The FT has published this comment today:
Eurozone central bankers, struggling to boost the currency area's flagging recovery, have received help from Beijing in delivering their €1.1tn quantitative easing plan thanks to sales of German government debt by the People's Bank of China.
The PBoC's reserve management wing, the State Administration of Foreign Exchange, has been selling some of its German government bonds since the ECB began buying them in March.
The FT then adds:
Its sales of bonds are making life easier in the dealing rooms of Europe's monetary powers, where traders have been handed the difficult task of finding €60bn of mostly government debt to buy each month as part of the QE package.
Of that purchase package at least €10 billion is German government debt, and the simple fact is that there's not enough of it around to make that an easy task.
This though is potentially just the start of the problem of a shortage of high quality government debt. As I noted a while ago, the same debt that governments are buying using largely misguided QE policies that have little sign of now working are exactly the same assets that much of the world's capital is looking for as a safe haven. QE is then spiting the market that wants more debt by going out and cancelling it.
The answer is, of course, obvious. First, we need more quality debt. That means government must create more.
Second, they must do so wisely. That means that they must use fiscal policy to create new infrastructure investment, ideally via a National Investment Bank in the case of the UK.
And third, only in the event of a downturn should they resort to QE, which in the case of the UK has to be People's Quantitative Easing, because it is only by combining monetary and fiscal policy in this way that we have the mechanism needed to beat the global economic doldrum surely heading our way.
You'd think none of this should be rocket science. Apparently it is to those spending billions. Which is probably the most worrying thing.
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Richard, are you familiar with the Positive Money campaign and the idea of Sovereign Money? Would it work alongside or instead of a primarily debt based model of economics which we have today?
I think conceptually Positive Money have made mistakes in their theoretical work: their claim that there is a stock of money is just wrong: there is only debt
I also have major concerns about their suggestions on the role of banks: I do not think we can work with a banking system that is merely a conduit system. I think (although I keep thinking about it) that they need to have a bigger role than that
But I do so clear roles for sovereign money. That is what PQE is, in part, of course
So, yes, we can find parallel roles
Thank you for that response! So debt is a natural and necessary consequence of the existence of money?
No, it’s a pre-condition of the existence of money
Positive Money have the idea that money issued by Government/ Central Bank is debt free. That’s not true. It is a liability just like any other issued money. But its not a liability that causes Government any real problem in the same way that non-government liabilities might be a problem.
Another way of looking at it is to think of Government is like the ‘banker’ in a game of Monopoly. The ‘banker’ hands out money when we pass GO but he has also to accept that money as a payment for tax whenever a player is required to do so. The banker/govt is always in debt. That is quite natural and of course he has to be for the players to have any money.
Now there’s an idea….
I think it is the very crux of the Positive Money view that money, as it currently stands, is only debt. They want to move away from a debt-based money system to a sovereign money system where money is not debt issued by banks:
http://positivemoney.org/publications/
And I am not convinced that is possible
Although I acknowledge Green Backs and the Bradbury Pound suggest to the contrary
I think one of the main differences between Positive Money and MMT is that MMT sees Government transfers as sovereign money whereas Positive MOney thinks that 97% of money creation are bank loans.
I don’t think that Positive Money is saying that money isn’t debt (something you owe in payment) but that the nature of the ISSUANCE is the key factor. Bank loans have collateral ( your house, car etc) A benefit payment is just sovereign money (not a transfer of taxes as the Tories like to say!).
Warren Mosler has said the Sovereign Money already happens so the Positive Money people don’t need to say it has to be created.
There is also a debate about whether bank loans REALLY are money creation because they are based on collateral and of course get paid back. What we do know is that banks can steer the economy in all sorts of undesirable directions that create rentier systems.
Can’t resolve all this as yet!
Rich, the system is broke, it aint gonna fix easy and until we outlaw this crazy system where the private banks control the system and rig the game, we are just going to go round and round and round in the same old way. They have all the power and none of the risk, we have all of the risk and no power. Now you cqn argue until the cows take up spacetravel but you are never going to convince me regulation will work, it gets bypassed, corrupted, abused. Since the inception of credit this has been the case and now with the neolib philosophy theres no debt reset, as there was in ancient times (thank Steve Keen for that).
So we need as a supposed educated society to reset the way we view money. It should be a tool, a representation of exchange, not a full blown system for creating wealth in its own right.
Come on you guys, we believe in you, solve this problem for the benefit of the many, not just the few.
Isn’t sovereign money effectively debt free though? There is a liability recorded, certainly, as there is with cash, but it isn’t a liability that’s ever likely to be called in, is it?
Yes, it’s more accurate to call sovereign money interest free, rather than debt-free, but I think, in the real world, the money is effectively debt-free.
I actually think the double entry in the acse of sovereign money is to credit BoE reserves so it is potentially debt free
Richard
“Isn’t sovereign money effectively debt free though?”
It all depends on how we define debts and liabilities. But there’s no internal consistency about that is done at present, as I understand it. We all think of £5 and £10 notes as an IOU of govt but they aren’t counted as debts. But if government issues a gilt IOU that is counted as debt.
If we consider the creation of a new currency and the govt issues 100 million units and gets back 60 million in tax then its deficit and debt is 40 million. The next year if it issues another 100 million and gets back 80 million its deficit is 20 million and its debt is (or should be) now 60 million. This is true whether or not govt bonds are sold to private buyers.
That’s the only sensible way to look at it IMO, but maybe Richard disagrees?
First, we need more quality debt. That means government must create more
Really? Who’s “we”? Who needs the “quality debt”? Largely it’s the net exporters of the world and the ultra wealthy who need somewhere to park their money. The “quality” from their POV would be that the debt they’d bought would pay high interest and that the currency in which this “quality debt” was denominated was inflation free.
Well. much as I might try to sympathise with the world’s multi-billionaires, the People’s Bank of China, the Bundesbank, and others who might have to do without their “quality debt” I’m just finding it too difficult! They should be extremely low down in the British government’s list of economic priorities!
Who needs debt?
Pension funds
Insurance companies
Banks
Do you want to do without them?
Richard,
According to the UK sectoral balances the UK government’s deficit is entirely accounted for by the external deficit even to the extent that the domestic sector is desaving to the extent of ~ 0.5% of GDP. Neil Wilson does a good job of compiling these stats on his blog 3spoken.
http://www.3spoken.co.uk/2015/10/uk-sectoral-balances-q2-2015.html
If it is pension funds, insurance companies and banks who are net buying UK debt they aren’t based in the UK.
So why should the provision of “high quality debt” to suit their needs be a priority for the UK?
You know I’m not one of those “we must balance the budget” types – which would mean creating no debt. But neither should we be providing corporate welfare with overgenerous terms on the debt we do create.
So, yes, we should be selling debt but the quality should not be determined by the requirements of corporate interests. Especially overseas corporate and central bank interests.
That’s simplistic
Savings is a total
The need for debt is because of domestic reprofiling as much as any foreign demand
I know that there is foreign demand but to argue that is all this is about is just wrong
Aggregates have a role but so does granular data