Victor Xing has an article in the FT today in which he discusses the now widely understood and adverse distributional consequences of QE that I predicted as long ago as 2010. In the article he says:
This ... offer[s] an effective segue to allow establishment candidates to tap into populist support and morph their candidacy away from traditional partisan issues (which are vulnerable to disruptors) into struggles for those disadvantaged by distributional central bank policies ....
These views can be seen in Jeremy Corbyn's push toward “People's QE”, as well as recent discussions over Universal Basic Income via debt monetization, which is based on Milton Friedman's “Helicopter Money” to bypass the financial sector in the transmission of ultra-accommodative monetary policies, i.e. “channel QE money directly to the people and communities!”
With Corbyn's “People's QE”, the Bank of England would print money via digital ledger entries, similar to traditional QE, to either directly buy HM Treasury's debt issuance, or directly transfer money to Treasury to pay for government expenditure. (Adam Posen, who served on the Monetary Policy Committee of the Bank of England, once suggested something similar.)
Ben Bernanke's essay on Milton Friedman's “Helicopter Money” proposal explained how the Fed would print money to pay for increases in Federal expenditure, tax cuts, or purchases of private assets.
Both of these proposals could infringe on central banks' hard-won monetary policy independence by turning them into on-demand cash machines for fiscal authorities, although both have the support of at least some central bankers. It would be difficult for monetary authorities to terminate debt-financed fiscal expansion after it was set in motion: social pressure would make an exit politically difficult, for opponents to debt monetization would be labeled as “opponents to making QE fair again”.
People's QE, of which I was the originator, is alive and well and apparently has the support of some central bankers. Let them step forward please: we need them.
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97% of the money in our economy has been created as credit – i.e. debt to themselves – by commercial banks. Every time someone pays off a bank loan it removes money from the economy. People’s QE or the re-introduction of Sovereign money into our economies is a means of maintaining liquidity. However it must be balanced, as Adair Turner recommended a few years years ago [2013: http://www.positivemoney.org/2013/04/adair-turners-keynote-speech-at-inet-conference/%5D, by progressively hiking up the capital reserve requirements of commercial banks, eventually to as much as 30%. RBS was a sitting duck at 2% when it went belly-up!
That is not true for People’s QE
This is also not the bizarre PM proposal, for which I have little time because it’s akin to a return to the gold standard and is based on the embarrassing fact that they don’t understand what money is…
Sorry Richard, I’m not referring to the PM link, it’s clicking on Peter Close’s name that produces the dodgy link.
OK….
Clicking on Peter Close’s website link throws up a warning from my virus checker.
Seems a bit irresponsible directing us to a dodgy website.
PM is not dodgy in that way
You love blowing your own trumpet. There were many folks ‘back in 2010’. How about saying “Others, including myself” rather than the lame self-promotion? Although you have some interesting things to say, you are at times a bit of a smug prat.
I notice your courage in saying so, including the use of a false email address
Originator? Perhaps in calling it Peoples QE. But if you look at the lecture given by Professor Joseph Peden at Houston Texas on 27 October 1984 published in the Mises Institute of 9 July 2007 the concept is traceable back at least to the Emperor Caracalla of Rome. But those of us who like their antiquity could point to some of the excesses of the earlier form of Greek democracy. As for more recent times there was the selling of Indulgences which led to The Reformation that could be called Papal’s QE. I assume therefore that you have not celebrated the 500th anniversary of Martin Luther’s nailing his theses to the door.
People’s QE without a doubt originated with me
And I had not read that material to which you refer
Nor do I quite see the relevance
There have been lots of writers talking about a form of QE for ‘main street’ (the ordinary economy) since 2008 but I’m sure that the first time I have heard of it being branded as the ‘People’s QE’ was on this blog.
Can I also say that many progressive economists are very good at diagnosing the problems we have but all to often attempt to fiddle or tinker around the edges in terms of changing things. The only person who has delivered a compelling vision of a society that sorts these problems out in a more joined up way is the man who runs this blog.
Thank you
I’m not a practicing political economist
I do it for real
That’s all very well Demetrius, but why then go and boast about what you’ve posted on the “Worst of all” blog?
Dear oh dear, Demetrius,
I have no doubt, that the general idea of “overt monetary financing” (Bill Mitchell’s preferred term) existed well before Richard’s PQE, and Bill Mitchell didn’t invent it either. Historical examples do abound nonetheless.
That’s not the point. Richard Murphy devised a detailed proposal (as opposed to a general concept) that is specifically for infrastructure financing and (arguably?) compliant with the Lisbon Treaty. Of this there is no doubt and for that he deserves full credit.
There now. Sorted.
Richard, do you ever feel a slight sense of frustration that it takes seven years of going on about something which is so clearly and obviously sensible before it starts to become mainstream? Anyway thank you for keeping at it! Sadly I fear there will be a long way to go, and a Labour government will have an awful lot to do just to stabilise the ship before it finally sinks into the depths, as it seems to be doing daily.
I have got used to the long haul
Don’t you just love the idea that people’s QE “would be difficult for monetary authorities to terminate”.
QE as we have it can’t be terminated without crashing the global economy. But apparently that wasn’t reason to not do it.
The coining of the phrase ‘helicopter money’ has done much to undermine the rational argument for ‘people’s QE’ by making it sound ridiculous. It readily conjures an image of the public scrabbling in the street and fighting each other for currency notes. It’s a powerful image of social chaos which serves well to put the idea into the realms of fantasy.
Victor Xing’s article seems to have a lot of weasel sentiment in it. Anyone skimming this article is going to suspect people’s QE is a potentially dangerous idea.
I don’t see this article supporting the optimism of your headline, Richard.
I see silver linings in the fact it is still being discussed
I’ll try to hold on to that positive thought.
“QE as we have it can’t be terminated without crashing the global economy.”
You need to get on the phone to Janet Yellen, pronto, as it looks like that’s exactly what she’s about to do!
I have long suspected that this is her way of undermining Trump
£10b was priced in from forward guidance, but the accompanying interest rates have been repeatedly postponed. December’s interest rate hike is still only maybe. Not much sign of confidence is there?
On balance that isn’t tightening.
Andy,
“Helicopter money” in its various versions (Friedman, Bernanke, Steve Keen) is not PQE. It specifically refers to central bank money being distributed to consumers for consumption. Not to the state for public works.
I don’t see that the 2 separate ideas need to be confused.
Richard,
I had the same thought about Yellen and Trump and then wondered if I was being a litttle too imaginative. Maybe not…
You are quite right
Helicopter money and PQE are not at all the same thing
There is no doubt that what we need NOW is real money – especially now that much that is in circulation seems to be debt. This business with growing debt and declining wages is a recipe for disaster.
Er, all money is debt, by definition.
Er……Yes – but who is paying then?
Hard pressed, just about managing (JAMs) or the Government who could raise money any number of ways AND pay off any debt incurred to create it?
Or should we just leave money creation to the banks who create it out of nothing and then charge you interest on it? Like car loans for example?
I stand by what I said.
We need more money in the micro economy that is not debt (investment to create jobs, pay rises, benefit rises etc.,) and let any debt from this be dealt with at the macro level (Government) who can print money to get rid of it.
This does not need to happen forever – just until living standards either improve and then continue to do so (it would be nice if green technology was pushed to the forefront of this).
The mistake by the Tories is to believe that the Government has no control over money other than interest rates. It’s tosh and that is why we are in the state that we are in.
Also – if you are going to apply the theory that all money is debt (a valid theory BTW) , you cannot just use it as a blanket statement without working through how that theory works with the way in which the supply chains for money work in the economy. Otherwise you’ll just end up being a Tory neo-lib – known for over simplifying everything and ignoring the finer detail. And I wouldn’t wish that on anyone – even you.
We need to go a bit beyond debt = bad and surplus = good and try to look again at the balance of debt that we have in the UK and try to prioritise positive investment (crudely put as good or beneficial debt) versus risky, gambling debt that increases the level of economic and societal risk.
What do I mean by that? I see good or beneficial debt as investment into infrastructure, education, research and development, support services and communities. I.e. largely Government stimulated debt (but also private where it is businesses and individuals investing in economic enterprises).
Crudely put I see negative or bad debt as being high risk, speculative debt or investment, that has a gambling element and increases systemic risk to the economy and society as whole. I see no clearer example of this than the housing market. People see housing prices go up and up. They then take a gamble on getting a mortgage for a house which they know is really over priced and is more than they feel they really should have to pay for the house. But they pay the inflated price and take on the extra debt because they expect that the house price might go up and if they don’t buy it now it could cost them more in a year’s time. But it’s also risky and the market could crash leaving them financially ruined.
We could reduce both the level of housing debt and the stability risk it poses to our society as whole by massively investing in social housing, and giving people an alternative to private mortgages. A social housing property could be “sold” to a buyer on the basis at an affordable rate on the basis of them being able to sell it on at a rate which is pegged to the purchase price to keep it affordable. I.e. they can’t just flog it on at market rate so that it remains affordable for ever. This would give the best of both worlds. Security of owning your own home without the crippling cost.
An example of good investment risk, would be investing in supporting infrastructure and skills for the manufacturing sectors of tomorrow. Ha Joon Chang, in kicking away the ladder and many other books of his, points out how in the 70’s his home country, South Korea was a poor country with a weak manufacturing sector.
The South Korean government then invested heavily over the long term in order to try to develop its manufacturing sector. Sure, it made losses along the way. Some investments went bad. But fast forward to today and Korea has some of the world’s most successful and growing (emphasis – growing) manufacturers including Samsung, Hyundai and LG. And they’re not successful simply on the basis of South Korea being a bargain basement low wage, low regulation economy. South Korea now has excellent infrastructure, including the world’s fastest broadband speeds. Whereas in the UK we struggle to provide decent broadband to a good chunk of our rural population.
South Korea didn’t become successful by chance or just because of some fluke of the market. The Government planned and invested into supporting manufacturing and the success eventually came as a result of that. We need our Government to take a similar approach, but the idea of them thinking beyond the end of their own noses let alone, 10, 20, 30 years into the future is just not realistic with the current bunch of clueless administrators in charge. They administrate, they don’t lead.
If too long, in summary – reduce risky debt that does not have a societal or economic benefit and increase debt/investment into productive, positive causes that will benefit the future.
You get my point that it’s not debt per se that’s wrong
It’s the wrong use of debt that’s our crisis and this is currently happening in state and private sectors and none of the corrections appear to be flowing in the right directions right now – especially if QE is reversed
Why is this preferable to government investment – e.g. on the NHS, education (including free university/further ed) infrastructure, renewable energy, your 50bn for housing, scrapping Trident, Hinkley, HS2 (or doing HS2 properly and quickly) etc – things that would improve lives, provide decent employment and wages and also really tackling inequality?
It’s a way of funding that investment
Sing really tiptoes around the subject in this piece . Calling a few spades I would sum it up like this :
1. QE has failed to produce any significant improvement across the whole economy.
2. In the process and because it has gone on for so long Central Banks and their so-called independence have largely made themselves irrelevant and they know it .
3. The political establishment have no solutions or policies to address any of this because to do so would be to admit the game is up and our financial system as a whole needs a reset .
4. Putting in place a money creation system outside of the hands of the private banking sector is essential if the real economy – us – is to grow.
5. Bottom line. The voters know it’s all bullshit.
John,
“1. QE has failed to produce any significant improvement across the whole economy.”
We don’t actually know that and I doubt that we ever will. I am not a fan of of QE and I am aware of much of the evidence which shows that it does more to sustain banks and asset prices than it does for production and the real economy.
But, objectively and academically we would probably need to know the counterfactual in this case to know if your statement (above) was true. Meaning that we would need to know what would have happened if QE never existed.
Strictly speaking (I mean strictly) its hard to say and impossible to know.
Yeah, it’s a bit difficult to say what it has / hasn’t achieved, especially given the haphazard way in which it was dished out. It has inflated asset prices, I think that much is clear. You could measure it more effectively if it was used for specific, measurable projects as per People’s / Green QE.
Without too much cynicism I would suggest that QE’s affect on the real economy might be a bit like the opposite of fiscal stimulus, in one regard, at least.
With fiscal stimulus we expect a multiplier effect where, for example, £10bn of stimulus spending might generate 30 or £40bn of consumer spending (or more) as it flows through. With QE, we’d be more likely that we get a subtraction or fractional effect where every £10bn of QE might generate £1bn (or less) of additional aggregate demand.
With QE, it seems that its not really meant to be a stimulus. It appears to be a means of propping up financial bubble markets regardless of the real economy. Which is a questionable objective, to say the least. That’s where the counterfactual comes in: what would have happened if the central banks hadn’t propped up the asset markets?
With this type of QE I think that likely