John McDonnell was asked whether Labour still needed the policy of People's QE on the World at One yesterday.
His answer was close to the one I would have given. We will. But not quite yet.
At present peole are queuing up to lend the government money at very low rates. And because there is ample - even too much - credit creation in financial markets it makes sense for the government to take the cash offered to them.
But, and John made clear this but is much more likely a when and not an if, come a change in this situation then there will be a need for People's QE, not least to inject the liquidity and new cash into the markets that will then be needed as banks pull out of lending and new commercial money creation dries up.
When will this happen? If the economy faces the threats George Osbirne clearly thinks exist based on his speech yesterday, the answer is soon.
In the meantime a wise Chancellir woukd anticipate that by getting an on the ground investment programme rolling. Billions of existing QE funding will require to be rolled over this year. Rather than simply put these sums back into the financial markets I would be putting them into being the pump priming capital of a new National Investment Bank. That way the investment programme the UK does desperately need to get through the coming recession will be got under way and at the same time the cross over from old to new QE can begin.
it would be good if John could say that.
But otherwise I agree with him: People's QE is as yet waiting in the wings.
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I’m sure you’ve answered this before, Richard (but I’ve forgotten!) could a proposed Investment Bank issue bonds that could be bought directly by the Central Bank, or is this verboten a la Maastricht/ Lisbon so the ‘smoke screen’ of secondary markets is maintained (more ‘welfare’ for the GEMMS?).
They have to go via the market first, but I think this a minor issue little different to paying an annoyng underwriting fee
“illions of existing QE funding will require to be rolled over this year. Rather than simply put these sums back into the financial markets I would be putting them into being the pump priming capital of a new National Investment Bank. That way the investment programme the UK does desperately need to get through the coming recession will be got under way and at the same time the cross over from old to new QE can begin.
it would be good if John could say that.”
Listening to it, I thought exactly the same. Trust you’ve told him! He was so unfailingly polite and matter of fact, that I felt diverting the roll over of QE could have seemed just the thing to do – not even radical, which seems so regularly to upset the horses – and the media.
Given that inflation is the only real and practical constraint upon PQE, considering that the BoE target is 2% and the current rate of inflation is nearer to zero, one could suggest that there is currently room for the prospect of a PQE program.
With that being the case I’m guessing that both you and the Shadow Chancellor are keeping your powder dry. Which is fair enough in itself, unfortunately there are some (eg. Guardian) observers that appear to have interpreted your view on PQE as a suggestion that the economy is currently doing OK with no immediate need for intervention (period).
For one thing, they don’t seem to be aware of your proviso with regard to the QE rollovers and, prior to reading this post, neither was I. Either way, I agree and I’m glad that you’ve said it. I would nonetheless be wary of those who would simplify your statement for convenience or interpret it in a way that suits their
preconceptions.
Thanks
But it is not me keeping any order dry
Didn’t you previously claim that QE would never be unwound?
What has made you change your mind?
I haven’t suggested it should be
Changing the nature of QE is not unwinding it
It’s just changing what it is invested in
I would argue that any form of QE, whether or not we call it PQE, is only necessary when the Govt desires to reduce longer interest rates by issuing what is essentially a debt or a liability at zero interest rate. The demand for other more conventional forms of govt debt, like gilts, is then proportionately higher which forces up the sale price of those gilts and therefore the yield and effective interest rates fall.
Government perhaps doesn’t want to do that at the moment but there is still some scope for QE, or PQE, if it wanted to reduce the exchange rate of the pound and bring imports and exports into balance.
petermartin- Could I clarify a point that still confuses me?:
If the Government (consolidated) buys bonds, therfore the supply reduces, demand increases and yields fall as prices rise-this gives rise to my confusion:
Central bank bond buying INCREASES reserves (therefore inter bank rates reduce)
but that money goes back into bonds (generally) so the reserves REDUCE again.
Presumably we’re talking about repetitions of this cycle to keep interest rates low?
All things considered,and there admittedly, many considerations, I would have thought the devaluation effect – the extent of a fall in the exchange rate and its overall significance, would be secondary.
In the case of PQE, the impact on the domestic economy would be direct, it would be multiplied and the domestic economy is proportionately greater than the traded (or ‘external’)sector.
I would also suggest that there is a significant qualitative difference between QE and PQE. As far I can tell your suggestion seems to imply that there are no qualitative differences in the domestic economy and that, pound for pound, all acts of investment and expenditure are uniform in their effects, like homogenous and abstract mathematical units shifting from one sector to another.
Then again, I may have gotten the wrong impression by reading too much into your comment. If that is the case I offer my apologies.
The enemies of PQE are of course the “Big Banks” which are still in trouble – these have to be reined in first.
If we dodge another banking collapse then this will be no small miracle.