The FT posted this comment yesterday and I missed it at the time:
Labour's new shadow chancellor has got at least one thing right. Amid the brickbats thrown at John McDonnell, there is a nagging failure to acknowledge the validity of one part of his critique of the money-creation programmes of the four leading central banks. Quantitative easing , as this policy is known, has bailed out bonus-happy banks and made the rich richer.
The article concluded:
Mr McDonnell and Jeremy Corbyn, the new Labour leader, advocate a second approach: targeting QE at infrastructure projects. The central bank would buy bonds direct from the Treasury on the understanding that the funds would be used to improve housing and transport infrastructure. The timing is flawed; the Bank of England deems further QE unnecessary, and any large money creation now would risk stoking inflation. But if the idea were kept as something to implement the next time the country faces a financial crisis, it would carry quite a lot of respectability.
Some object that creating money to spend on infrastructure would undermine the central bank's independence by forcing it to buy direct from the Treasury. Yet monetary policy has already extended well beyond its technocratic bounds into the realms of wealth distribution. QE had clear wealth effects, which could have been offset by fiscal measures. All political parties should acknowledge this. So should those of us who want free markets to retain their legitimacy.
For the record, the timing issue is not one at all: no one is suggesting using it unless there is a downturn.
But what is really interesting is the autjor of this piece:
The writer [Paul Marshall] is chairman of Marshall Wace, a London-based hedge fund
That does make this interesting.
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“The central bank would buy bonds direct from the Treasury..”
I thought it was from a new national investment bank? Presumably at arms-length from the Treasury?
BoE is already authorised to buy non-gilts
Need not just but Tresury gilts now
So PQE is already authorised
Richard,
Heard your piece on Jeremy Vine. I thought you did a good job.
When people ask you about “printing money”, there is something more you could add – that all money is printed, that all money has come from nothing. PQE just does this in a different way.
Kind Regards
Agreed
I’m not even sure it’s that different is it? In the first instance all money has to be created by either printing it or editing the digits in a computer.
Once it exists, then it can be “borrowed back”, so to speak, by swapping them for gilts – which also have to be ‘printed’. Gilts can also be regarded as just another form of money. An IOU with some interest payments built in.
So, the question of whether govts should engage in PQE or more conventional ‘borrowing’ really depends on how they wish to influence longer term interest rates via gilt issue. PQE should lower them.
This could possible have an effect on the exchange rate. There may be fewer buyers of gilts if the yield falls. But would that be a bad thing? The trade deficit is a bit of a worry for some.
So the author obviously likes to think we are actually in ‘recovery’ at the moment? It seems to be the old adage: “if you repeat a lie often enough, people will believe it.
Employment is down, manufacturing is down and GDP has hardly moved. Investment is largely non-existent. We are far from recovery.
……and of course, based on the latest ONS figures, productivity is so poor that only the Japanese are keeping the UK off the bottom spot. Italy, yes Italy, are more productive than the UK as are those considered by the Eton Pig Fanciers Association as the European basket case, the French.
Recovery? Post truth politics. Don’t you just love it.
GDP higher than before crash. Unemployment at levels before crash.
(Mr. Murphy, I’m sure you’ll delete this, but you know it’s true)
As Mark Carney said thus week, great lie number 1 “It is different this time”
My point, so whaT?
It took the slowest recovery since 1720 to get this far
And it’s about to topple over again
Oh please Mr Appleseed! You cannot be serious! Look at the planned cuts Osbourne is imposing (that all strip spending power from the economy) and watch things go down the toilet again.
Employment and GDP may be going up but I assure you the long-term trends for these indicators are still too low.
Instead of feeding on Tory propaganda, please just try to find out for yourself.
My belief is that Osbourne & Co are hurting us on purpose because in downturns, certain types of people in the City can hoover up assets cheaply.
You can also see this logic being applied to the NHS and other public services: starve it of cash, get it to under perform and then manufacture consent to bring the private sector in. Oh and BTW, sell the assets well below their value.
@ Mr Appleseed,
Is it that GDP has increased since 2008 or GDP per capita?
I’m so glad see you say that. The recovery delusion is becoming quite scary. Its almost like a form of mental illness.
The persistent inflation (deflation) figure alone is enough to give lie to the suggestion.
It also treats the people in the more depressed areas (with the higher unemployment and the boarded-up shop fronts) with contempt – like they are invisible, or somehow don’t exist.
Dear Richard
I am in agreement with your policy of QE for the people. However it appears that you may “instruct” the Bank of England to create money, when it should be free from political influence. This allows critics to say the policy would lead to inflation, and it would be “bad for the markets”.
I am a strong supporter of Positive Money. 97% of money is now created when commercial banks make loans, and money is taken out of the economy as existing debts are repaid. When existing loans are repaid faster than new loans are created, or debt is written off, we get a reduction in the total supply of money (as measured by M4) and usually a recession. This is why the Bank of England did QE after 2008, mainly to repair commercial banks and help wealthy investors. The best approach would be for the Bank of England to create Sovereign money at the same rate that existing debts are repaid so the money supply does not increase and we do not get inflation. This money could then be spent by the government on infrastructure for example, or tax credits. This would reduce the amount of public and private debt, reduce the need for tax because less debt interest to pay, and enable existing debts to be repaid more easily. It would also be important to restrain commercial bank lending so they do not use the new Sovereign money as a basis for further credit expansion.
It would be even better if ALL money was created free of debt and interest, and free from political influence, by the Bank of England, and commercial banks could only lend existing money. However this is wrongly seen by some commentators as “restricting credit so causing a recession”. This need not be the case because the Bank of England could create as much money as required (or not) each month to keep the money supply stable, so we do not get inflation or deflation.
I am I hope you can adjust your policy so the Bank of England can create Sovereign money in the way I describe, free from political influence and at the level existing debt is paid back to the banks, because it will be then be very much more difficult for the main media commentators to criticise it. The main media fail to mention that the commercial banks tripled the money supply M4 between 1997 and 2008, along with M4 lending and house prices, so there was not just a problem with increasing money supply and house price inflation, but where the new money was allocated.
Thank you for your time and interest.
Simon Davies
The PM approach assumes there is something called money
There is one problem: there is not
All money is debt
I am afraid PM just got this wrong
I dont agree that all money has to be debt, which implies that something has to be repaid. Commercial bank issued money is certainly debt money that needs to be repaid. I get very tired of the arguments between the MMT people and Positive Money, when really we must agree on a common approach if we are ever going to get a fairer system of money for the future that is not dominated by banking interests.
But all money is debt….
Depends what you mean by debt Richard. The notes in my pocket give me a claim on goods and services now or in the future, so in that sense there is a debt under some definitions, but this is very different from me borrowing on my credit card or taking out a mortgage from a commercial bank, where I will then have a requirement in the near future to make repayments plus interest. Electronic money could easily be issued by the Bank of England in the same way that they issue physical notes, without any obligation for repayment.
PQE, for example
@ Simon,
Yes Positive Money has it all wrong. The fact that 97% of money is by commercial bank issue is neither here nor there. The banks could close down their internet banking sites and force their customers to go back to a cash and cheque economy if they wished. It would make no real difference apart from the loss of the convenience we are used to.
If we all received our pay packets in cash as I remember we used to, we would remove the bank’s liabilities on a 1:1 basis. Think of an economy where everyone uses cash but the bank notes become dirty and a health hazard. Like they can be in some third world countries. So the private banks offer to swap the dirty state issued banknotes for nice clean notes of their own issue. Pretty soon we could have 97% of the money in the form of new clean private bank notes too. Would it make any difference to the workings of the economy? No, of course not.
Banks aren’t allowed to do this in England but they are allowed to create money in digital form and that’s functionally equivalent to privately issued banknotes. This is all that’s happened.
Just to clarify (I’m not the same Simon by the way but have also supported Positive Money Campaign)
isn’t the main difference between MMT and PM as follows
1) Only the Government creates net assets by money issuance
2) Bank loans are backed by collateral so don’t create net assets and are therefore not real money creation although they have a big effect on the direction of the economy such as unproductive lending/asset bubbles.
3) Doesn’t confusion arise when we say ‘money is debt’ because PM is distinguishing between:
a) Money that is issued without collateral (i.e debt free at issuance-eg a benefit payment)
b)Money as loan issued by banks
4) wouldn’t a loan issued by a bank, spent and then cancelled by a debt relief order by debt free money issuance? Isn’t the keyword ‘issuance’ here?
Part of the problem is the linguistic issue which means people are at loggerheads for often no reason other than differently defined terms.
I also get confused over this!
You fairly get confused
I think you are close to the truth
I confess I don’t see the logic of your point 4
Simon,
I would say one of the key differences between MMT and PM is on the question of so-called debt-free money. The idea of sectoral balances, with money counted as debt to the issuer and an asset to the holder, is important to a correct understanding of the economy in the MMT view.
So, the government has to be in monetary debt, has to assume the monetary liabilities, for everyone else to be able to hold monetary assets. This is not quite the same as the so-called National Debt. The National debt (for historical reasons) doesn’t include the monetary base , for example, but I’d argue that it should.In the USA it doesn’t include the coinage (again, it should) so one possible work-around to their debt ceiling problem is to create trillion dollar coins.
The idea of debt does present political problems. It has connotations of failure, but mathematically it’s just a negative number. As a Physicist I don’t have a problem with imaginary numbers (based on the square roots of negative numbers – impossible eh?) so negative numbers are fine by me.
Not in my personal bank account though! As everything has to sum to zero it’s either me or the government that has to be in the negative, and I’d much prefer it to be them!
Simon,
One major problem with the “collateral” in your argument is that it is hugely & artificially inflated by the unproductive lending/asset-price bubbles that you referred to.
Asset-prices are bid higher with money borrowed against collateral values that were pushed up in a previous round of bidding. A self-fulfilling cycle that Minsky identified in his Financial Instability Hypothesis.
Collateral values don’t constrain lending. The lending increases asset-prices and (thereby) collateral values.
If we used PQE for EVERY bit of government financing (instead of the government borrowing money), it would over time reduce the government debt by two-thirds, I think.
(I know that is not what is currently meant by PQE, but it would still be worth having a look if using PQE instead of borrowing is a good alternative.)
Milton Friedman thought so – and it would have allowed the UK to have saved almost a trillion pounds in interest since 1951:
https://radicaleconomicthought.wordpress.com/2015/09/24/pqe-how-to-cut-the-uks-debt-by-two-thirds/
You can think that all financing by government is already PQE, using the concept that money is an IOU of a sovereign currency issuing government.
So, just as you or I have no use for our own IOUs, we rip them up when we get them back, neither has govt. All money collected by govt in the form of taxation or in bond sales is simply ripped up. Destroyed. When govt spends, it does so by issuing new IOUS. Issuing new money.
So what the point of taxation? It’s to prevent inflation.
And the point of selling gilts (bonds)? It’s to set longer term interest rates. Generally speaking: The more that are sold by auction, the lower their price, and the higher their yield. The higher their yield the higher are longer term interest rates.
So if Govt wants lower interest rates in the longer term it should just sell fewer gilts and still create as many new IOUs, as many new £, as it needs for spending purposes. Its spending decisions have to be such that they won’t produce too much inflation which would require them to raise taxes.
An alternative idea is to stop selling gilts completely and allow savers to put their money on account with the BoE < which is best considered as part of Treasury) and set the interest rate payable just as a high street bank would set the interest rate to us on our longer term savings.
“I promise to pay the bearer on demand” on notes is a hangover from when notes could be exchanged for gold, can now only be exchanged for an equivalent note (B of E website), or goods and services to the value of the note.
But it still says they are debt