’ As I explained, PQE need not prevent us doing that, contrary to what Yvette Cooper and others claim.
Precisely
The point about QE of course is that it put the non-government sector in pretty much the same position as if the Gilts had not been issued in the first place (there’s a small amount of capitalising term premiums going on, but I don’t see that being very significant).
Therefore ‘unwinding’ QE is precisely the same process as ‘unwinding’ PQE – issue Gilts for reserves and put up your interest bill for no good reason.
Richard
Fears that QE would be inflationary do seem to have been disproved. By extension, this should work for PQE (GQE!) also. To the layman, there has to be SOME kind of downside to counterbalance the very obvious benefits , however. But if this is not so, and it really is a “win win” scenario, what natural limits are there? Is £100bn of QE (a) ten times better than £10bn, (b) better, but less than 10 times better, or (c) worse? What other factors drive the optimal QE figure for any economy?
The need is independent of finance
It is useful work
If there is no more useful work with people to do it then PQE is done