I wrote this article for Progress, the Labour think-tank, and I am told they have published it in their Labour Party conference programme:
People's QE' might, according to Ambrose Pritchard-Evans of the Daily Telegraph, be the most important idea that Jeremy Corbyn has put forward. He is not alone in saying so. Paul Krugman said pretty much the same thing in an op-ed in the New York Times recently.
So what is all the fuss about? As the creator of the version that Corbyn has endorsed let me explain.
Quantitative easing is the process where a central bank (in the United Kingdom, the Bank of England) buys bonds that have been issued by the government that owns it. The aim is threefold. First, it wants to provide liquidity in the form of new money to the economy when private banks are not lending enough to meet the need for money creation. Second, the aim is to create inflation when (as now) the economy stubbornly refuses to do so of its own free will and the curse of deflation hangs over us. Third, it hopes that because of changes in the way QE, at least in theory, changes financial asset portfolios that some new money will trickle into the real economy to stimulate growth.
There is one problem. The experience from about $6.5tn of money being spent on or committed to QE in the United States, Japan, the European Union and the UK is massively disappointing.
We have no inflation. The UK has had the slowest recovery from a recession since the South Sea Bubble in 1720. And the new money has only given rise to asset price inflation, whether it be stock markets, or commodities (which many think remain overpriced), buy-to-let or top-end housing in London. Income and wealth divides have increased. Real people have lost out. And the story is the same in the other economies that have used it.
What is worse, now QE has so obviously failed there is no economic weapon left to deal with next economic downturn, and few doubt that is on its way. As Martin Wolf argued recently, that will be the next big export from China.
‘People's QE' is that new weapon. What it suggests is that the government will in the next downturn have to invest directly in what Krugman calls ‘stuff' and which I call social housing, rural broadband, sustainable energy, new transport systems and much more.
All such investment could be coordinated through a National Investment Bank. It would issue the bonds to pay for this essentially fiscal stimulus. The Bank of England could buy them to keep cash supply going, the one success of QE to date. By happy coincidence, the cost of the resulting funding for investment would be the lowest possible at present.
So would it work? My answer is ‘Yes'. It could create inflation by creating demand for labour and so delivering real wage increases, which is what we need. Can that inflation be controlled? Of course it can; housebuilding can be stopped at the end of the street.
Will it deliver growth? Yes. Indeed, Standard and Poor's estimates the multiplier effect on infrastructure in the UK could be as high as £2.50 for each £1 spent within just three years. Tax recovered would give a payback on investment over the same timescale, near enough. We would have the infrastructure for the long term. That is why Pritchard-Evans says: ‘QE as we know it is dead. It is an urgent national imperative to craft a radically new form before the next crisis hits.' I agree. And it has taken Jeremy Corbyn to notice the fact.
I hope this lays to bed once and for all what I think PQE is: it is a tool to help beat recession and deliver real wages growth as a driver of inflation. Which is what we need. Whilst creating long-term assets for the UK.
I'll deal with the counter arguments in a subsequent blog.
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On the subject of PQE, Bill Mitchell destroys a recent article in the neo-liberal propaganda outlet ‘The Economist’ that attempted to ridicule PQE:
http://bilbo.economicoutlook.net/blog/?p=31954
As Bill notes (typos corrected…) “It reveals that the Economist is a tawdry little rag that feigns understanding but reveals ignorance.” and “It has always been a merchant of so-called free market myths and adopting the conservative, anti-government intervention line.”
An excellent analysis!.
Very interesting Richard. Today, Progress magazine (house organ so to speak, of the Progress organisation, and a Blairite shrine) has a thoughtful, but self-serving, editorial about Labour’s future.
“A chapter has closed. The era of New Labour is over. It is living history to some, but history nonetheless. A Next Left chapter must now be written for Labour.”
http://www.progressonline.org.uk/2015/09/24/into-the-unknown/
Together with Mandelson’s disingenuous intervention yesterday, suggesting a wait and see attitude to Corbyn, this indicates a change of approach to dealing with the 59.6% mandate.
I wonder what they will do with your contribution? Subsume it into a new Mandelson inspired mantra of “Next Left”?
PQE has broader implications as well. It recognises the true nature and potential of fiat money in a sovereign, independent, currency issuing state. It does so in a way that is quite historic and profound while still being cautious and measured.
It is an important first step in the inevitable shift that was bound to follow the onset of secular stagnation, effective deflation and the failure of regular QE.
Conventional thinking holds to the premise that neo-liberalism is still viable and just needs a bit of remedial adjustment. Time (and a hundred economic indicators) have left that notion in the cold. Conventional thinking implicitly regards money in the same way that it did when the Gold Standard applied and official reserve currencies held sway. PQE represents a long-awaited break from the baggage of the past.
I am pleased to see Pritchard-Evans’ contribution by the way. His insights are often good (as are Krugman’s) and, at this stage, it is the quality of the support you are receiving that really counts.
“Can that inflation be controlled? Of course it can; housebuilding can be stopped at the end of the street.”
Yes but then we would no longer be building the homes that are needed. PQE is not just for macroeconomic management but also for public investment and the NIB needs to be able to plan long-term not try to fine-tune demand. That’s why we need other tools to help manage inflation so that the investment programme can be sustained.
Yes Lyn,
But what does that actually suggest. I would have assumed that PQE was primarily a macroeconomic device and that increasing inflation was part of its purpose – but, that it achieved that purpose by increasing investment, production, income employment and (therefore)demand.
Having done that it would have generated an increase in tax reciepts – they could fund public investment. If need be, the inflation target could be reconsidered. It could be more like the Australian target of 2to3% or the 4% suggested by some US economists. But the idea of pursuing one program that is increasing inflation beyond your chosen target and then trying to offset that with another that suppresses inflation would be ill-advised.
The administration would be acting in conflict with itself – with one foot on the brake and the other on the accelerator. The current method for reducing inflation is an interest rate increase. Technically, given the methods involved, I’m not sure that a rate hike and a QE (or, OMF) program could actually co-exist, and even if they could, the result would probably give truth to the usually fallacious claim of “crowding out”.
PQE is a macroeconomic device, first and foremost because it is quantitative. Its qualitative features add to its strength. But the point remains.
If you want “other tools to manage inflation” your best choice is probably competition policy – see if you can get rid of some of those corporate monopoly / oligopoly mark-ups. That, nonetheless, would be microeconomic and it would have nothing to do with the NIB.
Public investment can be funded in a variety of ways and it is reasonable to expect that it should accelerate during a downturn. That’s the Keynesian legacy. The UK downturn is secular and deep enough to allow for a lot of construction well before inflation becomes a serious concern.
Marco, thanks for the reply. I agree with PQE’s macroeconomic potential but the inflationary risk has been criticised and needs to be addressed. One way is indeed to point to the weakness of inflationary pressures given the length and depth of the downturn but I also want to show that we could deal with those pressures when they arise.
For that, I don’t think Richard’s suggestion of switching a programme such as house building on and off suffices. The pace of public investment should certainly be adjusted for macroeconomic conditions but it’s hard to judge the precise short-term impact. I also want to keep NIB programmes running, even if that does ‘crowd out’ some private spending as we approach capacity, as those programmes address issues, such as affordable housing, which the private sector cannot.
You’re right to point to the limitations of current methods of managing inflation. One advantage of PQE should be cheaper public finance than deficits but that advantage would be dissipated if rising interest rates and QE unwinding result in long-term increases in funding costs. Growth will offset that by improving the public budget but we should also think about tools.
One option is to return to imposing reserve ratios on banks but at a high and permanent level. This would have fiscal advantages. The BoE could return to paying interest only on excess reserves and would not need to unwind QE by selling assets back to the market as it would need them on its balance sheet. Indeed, it would often wish to purchase more to expand the broad money supply, which would support PQE. Reserve ratios would also act directly as an inflationary brake.
More ideas please. I want to show opponents of PQE that we have a worked through proposal.
Why not insist money creation be purely under state control? No more phony bank ‘loans’ at all unless they have the money there to lend in the first place.
Because that is impossible
Debt is not only created by government relationships
Lyn,
I think that Richard does have a worked-through proposal. It may have one or two unresolved, peripheral areas but ample time to deal with them. As regards your reserve ratio idea. I believe your suggestion resembles the method used in some countries in the (Pre-neolib) era before financial deregulation.
In those days it was more effective because the savings banks’ lending was restricted to their deposit base (‘asset management’). De-regulation allowed for the additional ability to borrow short and lend long (‘liability management’). At that point the reserve ratio requirements had become less of a constraint and the central banks moved on to different methods.
Either way, I would suggest that counter-cyclical budgeting is what it is and inflation is always going to be the constraint upon expansionary fiscal policy. That still allows some room for progress. Its not a death sentence, its just a limitation.
You can borrow money on the markets if it’s a time like now. We could even issue financial products investing in social housing if we wanted and sell them to pensions or citizens. It might even be better than buy to let, how nice would that be.
Now
Hang on folks, what do you mean by “now”, “a time like now”? UK inflation is 0% (no, sorry 0.1!) and has stubbornly been there, or below there, for a very long time – despite the presence of regular QE.
The scope for PQE may be constrained by inflation. It should not be constrained by fake, Orwellian-style stories about some alleged “recovery”. There should be plenty of scope for PQE if its a time like now.
We do have an economic weapon as yet untried in what we refer to as our civilisation, that of jubilee. Civilisations before ours carried them out regularly, we are, I understand, unique in history in that we don’t. I don’t know if any serious attempt’s even been made to study how it might be implemented and what effects it would have. It’s available though. People forget these things and they shouldn’t.
An effective debt jubilee is probably inevitable in some form or another.
Imagine, for example, that another Lehmann-style collapse occurs only this time none of the banks or creditors gets bailed-out. The shareholders take the full haircut. The state guarantees the depositors and the mortgagors (indebted businesses and households)walk free, their contracts effectively nullified (no jackass foreclosures).
There, in effect, is a jubilee.
My description is simplistic. A similar but mild & more detailed version is offered by (believe it or not) Niall Ferguson, who can be stupidly conservative but, in 2009 outlined a viable ‘restructuring’ scenario.
http://www.theaustralian.com.au/news/the-great-repression/story-e6frg6n6-1111118987504
Good to know but what’s actually been prepared for in legislation is a bail-IN, where we the ordinary depositor are the ones to visit the barber’s. I have links for this somewhere but, you know, Friday night beckons… 🙂
Bill,
I am finding this “Bail-in” scenario to be a little too hard to imagine. Its just too stupid – even for the stupidest among Tories and Neo-liberals.
Any hint of public awareness of such an alleged scheme would trigger a self-defeating, self-fulfilling, system-destroying, nation-wide bank run of historic proportions.
http://webofdebt.wordpress.com/2013/07/05/depositors-beware-bail-in-is-now-official-eu-policy/ and http://webofdebt.wordpress.com/2013/07/05/depositors-beware-bail-in-is-now-official-eu-policy/ These are what I have to hand. Eye-opening, I think 🙂 We’re EU and we’re G20 so it looks like we’re up for this whichever way you look at it.
OK Bill,
It appears that your source semi-insinuates but does not actually say that there is draft legislation to suggest that depositors will bear the brunt of bank failures. Your source’s sources confirm that their is legislation to ensure that shareholders and creditors take a bigger hit. That’s the ‘bail-in’ and fair enough.
Beyond that there were issues with uninsured (larger) deposits in Iceland and Cyprus. Foreign holders of larger deposits in Iceland had to wait because there was no money at a time of systemic collapse. In Cyprus their were concerns that the banking system was several times larger than the economy and that the big foreign depositors were mostly Russian money launderers.
There are 2 points of exception here. One is a uniquely Eurozone issue where deposit insurance is required because the stupid Maastricht treaty won’t allow the ECB to act as lender of last resort – not even for depositors (my simplified version but, more or less true).
The 2nd point concerns foreign currency deposits. The Central Bank in most countries is free to guarantee deposits – which they can easily cover in the currency of their own issue – foreign currencies are another matter and not one that concerns the vast majority of depositors.
To sum up there is no threat to regular depositors in the non-Euro world and very little threat in the EZ. Were that not the case the great global bank run would have begun already.
And now I found this one – did this happen? http://investmentwatchblog.com/nov-16-2014-g20-to-implement-a-new-policy-that-makes-bank-deposits-on-par-with-paper-investments/
1. This is interesting but this G20 guideline is non-binding. If and when it applies, it applies to deposits over 85,000 GBP – minimum, and even then the depositors security is ranked above bond-holders. There are very few people with 85 or 100,000 sitting around in savings accounts.
2. The wealthy are more likely to put those sort of amounts into bonds or superannuation. Given that is so, this looks more like some sort of anti-hoarding / anti-laundering gesture. As an anti-hoarding measure it could backfire by encouraging mattress-stuffing behaviours, as the various articles suggest. In the case of deflation, hoarding becomes a form of investment as the purchasing power of the passive money increases.
In any case I’ve chased more than enough geese on this account already, so I’ll leave it at that.
Three questions from a lay person:
1. How does PQE via a new NIB differ from HMG issuing new gilts and so funding the new expenditure direct?
2. I have read suggestions it will compromise the independence of the Bank of England. Is this correct?
3. Likewise, it is suggested it will cause devaluation of the £ sterling and cause foreign investors not to buy British bonds/ gilts. Is this correct?
These may be naive; I am not an economist.
The idea of it enabling infrastructure and house building sounds great. If more houses are built, and so supply is increased at constant demand, would this not help to reduce house prices, or stop them growing (a good thing in my view)?
If I had not addressed all these points several times before I would answer them, but a,, have been addressed several times already
In summary:
1. The difference is the bonds are re-purchased
2. it changes nothing: the BoE is already authorised to do PQE. I have published the letters showing that
3. Nonsense: QE has not done that. PQE will not either
Social hiusing t meets need: the aim Ms not to sell them
Richard,
I’m not sure I agree with you on the effect of PQE on the exchange rate. If more spending is via PQE there will be less need for the govt to ‘borrow’ therefore less need to pay out interest. The price of gilts will rise at auction, if there are fewer fall sale. Their yield will therefore be lower meaning longer term interest rates will fall.
This will have an effect. So I would argue that PQE should be part of the govts exchange rate strategy. If it wants a lower pound it does more PQE. A higher pound means less PQE. It depends on what sort of trade deficit we want to run. If we are happy to run a high deficit we can keep the pound high, but if we want to reduce it we’ll need a lower pound.
Accepted
The S&P report actually said that a coordinated programme of public investment across the entire EU would generate multiplier effects as high as 2.5 for the UK. Their estimated multiplier for a UK go-it-alone approach was 1.9. Still high, but not as high as you say.
All numbers are ranges