The world's financial markets are in an uncomfortable place this morning. On average they seem to have lost around five per cent of their value yesterday. No doubt they will swing all over the place today, because that is what always happens when events like this occur. But what does it mean?
I suggest there are a number of phenomena to take into account, the realisation of all of which is growing.
First, there is euphoria. This is firstly implicit in the share price itself, with the Dow Jones up 34% in the last year.
Second there is euphoria that, as I noted yesterday, there is currently growth in the world economy at above the long term sustainable rate.
Third, there was some sense of relief, if not euphoric, that inflation was returning, because that was what markets want.
Fourth, this gave rise to another euphoria about interest rates, which was that they might return to ‘normal'.
Fifth, central bankers responded by suggesting that they might respond to all this by raising rates. So it was ‘triples all round'.
But underlying it all was a sense of fear. Fear, for example, that the rent seeking outsourcing that has driven so much market activity for so long may be at an end with the collapse of Carillion and difficulty of Capita and Virgin.
And a sense of fear that although house prices - that universal barometer of well being for those who have more than they need to live off - might have peaked as over supply of vanity accommodation becomes apparent in London and elsewhere.
Coupled to which there may just be concerns about Brexit.
And a sense that a Trump tax cut may not be all good news if it results in massive deficits.
Whilst the perception that governments simply can't deliver in the two biggest financial markets of the UK and US might be very real indeed.
So what happened? Euphoria hit reality yesterday, I suggest. I make clear, I am only guessing, but there is evidence to support the hypothesis.
First, there had been a disconnect from reality for a month or so in bond markets. They were seeing prices fall as interest rate perceptions, potentially reasonably, rose. But stock markets were not falling to reflect the growing risk that this represented. For a month or so there was a disconnect.
And that disconnect even continued when interest rates on 10 year government bonds in the US moved beyond 2.6%, which is more than two standard deviations from their long term downward trend rate, and then went well beyond it.
As I have long said, that meant that at some point the market's confidence would be tested. The idea that ‘this time its different' was bound not to last forever. And yesterday it looks likely that the euphoria ended. Time will tell.
But if it does end, what then?
First, interest rates may not rise after all. They may not need to do so. Interest rates would only rise with inflation and inflation in the US at present represented some returning confidence. The end of euphoria will sap that confidence. Perversely, that may in turn bring to an end the speculation that rates will rise.
Second, if the euphoria ends then the above sustainable growth rate economic growth will also go with it. There is no direct relationship between markets and real economic activity. Indeed, it often appears that the two are wholly unrelated. But that is not entirely true: sentiment is the link. And sentiment matters, a lot. People only invest if they feel good about the future. They feel good when they're euphoric. They never feel good on the frown side. So growth will slow, and rapidly, because investment will fall.
Third, other asset prices are going to fall. Property in the UK is an obvious one, where over-supply of apartments to the rich is going to give rise to a serious price adjustment, and soon.
Fourth, expect all this to have knock on effects. The supposed high employment rates of the present time may well be a memory very soon.
So is it going to be a crash? I am presently doubting it, although I would expect a lot of recent market gains to disappear. For the FTSE to fall well below 7,000 but maybe stop before 6,000 would seem entirely plausible.
But that's not the big concern. What really matters is the real economy. And there I see Brexit fears, market fears, property valuation fears and more having real impact and really hitting the economy hard.
Once upon a time I created People's Quatntiative Easing for a situation like this. It really will be time to roll it out soon. I think we are going to need it.
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Taking quite a few of your latest posts into account (not just this one, Richard) I think it’s time for people to adopt a simple remonstrance;
It is self-evident that we no longer have government of the people, by the people, for the people. My ‘politics’ therefore is this; I put under notice, from this day on, that each and every aspect of government which fails to operate on our behalf will be rolled-back from present circumstances when we have the opportunity. Every part, every consequence, every bit will be assessed and reversed.
They are under notice.
I’ve become really excited by this prospect of PQE, and also of UBI. Real vote winners for me a seriously deliberately abstaining voter. Such a shame Labour snatched defeat from the jaws of victory by dropping those ideas.
Also you know the party is over when someone such as yourself to the left and libertarians such as Peter Schiff, Ron Paul et al to the right are essentially saying the same thing about capital markets albeit from entirely opposite philosophies. Well “candidate” Trump it’s your ‘big fat ugly bubble’ now. It’s your ‘phony employment and inflationeered’ numbers now.
The rise in equities wasn’t really driven by economic euphoria it was down to QE. QE has driven investors out of gilts and treasuries and into equities, corporate debt and property hence forcing prices higher. Fear of deflation has been replaced by fear of inflation so rates rise and money will eventually (process could take years) flow out of equities and back into treasuries and gilts. Yes property in London can easily fall 30, 40, 50% from their peak. This was always likely to happen.
https://www.cnbc.com/2016/08/18/paul-singer-and-elliott-management-say-bond-market-breakdown-to-be-sudden-intense-and-large.html
QE no doubt saved us from inflation but the extent to which it has been used has been a dangerous experiment and not even the wisest amongst us know the consequences. It would be a interesting proposition piling PQE upon us now.
We know what QE did
It created euphoria
Now stop being boring
Dc says: “QE no doubt saved us from inflation ”
QE did nothing of the sort. It generated huge inflation, but iit was confined to the ‘top end’ asset market.
To have produced inflation in the real economy where most people live ‘trickle down’ would have to apply. And it doesn’t. As Donald Trump will realise once again when his tax ‘reforms’ fail to have the desired effect of stimulating the real economy.
QE was a very divisive policy. It saved the finance industry for a while – long enough to build up enough steam to destroy itself again.
Dc,
1. As you have been advised several times and would already be aware, QE had, over time, contributed to this current scenario but the QE program also ended quite some ago and is not a present factor.
2. PQE is not QE, not even similar.
DC seems to think that PQE is the same beast as QE -I’m sure you’ll agree Richard, it isn’t -the name is really using a qualitative contrast. The only point of similarity will be the increase in reserves but this time it would be a real stimulus not a free lunch asset swap for the corporate sector.
DC is very boring on this
I should really get round to deleting him
Without regard to Gavin’s comment, but just generally, ultra-low interst rates and neoliberalism, or more particularly financial de-regulation, do not appear to be compatible.
Oops, wrong spot. Reply transferred to right spot below.
The two biggest holders of this gilts, have increased the value of their holdings from a market value of £ 233bn to £522bn (Overseas) and £229 bn to £561 bn (Pensions and Insurance) during the last 9 year. Only around 25% of that increase is due to inflation, so money hasn’t been driven out of gilts , quite the opposite it’s been flowing in
The Asset bubble was driven by the inequitable distribution of new wealth. If it had gone to the 95% it would have helped pay down personal debt and helped consumer spending, but it went to the “already haves” and thus into asset inflation
Please remember that pension funds had their investment rules changed by Brown and Blair requiring them to match the duration of their asset with their liabilities and that the asset they invest in must guarantee a payout in 30years and be like AAA. Hmmm on long gilts match that rigged criteria and so there is a massive demand and low supply. Hence price rises and yields fall.
The trustees follow the rules and in a bull market celebrate their skill. First understand why the demand for each duration of gilts then note the flows
So what do you suggest instead?
What I suggest would is a gradual weaning off and reduction in the amount of long gilts needed to match any pensions liabilities and assets. It might take 10-20 years to allow for the effects of inflation and growth and the gradual increase in yields to return to sensible and normal rates on long bonds and the mortgage market.
And what do you suggest instead?
And why do you want to cripple the real economy with high interest rates that tax it for the benefit of the old?
Without regard to Gavin’s comment, but just generally, ultra-low interst rates and neoliberalism, or more particularly financial de-regulation, do not appear to be compatible.
Richard it is not crippling the country with high interest rates its more normalising.. There is no slack in the system for sensible valuations and returns when base rates are at a 300 year low. The balance of saving vs spending is out of kilter with capital gain overwhelming income gains.
For a time these extraordinarily high valuations can be kept up in the sky. Until finally gravity takes effect and like in Japan the value of the Imperial Gardens are no longer worth more than the entire state of California.
Everyone loves a bubble as it is going up everyone on paper is richer despite the physical assets not changing. Optimism, reinvestment, borrowing all rise.
The situation is like a blind folded man walking up a staircase with ever higher valuations be represented by other people putting in blocks to make the next step. There is more and more blocks needed the higher the steps go until every ruse and trick has been tried and the blind man has no step to go to and falls injuring themselves.
A good read of the book Manias panics and crashes shows the pattern. The speculation in wild schemes canals, railways, bitcoin, with the attendant stages revealed in the press statements and the insiders moves vs the general publics perception. The idea is to moderate that bubble which is very difficult to get right given the emotions running high beyond reason.
Ultra low interest rates for sustained amounts of time cause odd effects. The western world is in danger of a second big collapse in prices and confidence as eventually Bond valuations unwind after the central banks have run out of Bonds to buy to keep the yield down and prices up. Remember gearing works just as powerfully on the way down as on the way up. That will reverse the pension surplus holidays into net payments, which will reduce plc profits or send the PLC into bankruptcy, lower profits lowers PE ratios, lower stockmarket and bond markets lowers insurance company returns raising insurance premium rates. Each feeding on the other.
The money side of this system.
Banks are critical in the above in multiplying and creting money with loans. The stronger effect is the money creating central banks then needs to juggle the money supply and multiplier of money equation a very tricky balancing act. The central banks have loaded themselves up with debt so who is now the lender of last resort to keep the faith in money?
PQE would be the pure creation of money and could fill the gap with care. Although I expect like Sword Bank the politicians would take it beyond its small remit and ruin the idea.
The only other solution would be the tried and trusted GDP galvanising event of a large scale war as the goods produced disappear in a bang – cynically China, USA and N Korea look the most likely candidates to start that.
Remind yourself that the death throes of empires always end in financial trickery as the assets built up are sold off for the commissions gained in order to sustain the empire and luxury. Eventually the cupboard is bare and the reserve currency and global power pivots to the new nation with the engineering and trade strength. Eventually the ball has no further to be kicked down the cul de sac. When this will happen is the big if. History says it will take longer than you think, then happen faster than you thought.
“On average they seem to have lost around five per cent of their value yesterday.”
Funny old language, English. I don’t think any value change has taken place it’s just the price that has moved.
🙂
Price is what you pay value is what you get
No doubt i would be really interesting if i agreed with you!!..euphoria no, it created reluctant equity investors as they searched for yield as well a property and bond bubble. It would be great if PQE was foolproof solution to any economic problem like you suggest. But it isn’t…if deflation presents itself it is an option i grant you that. PQE now would be inflationary and tax rises needed on the scale to prevent inflation would be politically unacceptable.
I think your time here is over
This is a police for serious debate and all you offer it trite repetition otherwise known as trolling
dc says:
February 6 2018 at 10:33 am
“No doubt i would be really interesting if i agreed with you!!…”
I don’t think you can take that as a given, Dc. I’d say an element of doubt would remain. 🙂
Allan Wort’s ‘politics’ is hard to comprehend because there is no such singular grouping as ‘the people’. About whom is he talking when he states “government fails to act on our behalf”? Does he mean wealthy investors who would prefer massive tax cuts to increase their wealth or a massive increase in the provision of social housing for those unable to afford a roof over their heads. The two positions are incompatible with an idea of a single version of the people.
The tendency for individuals to believe that everyone else holds the same view as themselves can result in the rise of extremist politics as can be seen by the increase in singular views around the world.
You have to chose which ‘people’ you support and allow for debate of your position.
I have no trouble believing you find simple statements hard to comprehend. Or was that an attempt at rhetoric?
Both of your posts are meaningless.
‘It would be a interesting proposition piling PQE upon us now’.
dc – a question: Who is ‘us’?
I recall that the last round of QE was for ‘Them’. ‘Them’ being the banking and finance sector.
It would be nice and rather novel if ‘Us’ got anything for once if everything goes shit-shape because of a small minority who think that gambling is real work.
Don’t you think?
Richard where you say
“So is it going to be a crash? I am presently doubting it”
You may well be right but yesterday saw the Dow Jones biggest one day point drop of all time and there is little or nothing in the fundamentals to justify this market’s ‘boom’:
“The CAPE ratio (cyclically adjusted price-earnings ratio), a widely followed measure designed by Yale economist Robert Shiller that compares stock prices to corporate earnings, is currently at about 32, or double its historical median of 16.”
https://www.vox.com/policy-and-politics/2018/2/5/16975786/dow-crash-today-trump-market-correction
Double!
” There is no direct relationship between markets and real economic activity. Indeed, it often appears that the two are wholly unrelated. But that is not entirely true: sentiment is the link”
I’m not so sure. Forgetting the current flurry of immediate updates for the moment, on reflection it seems to me like we might have an historic moment here. A definitive point where it has become clearly apparent the the abovementioned suggestion is “entirely true” and the underlying causes are inherent and structural. Sentiment need not be the link.
Since 2009 we have observed a phenomenon where financial institutions and markets have been buoyed by QE and ultra low interest rates. They have also managed to enjoy their own separate boom regardless of stagnation in the real economy. That is an historic first.
Now we see the openly declared prospect of a market collapse due to a small increase in employment and below-target inflation. That’s another historic first and it is definitive! It has clearly identified a situation where ‘the markets aren’t merely indifferent to to stagnation in the real economy – they require it. One economy is diametrically opposed to the other.
As for sentiment, in this new scenario we need not assume that a downturn in the markets need necessarily lead to a decline on main street. If the financial world can boom on its own then so, perhaps, can the real economy The mild upturn in the real economy is premised on fiscal stimulus (or the expectation of it). If (if) the stimulus follows through sufficiently then we could see a situation where industrial stocks and profits begin to grow in relative proportion as financials decline (reversing a 20 year trend) and small-to-medium business fares relatively well, even better – regardless of ‘the markets’.
The great decoupling that has evolved over the past 9 years has reached a definitive point that puts us into new territory. That requires a shift of thinking.
I wholeheartedly agree with your last sentiment
I will return to this – when many hours teaching has been done….
What are today’s lectures focused on?
The nature of microeconomic problems in political economy
Or how power changes the allocation of resources in an economy
Marco
May I compliment you on your eloquence?
And thank you Richard for enabling it.
Thanks, Pilgrim.
Marco Fante says:
“You may well be right but yesterday saw the Dow Jones biggest one day point drop of all time…”
Yeahbut….that’s inflation for you. Lots of points dropped, but what are points worth. (and don’t even think ‘prizes’)
In percentage terms it’s not much it is it ? Just a good headline.
“….If the financial world can boom on its own then so, perhaps, can the real economy…..” I doubt it with this shower in government because I don’t see how the money will get into the hands of those who would spend it.
Then perhaps it can do it without “this shower in government”. I suppose.
The aspect that I’m looking at is an underlying historic shift.
‘The supposed high employment rates of the present time may well be a memory very soon.’
‘Supposed’ being the operative word. The EU is admitting to a ‘jobless recovery’:
‘EU Employment Commissioner László Andor has admitted that the EU is experiencing a “jobless recovery”, amid warnings from the International Labour Organisation (ILO) that the situation might not improve this year.’ ( 23 Million registered as unemployed with underemployment and non-participation to factor in).
The EU is already becoming a tinder box and one commentator ( David North-World Socialist Website) saw the U.S in the same light once Trump’s vainglorious bullshit becomes even more apparent. As always, the Left in the EU and the Democrats in the U.S (Left!!?!) utterly failing to find a narrative.
Simon Cohen says:
” The EU is admitting to a ‘jobless recovery’:…”
In what language does ‘jobless recovery’ mean anything at all ?
I suppose it’s too much to hope that the Magic Money Tree might be discovered by Theresa May and used for the right reasons. I’m just hoping the crash happens on her watch.
“I’m just hoping the crash happens on her watch.”
Of course. Its the only just outcome and would appear to be increasingly likely.
May has been so utterly incompetent in every action since she became PM, I shudder to think how incapably she would deal with such a crash.
Rees-Mogg in as Chancellor, I’d imagine. *shudder*
“Over $550 billion wiped off cryptocurrencies since record high just under a month ago”
https://www.cnbc.com/2018/02/06/bitcoin-price-over-550-billion-wiped-off-cryptocurrencies-since-record-high.html
Schadenfreude anyone?
Marco Fante says:
February 6 2018 at 12:38 pm
“Over $550 billion wiped off cryptocurrencies since record high just under a month ago……….. Schadenfreude anyone?”
Probably be just a correction.
Your sense of humour is becoming more sophisticated.
“Ethereum…marking a near 60 percent decline in a few weeks”
“Bitcoin is off around 70 percent from its all time-high hit in mid-December”
“ripple is off more than 80 percent from its record high of $3.81 it hit earlier this month”
Not being an economist it strikes me that one can discuss and analyse the performance/failure of markets and their ‘agents’ ad nauseam. There are endless variable externalities, and permutions within the ‘system’, that produce different outcomes. Day in day out. Some predicatable, others less so. We now pretty much know the nature of the ‘disease’ so surely it’s time to stop dissecting that which is known to be academically and experientially flawed – even morally corrupt – and focus our energy on implementing a sustainable remedy.
But nothing fundamental can change until banking itself is totally reformed, with money being invested directly into the PRODUCTIVE economy. Albeit this discussion with Prof. Richard Werner, City veteran David Buik and Ross Ashcroft has been posted previously, but for anyone who hasn’t seen it, worth skipping to 3.20. https://www.youtube.com/watch?v=qpq2eqz6mR0.
As he says, it’s absolutely not rocket science – but will require a degree of governmental intervention and regulation that is unlikely in the forseeable future. Until then the aberrations caused by the financial sector will continue to plague democratic societies, with the real risk of actually destroying them.
So, it’s beyond time to wipe the slate clean in order to generate the tangible wealth required for the running of a fair and just democracy, and not the kleptocracy currently imposed on us by a lazy, corrupt and dangerous élite. Some commentators like Chris Hedges are even suggesting it may be time to go on the streets with the pitchforks.
Rant over.
PS: wouldn’t PQE be a natural outcome of such reform?
I might wish pqe a natural solution but I think it would require will too
In my view PQE also requires politicians who know what macro economics is and that it is different to micro economics.
This to me is the biggest issue. If our voted representatives are ignorant of the latent power that they have over our nationalised bank, then woe be to us.
I don’t see many politicians advocating PQE as described here and elsewhere. I remain deeply concerned.
The Japanese channelled money and not too much into the productive area of the economy. they did very well until the Bank of Japan sought independence.
Richard,
I have a couple of questions for you.
The current market selloff in equities has been sparked by a selloff in bonds, as interest rates are likely to go higher faster given the strong growth in the US economy and good growth elsewhere in the world. With the low unemployment this brings this is pushing up wages, and therefore inflation with it. This means central banks are going to be ending and the reversing QE, as well as raising rates.
Firstly, I have seen you argue that instead of QE, PQE should have been done, because QE only raised asset prices rather than affecting the real economy. Now you are saying that PQE should also be used….because asset prices are falling!
Are you basically saying that PQE should always be used no matter what the situation? If not, when should PQE NOT be used?
Secondly, PQE would involve dramatically increasing the money supply – I’ve seen you suggest 50bn a year. This influx of new money to the economy would almost certainly increase inflation. Which would then require increases in interest rates to counter it.
Tax rises to remove the increased money supply would have to be drastic, and therefore politically they would never happen. Given the total tax receipts of government are around 700bn, you would have to increase taxes across the board by 7% just to deal with the 50bn of newly created money, let alone all the extra cash that money would create in the greater financial system. It’s just not feasible.
So, if you do create all this new money through PQE, are you saying that you would allow much greater inflation, or would you be arguing for much higher interest rates? Or are you somehow saying that a huge new influx of money put directly into the economy wouldn’t create any inflation?
I argued when PQE first hit the agenda in 2015 that it was an instrument for long term use as a backstop to a Nation al Investment Bank that could in normal times borrow to fund its activity
In other words, the QE element would kick in during a down turn
The National Investment Bank would however be an instrument for industrial policy
I said that if we are now to see a downturn this is the time for PQE
But it was an ‘if we are to see a downturn’ message
So I gace changed nothing in my thinking and not an iota of my suggestion as to when PQE should be used
And perhaps what you do not realise is that in downturns banks stop creating the money the economy needs, of which they deliver part when lending. So if lending stops do does their money creation and so money creation by the government is required to ensure economic liquidity.
Does that create inflation? Of course it cannot in a downturn because by defintion in downturns there is slack to be put to use by the new liquidity.
So again, my message is completely consistent and logical, and backed by fact and theory
Do you have any problem with that? Or will you continue to make stuff up suggesting I have said things that I never have?
Oh, and whilst you are about it, are you a fan of credit controls to stop banks creating new money in the identical process that PQE uses? Might you let me know, and if not, why not?
You are now saying that PQE would only be used in a crash, and a national investment bank would be normally funded by debt, but this doesn’t seem to be the case always.
In January you were saying (headlines from your blog):
“The companies hit hard by Carillion don’t need bank loans: they need new capital backed by People’ QE”
and
“The fundamental flaw in PFI can be overcome by People’s QE”
Which make no mention of a crash. You keep saying that various things can be funded by PQE regardless of the general economic situation. You specifically say that a NIB can be funded by PQE – not debt funded.
“Oh, and whilst you are about it, are you a fan of credit controls to stop banks creating new money in the identical process that PQE uses? Might you let me know, and if not, why not?”
PQE and bank credit creation are totally different. Anyone with a basic understanding of finance should know this. Even you yourself say that PQE money created is “free” (which I assume to mean has no liability) whereas bank credit creation might increase the velocity of money, but has both asset and liability sides of the equation.
In other words, as you have claimed repeatedly, PQE creates new money which can be exhanged for assets – and thus creates new value. Bank credit creation might create “new money”, but that money is offset against an equal and opposite liability so no new value is created.
Banks also already have credit controls in place, both directly (through Basel 3/Capital adequacy etc) and indirectly through market funding mechanisms. You don’t seem willing or able to put what limit there could or should be on PQE as as far as I have seen, you suggest that there are no risks to PQE – specifically that it won’t cause inflation or devalue the currency.
Which brings me back to a question I asked above: how much PQE would you create annually, and how much would taxes have to rise to counter the inflationary effect? Or are you simply saying there would be no inflationary effect? If taxes had to rise significantly, don’t you think that it would be politically impossible to raise taxes by the large amounts that would be needed, if you are solely using taxes to neuter the resultant growth in money supply and inflation?
“So again, my message is completely consistent and logical, and backed by fact and theory”
I’m not sure PQE is backed by fact and theory, as you claim. If it has, please can you give me an example where it has been tried, been successful and the theory behind it. MMT might well be a theory, but it is one absolutely riddled with holes. Given that printing money and spending it directly into the economy has been tried and when done, has caused massive inflation and long term economic damage.
Your arguments aren’t consistent, and seem to change dependent on what you are writing or being asked. Your message seems to be that we can use PQE to spend on everything we should ever want (as long as it’s the government that does it) and that there are no risks to doing so, it’s only neoliberal thinking and “the rich” that are keeping everyone else down, otherwise we’d all be living in state funded luxury.
Richard
You rally are a master time waster by quoting out of context.
The FT wrote a hostile review of QE here https://www.ft.com/content/c1060fb0-41b4-11e5-b98b-87c7270955cf
At the same time I was noted to say:
Please use the sharing tools found via the email icon at the top of articles. Copying articles to share with others is a breach of FT.com T&Cs and Copyright Policy. Email licensing@ft.com to buy additional rights. Subscribers may share up to 10 or 20 articles per month using the gift article service. More information can be found at https://www.ft.com/tour.
https://www.ft.com/content/0c1dfebc-41ac-11e5-b98b-87c7270955cf
Richard Murphy, a prominent advocate of people’s QE, told the Financial Times the idea works only if the current government’s plan fails badly. “People’s QE is necessary only if George Osborne’s plan comes off the rails pretty fast, which it almost certainly will,” he said. “There is a significant risk of another recession.”
So, I was clear: PQE is a backstop
That’s precisely what I meant by ‘backed by PQE’ when discussing Carillion as well: if the loans did not come in to an NIB then PQE could do it
And if PFI is too costly to but out any other way, PQE can do it
And let’s be clear, you quite clearly do not realise that all money is created in the end by a government promise to pay, backed by tax. Even bank made money is backed by that fact and the licence the government grants to them to use that promise.
There is always a debit and a credit
On the case of monetisation the credit is to equity and not liability. That’s the difference. The government is saying it will permanently leave money in circulation because the eocnomy needs it
But in practice it can always reverse that with tax whenever it likes – which is why tax and not monetary is what should control inflation
The ability to tax is the balance in the equation
Do you deny that?
And do you deny that there is a need for government created money which does grow with the economy?
My message is clear: we can and should deliver full employment. When banks can’t or won’t deliver the liquidity to do that government should. PQE can do that in better ways than QE. It could be unwound by tax or bond sales but the reality is that is exceptionally unlikely and we should recognise that reality
Do you have a problem with reality is ultimately my question? Those who deny MMT do because it simply describes what actually happens. Tell me where it is wrong if you deny that
‘Richard’
As far back as I can remember no one here has advocated PQE/GQE forever and a day. It is a new idea to deal with the boom and bust cycles we’ve all been living with for far too many years. We only use PQE when we need to.
Both QE s have been proposed as a means to address low demand in an economy that has been seriously damaged by stupid Tory policies like austerity since 2010. Mind you, we could also have done with PQE after 2008 crash too.
All PQE is, is a measure to be used until the economy recovers and does what it should do – producing and circulating wealth and social utility to the greatest amount of people unlike the orthodox crap we’ve putting up with like austerity that only seems to help the top 1% and the financial sector only.
I would like to see PQE/GQE used. Let’s see what happens. And if and when the QE s achieve their goals, we then do something else and QE is revised down.
And instead of the real economy being made to change (less wages, more job insecurity, less unions etc.,) we could then turn our attention to the real source of the boom and bust problem leading to reforms in the banking and financial and pension sectors via more oversight, regulation and law.
Who knows – after draining the swamp that is the banking and financial sector we may never have to worry about boom and bust or QE again?
It is a weird situation when Governments will tolerate excessive risk taking and its consequences in say the derivatives markets of the financial sector but will not risk trying PQE/GQE.
The only answer that can be is that the interests of that sector are over-represented in our politics.
Richard,
I am not trying to go into the rights and wrongs of normal QE, though there hasn’t been a recession which you have repeatedly forecast.
I am trying to ascertain from you when exactly PQE would be used, because reading through your articles you use it as a catch-all for when spending needs to happen – and you claim there is no cost and no negative consequences to it. We aren’t in a recession, but even now you are suggesting it should possibly be used for Carillion and to buy out PFI. If those, why stop there and what limits would there be on it? Even in your last comment you say it is incredibly unlikely that PQE would ever be unwound, so again, where is the limit for it?
I am also asking the very pertinent question of how tax would control the inflationary effects of PQE. If you did a certain amount of PQE – say 50bn which you yourself have suggested on occasion – how much would taxes have to go up by to remove that excess money supply from the system and control inflation? This is the method you are saying you will use to control inflation, so you must have some idea about how much taxes would have to rise to manage inflation, otherwise inflation could run out of control quite easily.
This is a very important question as one of the many flaws in MMT, and probably it’s biggest, is that it doesn’t contain a plausible theory of inflation. Without that, it is impossible to manage your tax rates to control inflation. Are you saying that you can provide us with such an inflation model and therefore tell us how much taxes would have to rise?
“On the case of monetisation the credit is to equity and not liability. That’s the difference. The government is saying it will permanently leave money in circulation because the eocnomy needs it”
Again, bank creation of money and PQE are very different. Bank creation leads to a asset/liability of equal and opposite size. If a government issued bonds it would have exactly the same thing on it’s balance sheet – asset/liability. You are saying that PQE can create new assets without an associated liability, or in effect that the liability can be cancelled. You are making things up when you are talking about “monetisation the credit is to equity”. That statement is pure nonsense. This is a simple asset/liability question.
“Those who deny MMT do because it simply describes what actually happens. Tell me where it is wrong if you deny that”
If MMT was accurate, why would people deny it? The problem with MMT is that it doesn’t describe financial systems or economics very well. MMT is essentially a derivation of neo-chartalism, itself re-statement of Keynesian economics, but doesn’t deal with problems like inflation (where as I say it has no consistent model), monetary policy, fiscal conflict and it makes vast assumptions on the stock flow models for exchange rates. It’s not exactly a new or revolutionary theory – it’s been around in various forms for years.
As I say, if MMT was correct, why hasn’t it and PQE been tried? Why indeed has every occasion of a government printing money and spending it directly into the economy ended in economic disaster? There is literally not one example where it has been done successfully.
@ Pilgrim Slight Returns
“We only use PQE when we need to.”
As I asked Richard, when exactly is this? It seems Richard is suggesting we use it for a variety of situations, and not only when the country is in the grip of a recession.
“All PQE is, is a measure to be used until the economy recovers and does what it should do — producing and circulating wealth and social utility to the greatest amount of people”
The economy has recovered. It has been growing fairly well since 2010. Are you saying that it should grow even more? Or is it the case that you simply don’t like the idea that the economy grew under the Tories. Unemployment is low, and even inequality has fallen since the days of the Labour government. You might not like it, but that is the truth.
“I would like to see PQE/GQE used. Let’s see what happens.”
And what if, as money printing always is, PQE is an unmitigated disaster? To control the inflation PQE would cause would require massive, politically impossible tax hikes across the board. Which would damage consumer spending and thus growth. The increase in the money supply would almost certainly devalue the pound, again increasing inflation. Monetisation has been tried many times, and has ended in ruin literally every time. So what makes you think calling it by another name, PQE in this case, will be any different?
“we may never have to worry about boom and bust or QE again?”
Except the main criticism of MMT is that it’s lack of an inflation theory, plus the removal of the fiscal constraints to a government’s spending are a recipe for major instability. Various countries – almost always with a left-leaning/socialist government, have printed money to fund government. It’s not like it hasn’t been tried, so why has it failed every time?
“It is a weird situation when Governments will tolerate excessive risk taking and its consequences in say the derivatives markets of the financial sector but will not risk trying PQE/GQE.
The only answer that can be is that the interests of that sector are over-represented in our politics.”
Or it could simply be that PQE is generally understood to be a much bigger risk than derivative markets. People do understand MMT – it’s hardly a secret in the economics world – and it is also no secret that is holier than swiss cheese. Would you want to take huge gamble on a theory which is unreliable and unproven at best, and the times similar policies have been tried there has only been one outcome?
What a lot of waffle to make very few points.
Re PQE, my answer has always been clear. It’s to be used to fund an NIB when either a) markets would not but full employment policy demands it or b) when the economy’s need for new liquidity requires it.
The first extends current government policy: it does not seek to deliver full employment. We do not have anything like full employment now: we have disguised under employment, much of which is exploitative.
The second is making sure QE results in real spend in the economy and is not just about inflating financial assets.
Please explain your problem with either.
Re MMT and inflation. MMT wants some inflation. I think 3% at least desirable. It controls it by tax.
But let’s be clear what your real message is, which is you do not want governments to create the money the economy needs. Who else ever has is my question? And please don’t say banks. You might have noted they do it under government licence.
You are avoiding my direct questions:
What are the limits of PQE, and exactly when would it be used. You haven’t given a clear indication, and indeed have claimed PQE could be used in other situations, like Carillion and PFI. You are essentially saying that PQE could fund anything and everything the government ever wants.
“The first extends current government policy: it does not seek to deliver full employment. We do not have anything like full employment now: we have disguised under employment, much of which is exploitative.”
MMT has huge problems here – see the Palley paper.
“The second is making sure QE results in real spend in the economy and is not just about inflating financial assets.”
QE lowers interest rates and forces people to buy other assets to make a return. Have you any evidece that PQE would do anything different? Interest rates would be set at zero, forcing people into other assets, and inflation would likely run high, again causing asset bubbles.
“Re MMT and inflation. MMT wants some inflation. I think 3% at least desirable. It controls it by tax.”
I am asking you directly to tell me how much tax rises would have to be to control inflation, or a certain amount of PQE.
My guess is you simply are unable to. Not least because MMT can’t tell you the answer to that, as it can’t properly account for inflation in it’s model.
“But let’s be clear what your real message is, which is you do not want governments to create the money the economy needs. Who else ever has is my question? And please don’t say banks. You might have noted they do it under government licence.”
No, my problem is that MMT is at best a huge over-simplification of economics and at worst is being used as cover for thoroughly lunatic economic ideas. it is a theory and only a theory, and has lots of very serious problems with it.
I have answered your question, as clearly as just about any economic question can be. I am not sure what I might add
I have also explained what ‘backed by’ means: it says that if support for a bond is required it will be
But what you actually make clear is that you do not understand PQE. PQE is not seeking to control interest rates. It recognises that interest rates are at and are likely to stay near the zero bound, even if they rise a little because of inflation. In other words it recognises that monetary policy is dead and that there are better issues to focus on, like full employment, productivity, rising median wages, and so much more.
You want to play games in markets. I and others who think like me want to change the real economy. Of course you are asking the wrong questions as a result. And of course you do not understand the answers. You literally cannot conceive of a world where people care.
“You really think the Phillips Curve is now seen to hold true?”
I’m not sure you even know what the Philips curve is, as if you did you would know that it is not a true/false situation, and it constantly evolves – as does the economic theory behind it.
But regardless, most major central banks (including the FED, ECB and BoE) use it or derivations of it – specifically NAIRU or the long-run Philips curve when looking at the inflation, wages and the resulting effect on monetary policy.
Even MMT uses a basic L-shaped Philips curve to determine the inflation effects below full output and at full output. With this gross over-simplification – that inflation is an on-off thing, MMT falls at the first hurdle.
“And you really think Keynes addressed the isssues surrounding money the way MMT does when he lived in the pre ‘71 era?”
No, I’m saying that MMT is a fairly basic derivation of traditional Keynesian supply side economics. It has lots of errors in it, and there are plenty of economic papers pointing out what they are.
Thomas Palley is a very highly respected economist, and other serious economists have also pointed out the various flaws in MMT – not least Krugman.
MMT’s eye opening “revelation” is that governments can print money, and therefore can never technically run out of it. So what? Everyone knows this.
MMTers like yourself then go on to say that this newly created money could be spent into the economy without any negative consequences. This is the point where MMT – and PQE with it – becomes utter rubbish. You are wedded to MMT because it gives you cover for PQE, a big spending government which plays the central role in the economy and high taxes. I’m not sure you really understand MMT or even how QE and PQE works, for that matter.
MMT can’t properly account for inflation, which makes it impossible to predict how much you need to raise taxes to control it. You can’t tell me, and nor can any MMT economist out there, because simply they don’t know. They cover it up – as you have – by simply saying tax rises would stop it.
MMT can’t account for the fact that there is an open economy, and people DO NOT need to hold the local currency until payments need to be made – again weakening the use of taxes to control inflation.
I could go on pointing out the various flaws in MMT, but I’ll leave you with Palley’s summation:
“This paper has examined the theory and policy recommendations associated with
modern monetary theory. MMT analysis is based on the simple well-understood incomeexpenditure
model with addition of a government budget restraint that has the central
bank finance the deficit. Its claims about the ease of attaining non-inflationary full
employment via money financed budget deficits ignore the challenges posed by Phillips
curve analysis, open economy considerations, and financial stability concerns. The oversimplification
of the macroeconomic policy challenge is accompanied by an unwarranted
policy recommendation that central banks set the overnight nominal interest rate at zero
and hold it (park it) there. These theoretical and policy failings are compounded by naive
political judgment regarding the possibilities of fiscal fine tuning and the political
economy implications of ELR for public sector employment.
In the current moment of high unemployment, MMT makes a valuable
contribution as part of the rhetoric of advocacy for expansionary policy. However, as
regards macroeconomic theory, MMT adds nothing new warranting its own theoretical
label. Instead, its over-simplifications represent a step-back in understanding. In physics,
the crank physicist is drawn to the idea of a perpetual motion machine that denies the
effects of friction. In economics, the crank economist is drawn to the idea of a money tree
that voids financial constraints and macroeconomic trade-offs. MMT constitutes a form
of modern money tree economics.”
I have already answered these points
Repetition is trolling on this blog
And trolling leads to deletion because it shows you actually have nothing useful to say
\then answer the question:
You say tax will be used to control inflation created by PQE.
Do you (or anyone else for that matter) have a model to suggest how far tax rises will have to rise to counter a given amount of PQE?
As it is, both you and MMTers in general gloss over the inflation problem by simply saying “it won’t happen”.
I also ask again: plenty of serious, published and respected economists have pointed out massive flaws in MMT. Are you saying that this large group of economists have it all wrong, and MMT has no issues whatsoever?
I see there is a theme on your blog – you block people every time they point out your inconsistencies, disagree with you, point out problems with your arguments and generally expose your lack of knowledge and understanding.
You’re still here i note, which proves one of your cla8ms wrong
And how much tax will PQE require?
Let’s assume a reasonable multiplier of 2.5 on investment, which is what it will fund
How much tax do you think PQE will raise in that case given current prevailing average takes?
Then answer your question
To add: I suggest you read the following paper by Thomas Palley for a thorough treatment of all of the various problems with MMT.
http://www.thomaspalley.com/docs/articles/macro_theory/mmt.pdf
That is quite amusing
You really think the Phillips Curve is now seen to hold true?
And you really think Keynes addressed the isssues surrounding money the way MMT does when he lived in the pre ‘71 era?
You really need to jo8n this century.
What waffle! Again! Once again, I pity the poor students underneath you who have to deal with your bias on a day to day basis. Grow up. Get over the chip on your shoulder. You have talent. But every nonsense article such as this just diminishes that talent.
WOuld you like to explain the nonsense, starting from economic theory?
I thought you normally said that most of economics is wrong? (Not that you actually studied economics – didn’t you previously boast about never going to any lectures)?
Bill
You really shouldn’t believe everything Tim Worstall writes
What I said was that most of microeconomics, and so now much macro, is built on assumptions that are very obviously wrong
And I said I realised this in my first term as an undergraduate
But I never said I did not attend lectures. I wanted to know why it was wrong and what to do about it, even then
I suspect I attended 98% or more of all my lectures and classes as a student
I suggest you stop talking nonsense
Richard
The effect on money in circulation depends on where it is put.
Buying and object and putting a higher price on it changes nothing other that the amount of cash in your wallet.
To be overly simplistic as an example buy a potato and put it in the ground and at the end of the year you might have 6 potatoes plus the original one. That is deflation in action and putting money to a productive use.
Most sophisticated – give the money to an SME that buys a faster lather – result more good produced for lower cost, deflation in price and increase in quality. After 10 years the machine to replace cost twice as much and the companys depreciation system has set aside only the original cost. The gap is dissolved by the original gift/loan/PQE.
Watch the movie Prince of the Yen several times and come back please.
If a first year undergraduate had given me this it would be 49 at besr.
When did you last teach an undergraduate?
And how many?
And what about?
Pauline,
If a student handed in an un-requested editorial rather than an assignment then you wouldn’t expect them to do well. So, not much room for comparison there.
BTW reasoned arguments don’t cost money so if you any to share…
Pauline says:
“If a first year undergraduate had given me this it would be 49 at best.”
I’m not sure either George Osborne or Phillip Hammond would score double figures judging by what I’ve seen over the past eight long years.
Yes Andy – and they are being PAID to implement policy that is based on CRAP!:
Chancellors
Refusing to
Acknowledge
Problems
Definitely an ‘F’ for those two.
You are trying to pull as fast one Mr Murphy. What you are saying about PQE is deeply disingenuous and frankly, little more than a fraud.
You are saying PQE can be used to spend money into the economy on all sorts of things, and you make out that because it doesn’t create any new debt that this spending is “free”. The voting population get lots of lovely things without having to pay for it. Who wouldn’t vote for that.
What of course you don’t say, is that the resulting inflation would have to be controlled by higher taxes. So any new money put into the economy would taken out again through much higher taxes on people. You don’t tell people that for every penny of PQE, eventually that penny will have to removed via higher taxes.
If you were being honest, you would simply say that you want higher spending and you want to pay for it with higher taxes. Some people might agree with you, many won’t. But you are not being honest. You are telling people they can have their cake and eat it, whilst trying to hide the fact that they are going to have to pay for all that spending in the end.
But what you ignore is that spending goes into people’s pockets to create real infrastructure
And that boosts productivity and real pay
And the economy grows
And as a result it is true that more tax is paid
But everyone is better off
And when we have under employed resources this is simply what happens
That is when I say PQE should be used
Now tell me why you are offended by investment creating growth and increasing wages?
I’m not ignoring that the spending goes into people’s pockets and it creates real infrastructure. PQE claims to do that, but so does everyday debt funded deficit spending. Which can also grow the economy etc. You are ignoring the fact that PQE is not the only manner in which investment can happen – you are making out as if PQE doesn’t happen there won’t be any growth, and governments won’t be able to invest. As if PQE is the only solution.
What you are trying to claim though, is that PQE is essentially “free”, because the government can print the money and doesn’t have to issue debt.
The insinuation being that because the government doesn’t have to borrow, it doesn’t have to get any more money from its taxpayers.
Of course the truth is that PQE would lead to massive tax rises (which you won’t tell us about, or how big they will be) to control inflation – and I see above you say several times that tax rises would be used to control inflation.
Which is why, until you can tell us exactly how big tax rises will be to control PQE of a certain size, what you are claiming is basically fraudulent. You are telling us about the benefits but failing to tell us about the costs.
Gavin
You really are a time waster
Note I was reported to say this in the FT in 2015:
https://www.ft.com/content/0c1dfebc-41ac-11e5-b98b-87c7270955cf
Richard Murphy, a prominent advocate of people’s QE, told the Financial Times the idea works only if the current government’s plan fails badly. “People’s QE is necessary only if George Osborne’s plan comes off the rails pretty fast, which it almost certainly will,” he said. “There is a significant risk of another recession.”
Mr Murphy is an adviser to the Trades Union Congress and a long-time campaigner against corporate tax avoidance, a subject on which he has been quoted by the FT and other publications. But now his views on economics, which he studied as a degree, are being sought out as his influence on the MP for Islington North becomes clear.
Mr Murphy has known Mr Corbyn and other leftwing MPs such as John McDonnell and Michael Meacher for years, having served alongside them on a group known as the Left Economics Advisory Panel. But he said he was only aware that his ideas had been picked up by Mr Corbyn when the latter’s economic policy was formally launched.
The idea of people’s QE was floated during the depths of the crisis but some economists say that if it was used during more benign conditions, it could cause inflation and undermine the independence of the central bank.
But Mr Murphy said on Thursday that people’s QE would be essential by 2020 because the economy would probably have taken a battering by then. “China’s currency devaluation is likely to export deflation, to prick the housing bubble and to prick the investment bubble,” he said. “But if it is not China, it will be something else – there are significant other problems which the chancellor is doing nothing about.”
In any case, he added, if Mr Osborne’s plan for the economy was successful, there was no chance of Mr Corbyn or any other Labour candidate becoming prime minister in 2020. “There isn’t going to be a prime minister Corbyn – or Burnham, or Cooper, or Kendall – if George Osborne delivers his plan. If you deliver bright, shiny blue skies, then arguing about whether Corbynomics works is irrelevant.”
So you’re arguing with a straw man of your own creation.
I always said, as I still do, that PQE functions in a downturn and is a backstop if markets cannot deliver debt finance or if it is undesirable to ask them to do so.
And as you know, QE does not, as PQE would not, lead to massive tax rises in that case
Indeed, it cannot because in government income accounting
G = T + ∆B + ∆M where M is government created money
QE substitutes for tax then
You are talking nonsense at every stage.
And as as for saying if I cannot predict future tax I cannot suggest PQE, that;s like saying if I do not know the outcome of a football match it should not be played
Politely, please do not be silly
No, I think you are the one with the straw man here.
QE doesn’t create inflation directly because it doesn’t put new base money into the economy. It works by lowering interest rates. You can see this in the UK’s monetary aggregate figures. M0 in the UK is 82bn and as we all know QE was far larger than that.
PQE directly puts new money into the system. It creates new M0. They are totally different animals.
Your equation doesn’t tell us anything either. Sure, if the government creates new money it has more of it. G gets bigger because you have increased M. Wow. Give yourself a Nobel prize for that insight.
That is not th epoint I have been making. If a government creates lots of new money, that will be inflationary. And you are telling us that to combat inflation it will have to raise taxes.
So on one hand you say that PQE won’t lead to higher taxes or inflation, but the government can print money as it sees fit with no consequences. On the other hand you are saying that MMT and PQE works by raising taxes to remove the excess moeny from the system and reduce inflation. Do you realise how ridiculous that is? You can’t have it both ways.
If you can’t predict how much inflation PQE will cause (apart from saying it won’t create any), how can you be sure it won’t create any inflation? And if you can’t predict how much inflation it will cause, how can you control inflation, because you – as you admit – don’t know how much taxes will have to rise.
But you seem to be willing to take a massive economic gamble on PQE, despite not knowing how it will work, or how any inflation can be controlled. High inflation is the best way of pushing millions of people into poverty, and crashing an economy. But because you don’t know what the score of a football match will be before it happens you are willing to take huge risks with the economy, despite other experts clearly saying that PQE would be a disaster.
Wow! You think M0 is moeny? Notes and coin is it?
And you want to be taken seriously?
If this is the limit of your understanding no wonder you dan’t understand that what the rest of your questions demand is that if anyone does not know the future the6 may take no action
And that would be true for any economic model: no one knows the future
You really are wast8ng my time
I didnt realise there was another Gavin commenting on this page.
Gavin other Mr Murphy is right. The application of money into productive areas of the economy is best done by a British retail Bank or like an Investors In Industry Bank. Areas of banking that are non productive should be reduced and that includes property lending for buying, financial money trading. . . . .
PQE is a way in which you can assist spending although to stop the money just going to pay off debt or build up a cash balance which is not so productive hence Keynes ? suggestion of coupons that would expire worthless unless spent.
Far better is Richards allocated banking channel as the borrowers would tend to be SMEs who employ most of the working population and use the money to add value in their production processes training rather than he unproductive pass the coin/note around clipping a bit off each time.
Investment in productive assets increases taxes eg the German Autobahn, the US highways network which at the time republicans said ‘would bankrupt the country’ but actually allowed many more travelling trips by a driver reducing costs per item increasing demand and sales and sales taxes. Also savings of travellers lost time spent travelling allows greater production and other efficiencys which generate more taxes.
Watch the Princes of the Yen for an education
Gavin Palmer,
Are you trying to tell me that the government can tell us what parts of the economy are going to be productive now and in the future? Without political or ideological interference?
Apart from the fact that governments have a horrible track record of getting business and productivity right, what would happen to an industry, nationalised and paid for by PQE that wasn’t doing well or being productive? Do you think the government would shut it down and fire the workers, or do you think they’d keep it going forever, paid for by yet more PQE, so they don’t have to make politically hard decisions.
You say that certain areas of finance aren’t productive. That’s your view, and is ideological. You don’t have any fact to back it up. Do you think politicians would be any different?
You don’t mention the problem I brought up either though – you can spend all you want through PQE but if it all has to be taxed back, the idea the Murphy is putting about that PQE can pay for anything and everything without any cost to government or it’s taxpayers is a lie – he’s ommitting the fact that if 100bn of new PQE money was created taxes would have to go up by the same 100bn or we’d have an inflation problem.
Gavin,
Are you trying to tell me that markets can tell us what parts of the economy are going to be productive now and in the future? Without political or ideological interference?
And don’t you agree that markets have a horrible track record of getting business and productivity wrong and then require bail outs for their liabilities at cost to society at large?
Richard
No I’m not saying markets can tell the future. But they have a much better track record of productivity than goverments. And they are influenced by profit and growth, not by winning votes to stay in power. Government controlled industries have been huge failures, let alone the massive waste in day to day government spending.
Do you honestly think a Labour government would fire people, or cut their pay to improve productivity when a nationalised industry is doing badly? If the industry was losing money they’d simply keep throwing more at it, because letting it fail would lose them votes and lose them face.
But don’t take my word for it. Why not take a look at the ONS data, which shows that public sector productivity hasn’t changed in 20 years, whilst in the same period private sector productivity has increased by about 25%.
You just don’t like markets, and want the government to do everything, even it doesn’t do it as well. And then you want the government to be run by left-wingers, and I guess ideally you’d like to be made a Lord and get the chance to run the government, or at least part of it.
Let’s consider for a moment why the private sector has a better record on productivity
Tell me how very large parts of government services that require time and face to face service can see productivity improved without dramatic failure in quality?
Of course you can have the time for a medical examination, for example. But the you miss the diagnosis
Is that what you would want?