It's a weird world when Mark Carney seems to be the one person able and willing to act on the UK economy. But we are, very definitely, living in weird times and as a result it is his voice that is giving indication as to what may happen next.
What we know is twofold: the Bank of England is likely to cut its interest rate. Already at 0.5% and with 10 year government borrowing costs at less than 1% this is the clearest indication that even if we are not yet heading for negative interest rates in the UK we are certainly following the trend in that direction.
Second, we will almost certainly have more quantitative easing (QE) which must mean that he thinks that there is a shortage of liquidity in the banking system.
Put these two factors together and it is obvious that Mark Carney thinks that Brexit is having a significant, and negative impact on the UK economy. In effect, what he's saying is that he expects people to save more and borrow less. In the new understanding that the Bank of England, thankfully, has of money saving (which can take the form of loan repayment) effectively destroys money by taking it out of existence whilst lending effectively creates money by pushing new cash into the economy.
Cutting interest rates is designed to encourage lending when there is a shortage of new money creation.
QE is a backstop measure when a cut in interest rates does not work and means that the Bank of England does, itself, create the money that the economy needs to keep functioning.
That both measures were mentioned in the same speech clearly indicates that Mark Carney has little confidence that interest rate adjustment work: it is symbolic rather than effective. It would be wise to assume that QE will follow soon.
This puts us back in the position we were in in 2010. QE will pump money into the economy, but the reality is that the vast majority that will go into speculative activity, will support financial trading, will boost bankers' bonuses, and will preserve the integrity of bank balance sheets, which is, however, an objective that could be much better achieved by the government taking direct stakes in their share capital instead using the same money. To put it another way, QE is an extremely blunt instrument to achieve a goal that has very little direct benefit to most in the UK.
This is why Colin Hines and I created the idea of what we then called Green Quantitative Easing in 2010, which is probably best explained here. Jeremy Corbyn did, of course, rename this as People's QE but the essence did not change.
In this alternative form of QE the money created by the Bank of England is provided to a National Investment Bank to inject into the real economy. In other words, it funds new investment. In the short term that could be infrastructure repairs. It could also be investment support to businesses. That investment in business can either be in equity capital or by way of loans. In this way the risk that the money will be used to fund speculation and not to promote real economic activities is avoided: the banks as middlemen are cut out.
This is precisely what our economy needs now. In the aftermath of the referendum vote, with all the uncertainty that is faced, the British economy needs a direct injection of cash to ensure that it has the capital it needs to continue to create the jobs that the people of this country deserve to make the goods and services that we require and which we must export to continue to provide a solid foundation for our future. At this time only the government can provide this, and QE provides the mechanism to do so.
If, and when, we have politicians able to make decisions again they must in that case step up to the mark and tell Mark Carney that much as he might want to create QE to support banking sector the country requires that he does more: this time we need People's QE as well.
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Also listen to Prof Steve Keen on the same topic and modern debt jubilee
Prof Richard Werner advises similar.
https://audioboom.com/boos/4767865-westminster-bubble-with-professor-steve-keen-of-kingston-university-looks-at-managing-our-economy-during-brexit-potential-trade-deals-and-more
Here is a good explanation of one of the negative effects of conventional QE
http://positivemoney.org/issues/house-prices/
At the risk of sounding like a broken record: many people up North voted “leave” due to a lack of long term fairly paid jobs. Green QE could play a role through, for example, funding the (energy) rennovation of the UK’s housing stock – which has significantly poor thermal performance. Initial focus could be economically deprived areas. Very roughly: 1 million houses rennovated over 20 years would provide direct employment for around 16,000 people. Indirect employment rhogun this would probably add another 10,000 due to economic multipliers. There are about 24 million houses in the UK. At least 12 million (maybe more) have very poor thermal performance. This provides an interesting and large target for Green QE. Furthermore, this sort of action would suit the use of local companies, employing (by definton) local people.
Yeah – this is a no brainer really. Win win in terms of productive use of investment due to the long term cost savings and improvements to people’s accommodation.
Some of you may have heard similar stories to the one I will recount but here goes…………..
Last weekend a neighbour and I took our sons down to the ‘Tankfest’ at Bovington in Dorset.
We had mutually agreed not to talk about BREXIT and especially not the Corbyn saga.
But the mood was grim and the dam we built up to contain our feelings broke about 2 hours into the journey and inevitably we ended up talking about both (agreeing about BREXIT but not agreeing about Corbyn and the PLP – things were kept good natured however).
My neighbour works in environmental services – the remediation of land is a speciality. His company is Spanish-owned.
He told me that within 48 hours of the result, he knew that a business start up that could have provided 700 jobs in the capital of our Shire had been cancelled. Another existing business would close down with the loss of 200 jobs in the same city. My neighbour may have to move his family to Spain in order to keep his job. And this is a man who loves the UK – even more than me. A real patriot who loves his culture and history. I can tell you that he is crestfallen and like me, embarrassed.
He even proposed an idea to limit voting to a certain level of demonstrable intelligence, education or IQ, so angry and disappointed was he. I could not remonstrate with him as when you consider that certain areas of the UK that have actually benefited from EU inward investment have voted not to receive it anymore by choosing BREXIT. Well – I mean……what can you say?
These little vignettes above point to an economy in crisis as a result of BREXIT. What is happening in our capital might very well be happening up and down the country. So I have no reason not to take this post seriously.
The Tankfest was a great day – a mixture of self propelled Tonka toys, history, pathos and remembrance. To hold a real Bren gun and see a real Tiger tank drive towards you with its turret pointing towards you even in an arena seems to help you to remember history even more. These tools of death were really used and a lot of killing took place.
And with BREXIT upon us we later discussed our fears as parents of conflict rising once again in Europe possibly swallowing up our children or grand children and other loved ones in the process. The sun came out – it had been a thrilling day – but our thoughts were sombre.
So QE is indeed needed but please let it happen beyond the shores of the UK for all our sakes. The ECB needs to bear this in mind too. I hope they do. And please, let Greece off the hook.
I’m afraid Brexit is very sad reflection on our current society – and government – and is really an indication of a bomb happy electorate – a significant minority of whom I would say, consider a plague on all your houses to be a robust response to their own lack of hope. It’s unlikely to work to improve their lot of course, but I remember when, a long time ago, I was threatened with being thrown into a lake by ‘a group of lads’. The only possible response was which one will I take with me?
Probably the Brexiteers will, in time, have taken some of the Middle Classes with them…
Can we start a petition to the Bank of England Carney fellow to add public pressure to the need for Quantitative Easing for infrastructure and public works rather than financial speculation?
We know from the research from positive money, assuming it is accurate, that every pound spent last time, the £370 billion, created 20p in the ‘real’ economy and that from peoples’ QE it might create £2.80.