I was confronted by one of my City University colleagues yesterday who, in the kindest possible way, said I had got much of my analysis on Labour's economic desirable economic strategy wrong. He was referring to my talk at the University of East London on Monday, summarised here, and his particular beef was with the continuing support for People's Quantitative Easing, or Green QE as I called it when inventing the term (which i think I did).
His argument was simple. It is that right now there is massive demand from insurance companies, pension funds and others for high quality debt and little comes better than UK government gilts and so the UK government's duty is to meet that demand when the interest rate those potential gilt holders are demanding on their money is so low it would almost be a crime not to take it from them. I think my colleague would take almost any sum on offer and even bank it as such for future use to exploit the opportunity for cheap government funding now available. He says in that case it would be crazy to limit the supply of gilts by using QE, which necessarily repurchases them. His desire is for unfettered fiscal policy. His beef is with my mixing of that with monetary policy.
I have to disagree, in part. Where I agree entirely is that issuing bonds makes sense whilst the market wants to buy them, not least because this is about ensuring that the current best user of capital by far (which is the government) gets access to it. I stress, by their actions the markets are clearly saying that they know that the government is a more efficient user of capital right now than commercial markets. That is why they are making their choice. I would not wish to subvert their wishes, so I think gilt issuing should continue: my colleague and I agree on that.
But, and it's a big but, there are three (at least) reasons for continuing to support PQE even when the markets want to give money to the government at incredibly low interest rates.
The first is that the impression of dependency on financial markets must be broken. The idea that government can only spend because of the largesses of the private sector is wrong, as a matter of fact, and the power of the bond markets, who believe they can hold government's to ransom because of this myth that government can do nothing without private money has to be shattered for good. QE does that by making clear it is spend first and then tax (or borrow, when appropriate) that is the right ordering of events and then only to the degree necessary to suit fiscal policy goals. There is, then, a point of principle to make in using QE.
Second, there is no reason to assume that the purchasing of bonds by the private sector will provide enough funding to allow a stimulus big enough to create full productive employment and so the resulting wage inflation that we need if the real economy is to be rebalanced. We cannot permit the gilt markets to be the determining limiting factor in creating the scale of change needed in the economy. In that case keeping QE as a component of change to deliver the scale of investment now needed is essential.
And third, as John Christensen and I discussed at University of East London, PQE can be used to buy out PFI at favourable rates right now and if the resulting injection of funds into the finance sector was matched by an increase in the required rates of central reserves to be held by banks then the cost of that buy back would be minimal and potentially nonexistent (the rate paid on deposits with the central bank is discretionary). PQE is about rectifying past funding mistakes as well as building a firm foundation for the future.
So, to QE or not? If that is the question then to PQE is the answer.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Your colleagues arguments seem to me to be arguments gainst QE per se and revolve around the diminution of savings /investment opportunities in wider society. I am sure that the BoE would argue that the stability of the financial system requires that the liquidity of banks be increased.
I do not pretend to know how this works (and it is has been made clear over the past few days that financial journalists are also ignorant of the detail) since liquidity injections do not affect the net worth of the entity, they simply replace investment assets with cash. What lies behind the £375 billion plus run on cash within the banks has not been explained, or at least I have not seen an explanation.
I would have thought that PQE would widen investment opportunities whilst also aiding the NHS (PFI buy outs) and the non service economy; also it brings the whole topic into the open so that the monetary alchemists can be challenged.
PQE is really an amended version of QE; its important to say this since many on the right will say that investment opportunities are only possible if (a) austerity is increased or (b) taxation is increased or (c) the economy grows faster than currently projected conveniently ignoring the fact that £375 billion of assets have been purchased outside of this mantra.
“who believe they can hold government’s to ransom because of this myth that government can do nothing without private money has to be shattered for good.”
That argument has been shattered by the Japanese experience:
Japan seems to prove that’bond vigilanteism’ is powerless against a sovereign currency issuer.
As Bill Mitchell puts it: ” Just ask Japan what it thinks of the rating agencies! Their sovereign debt has been downgraded several times over the last decades with zero impact on their capacity to issue debt in the private bond markets.
Just ask the United States Treasury what it thought the impact on its yields were following the downgrading recently of its sovereign debt rating. They will answer: no impact.”
As Michael Kalecski observed in 1943 Bonds are a disguise for the Government paying for services in cash and pretending it comes from the ‘private sector.’ see: http://mrzine.monthlyreview.org/2010/kalecki220510.html
Bill Also points out that: “The Bank of Japan can maintain yields on JGBs at whatever level it chooses, at whatever maturity range it targets, and for as long as it likes. The bond market investors are incidental to that capacity and are supplicants rather than drivers.”
Interesting stuff-keep challenging the paradigms, Richard.
You may say it’s been challenged
But it’s still believed
It seems to me that you colleague favours a cash injection from debt whereas QE is an injection of cash from printing fiat money?
You seem to advocate a mix of sources and I think that you are right Richard.
You colleague seems to be making a classic orthodox error of putting all his eggs in one basket and I believe that is how we got into this mess in the first place.
We are now in unknown territory economics-wise and we need as many new ideas and options as possible otherwise we will find ourselves back where we started.
“The first is that the impression of dependency on financial markets must be broken. The idea that government can only spend because of the largesses of the private sector is wrong, as a matter of fact, and the power of the bond markets, who believe they can hold governments to ransom because of this myth that government can do nothing without private money has to be shattered for good.”
I so agree. But this is never spoken of in polite society. Is this is because the the banking mafia have too many friends in the Tory party, and I’m beginning to wonder, too many in the Labour Party and also the BBC as well.
Encountered a quote from the Trilateral Commission in 1991 (founded to to foster closer cooperation among North America, Western Europe, and Japan) which brought me up short:
“We are grateful to The Washington Post, The New York Times, Time Magazine and other great publications, whose directors have attended our meetings and respected the promises of discretion for almost 40 years. It would have been impossible for us to develop our plans for the world if we had been subject to the bright lights of publicity during those years. But the world is now more sophisticated and prepared to march towards a world government. The supranational sovereignty of an intellectual elite and world bankers is surely preferable to the National auto-determination practised in past centuries.”
David Rockefeller, in an address to the Trilateral Commission meeting 1991.
I begin to wonder if these sort of ideas where the governments AND banks rule are still common.
Richard, what did your colleague reply with to your first point, about breaking the illusion of dependence on the markets for government spending?
He hasn’t, as yet
Have you seen the Labour List piece just published:
http://labourlist.org/2016/03/mcdonnell-should-not-forget-peoples-quantitative-easing/
‘In the foggy economic future we face, People’s Quantitative Easing might well be an important economic tool. It would be wise of John McDonnell to keep the conversation running on this one.’
The article is a little confused but I agree with the conclusion
Here is Positive Money promoting peoples QE at the European Parliament….
https://www.youtube.com/watch?v=LU4V8G0G_Tc&feature=youtu.be
That is not People’s QE
They were promoting helicopter money and that is not the same thing, at all
I beg your pardon.
Surely explicit money creation for use in the real, as opposed to the financial, economy is something akin? Green QE, Peoples QE, Sovereign Money Creation, Helicopter Money – how different are any of them. Differences I see are –
1. Use, or not, of a never-to-be-repaid bond.
2. The particular spending route into the economy, institutional
or individual.
So how far wrong am I?
I suggest you read what I have written on the issue
Helicopter money and People’s Quantitative Easing are miles apart, for example
So the essential difference is Peoples QE would be channeled through public investment banks and other public bodies whereas helicopter money would be channeled through government?
Your proposal eliminates the possibility that the money could be used to fund tax cuts or flat payments to citizens, and I understand your reservations on that front.
Quite specifically my suggestion is the money does go for investment
John McDonnell is clearly on that wavelength today
Interesting news from Mario Draghi at the ECB today.
“He confirms that the headline interest rate has been cut to zero, and that ECB has boosted its QE asset-purchase programme to €80bn per month (from €60bn). And expanded it to include investment-grade corporate bonds.”
http://www.theguardian.com/business/live/2016/mar/10/ecb-stimulus-measures-mario-draghi-negative-rates-qe-business-live