The FT has noted in an email this morning that:
Mario Draghi has given his clearest indication yet that the European Central Bank will launch another round of stimulus should the climate of weak growth and political uncertainty fail to lift, saying policymakers would discuss how to react to the downturn in the coming weeks. The comments triggered a fall in euro while German government bond yields hit a record low.
At some levels the decision is rational: it is clear that there is insufficient money creation within the eurozone to meet demand for currency and so the government must meet it.
But, we also know that QE has failed because it has promoted asset bubbles and wealth inflation and so created increasing social division within the EU and elsewhere.
My response then is simple: at long last make this green quantitative easing, which I explain here. This injects funds into the economy, creates job, greens the economy and provides real jobs that result in reducing inequality. Surely the time has come for this?
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Fat chance of money going into the real economy. That would be helicopter money.
Only the financial sector has the expertise to hoover-up government issued funds and make sure it is securely off-shored. Poorer people would just squander it on goods and services: shoes and clothes for their children; food which they would greedily devour and have nothing to show for it.; rents to property owners…that sort of thing .
No. Better to keep it in the finance sector where it’s safe. In nice tidy virtual piles, unsullied by the greasy finger prints of commerce.
I’m not sure that more Green QE will reduce inequality. Getting rid of the Winter Fuel Allowance and sticking £4/week on the state pension ( and pension credit and the applicable amount of benefit claims ) would reduce inequality, but that isn’t Green QE – that’s a better design of welfare and tax system.
But look at the programmes that have already been financed by Green QE e.g. CrossRail, HS2, cladding on tower blocks from the Ecofund that sort of thing. No evidence there that inequality has been reduced.
I think people need to make up their mind about their priorities – is there a Climate Emergency or not? If there is then tendentious links to good jobs, inequality reduction, injecting funds ( the drug user analogy ), jobs being ‘real’ can go on the back burner. Let’s solve the main thing using the best science possible, as endorsed by Nobel Laureates Romer and Nordhaus.
What a lot of unlikely names are populating thee pages today…..
And of course Green QE need not reduce inequality. In the wrong hands it won’t. In the right hands it most definitely could
Is it really necessary to state the obvious all the time?
You are conflating various things.
It is common to claim, but innaccurate that QE creates money. It creates bank reserves. There is a subtle but important difference.
New money would directly increase the money supply by that amount and it could go straight into the wider economy. There would in fact be no need for the bond purchase part of QE – you may as well just print it and spend it if you are going to do it this (utterly retarded) way.
QE creates bank reserves by replacing one reserve asset (government bonds) with another. These new reserves can’t enter the rest of the economy on a wholesale basis (because banks still need to hold onto the same amount of reseres, so instead of holding bonds they place cash with the central bank) – so the increase in the money supply is less dramatic and is driven more by the lowering of interest rates, which is the whole purpose of QE.
So by saying that any new QE, Green quantitative easing as you call it, should be done, you are mis-labelling it entirely. It wouldn’t be QE, it would just be fiscal expansion through pure money printing. This would likely only have a very short term boost, with the resultant weakening of the currency and impact on higher inflation.
It would also be wholly incorrect to say that a lack of money creation is problem. Eurozone M3 money supply has been growing at over 4% year on year since 2008. This is quite a large increase in the money supply, yet demand and growth haven’t really increased. Which would suggest the availability of money is not a problem, and that the Eurozone has much bigger structural problems (which it does – the EU is an economic mess).
You really do need to learn some double entry
WHat do banks do its the proceeds of sale?
How is the yield curve changed if the banks cannot use the proceeds of sale to buy higher risk assets?
I’m sorry – but you have this wrong
I do not dispute that bank re3serves are created but your logic is lacking, I think
Really not sure you understand QE, given what you have said.
Let me walk you through the process. I’ll simplify it marginally for legibility, missing out things like CA ratios etc.
Banks have government bonds on their books as Tier 1 capital.
Government/Central Bank does QE. Buys Government bonds already in issue. This raises the price/lowers the yield of these bonds.
Bank sells bonds to Central Bank. Bank now has no bonds, but instead has cash.
Bond prices rise/yields fall.
Bank still needs the exact same amount of Tier 1 capital, but instead of bonds it has cash. Because you can’t lend out your Tier 1 capital on the street, it can only get placed at the central bank (which is seen as 100% safe), creating CB reserves.
The yield curve is changed ONLY by the action of the CB buying bonds. Your statement “banks cannot use the proceeds of sale to buy higher risk assets?” is garbage. There is only one yield curve for government bonds.
Other assets might increase in value as other investors are forced to buy other assets, because of the lack of supply of government bonds or more often that those government bonds now offer incredibly poor investment returns.
This is not the same as the banks using the cash from QE to buy other assets. They can’t use that QE money for anything else.
The way QE increases the money supply is by lowering interest rates across the board, making borrowing cheaper and thus incentivising people to do so. The clue is in the “easing” part of QE.
This is also why QE has not been as effective as people hoped – £375bn of QE has not created £375bn of new money. It creates a marginal effect.
Which is why what you call Green QE (printing M0 money to spend directly into the economy) is not QE. It is just money printing/helicopter money. QE indirectly creates new M3/4 money, but only through the effect of lower rates – and even then the money supply aggregates didn’t really increase dramatically because of QE. In short, the money supply didn’t increase by £375bn because of QE (M3 increased about £40bn in 2009/10 and then stayed roughly the same till 2016, where it started increasing again).
Also, in short, I don’t think you really understand QE.
You know banks owned remarkably few gilts, don’t you?
Are you sure you understand this? You got that wrong, and so just about everything else that followed was
And for the record I have never suggested Green QE is the same as QE, but it can be via buying the bonds of a Green Investment Bank
And if you are so sure that QE does not create money you may need to ask why the BoE says it does
Banks CURRENTLY own about 17% of the whole Gilt stock. This is much lower than the amount held in 2008, yet still a large amount.
“Are you sure you understand this? You got that wrong, and so just about everything else that followed was”
Yes. I am sure. What exactly have I got wrong so far? Are you sure you understand QE, because at the moment you keep making statements which are manifestly wrong.
“And for the record I have never suggested Green QE is the same as QE, but it can be via buying the bonds of a Green Investment Bank”
It isn’t the same, but it is the same! Do you ever re-read the idiotic statements you put out?
This is again complete nonsense, and yet again shows your total lack of undertanding of QE. QE is nothing to do with printing money – it is everything to do with lowering interest rates. As I said before, the money supply does not increase by the amount of QE.
If a GIB issued bonds, which were then bought up by the central bank/government, you are just sticking an extra layer in the money printing press. You may as well not bother with the GIB at all and just have government print the money.
And that is ignoring the fact that to issue bonds a GIB would need to be capitalised, and would still need to hold T1 assets on it’s own balance sheet against the debt it was raising.
“And if you are so sure that QE does not create money you may need to ask why the BoE says it does”
Ah, you are referring to what the BoE call the idiots guide to QE, I assume. Is that the sum of your knowledge?
The BoE recognize absolutely that QE does NOT directly increase the money supply, and that QE is not money printing. It creates bank reserves, but the real function is to lower interest rates and extend credit channels.
What you are talking about – GQE – is nothing more than helicopter money, which the BoE themselves think is a terrible idea.
With respect, any serious economist thinks QE if not redeemed (and there is no chance it will be – just see what the ECB is doing today) is the creation of money
With respect, you are simply wrong. And the BoE do agree.
As for the comments I made on GQE – they are completely reconcilable
Direct intervention is not QE as done to date
Buying a GIB’s bonds would be
It’s really not hard to understand. Unless you don’t want to of course
And GQE is not helicopter money – because it is not given directly to the population
I really do think you need to learn some very basic basics
Please do not waste my time again
Are you serious? Literally everything you have said here is wrong.
“With respect, any serious economist thinks QE if not redeemed (and there is no chance it will be — just see what the ECB is doing today) is the creation of money”
Any serious economist would tell you QE creates bank reserves. It isn’t money in the traditional sense, as it cannot be directly spent. Also, QE is being redeemed at the moment by the FED. The BoE has also stated they are likely to do the same soon.
If QE created all this new money, why doesn’t it show up in the money supply data?
“With respect, you are simply wrong. And the BoE do agree”
No, they really don’t.
“As for the comments I made on GQE — they are completely reconcilable”
No, they are nonsense. What you are calling GQE is simply money printing to spend by the government. Funneling it through a GIB doesn’t change that.
“Direct intervention is not QE as done to date”
This is the only thing you have managed to get right. QE is not the same as money printing for governments to spend as they see fit.
“Buying a GIB’s bonds would be”
Again, you are mixing up QE and money printing. If a GIB issued bonds and the government printed money to buy them…..you may as well cut out the middle man and just have the government print and spend the money. It is EXACTLY the same.
“It’s really not hard to understand. Unless you don’t want to of course”
You are truly joking right? You can’t even see the contradictions in what you are saying. I get the feeling you knowledge of banking and finance is EXTREMELY limited.
“And GQE is not helicopter money — because it is not given directly to the population”
Literally the funniest and stupidest thing I have read all day. Helicopter money is just newly printed money. It doesn’t matter if the government spends it or hands it out – it is still the same thing. You REALLY don’t understand that?
“I really do think you need to learn some very basic basics”
Chap, I think you really do. From the utter tripe you are gargling out, I wonder if you have any experience, training or knowledge of what you are brain-farting. Did you come up with all this whilst sitting on the toilet, or more worryingly, do you actually think this is high quality stuff?
“Please do not waste my time again”
I assume this is the part where having made you look like an idiot, you do what children do and block me?
Ok. So you think I am wrong? And that no one agrees with me?
So I trawled definitins of QE. They all go something like this, without exception:
https://www.investopedia.com/terms/q/quantitative-easing.asp
Quantitative easing is an unconventional monetary policy in which a central bank purchases government securities or other securities from the market in order to increase the money supply and encourage lending and investment. When short-term interest rates are at or approaching zero, normal open market operations, which target interest rates, are no longer effective, so instead a central bank can target specified amounts of assets to purchase. Quantitative easing increases the money supply by purchasing assets with newly created bank reserves in order to provide banks with more liquidity.
No exceptions
Now, very politely, go and troll elsewhere
Yes you are wrong. You haven’t managed to answer any of my questions or the gaping holes in your arguments and logic I have pointed out – instead resorting to bluster and rhetoric.
By all accounts this isn’t a new hing for you (bluster, rhetoric or being wrong).
I don’t think resorting to investopedia as the arbiter of what QE means is the best idea either.
Of course, it is easy to see if QE directly increases the money supply. Central Banks publish money supply data on a monthly basis.
By logic we would expect to see money supply increasing by exactly the same amount as the amount of QE injected.
Yet we don’t see that at all. So the EVIDENCE is that QE doesn’t directly increase the money supply. If you had read a real economics research paper (rather than investopedia) you would know this.
With respect all authorities agree it increases the money supply – but you don’t
Now stop wasting my time
I think you are assuming that all the bonds belonged to banks, which is far from true. Most probably belong to pension funds and other institutional investors. Also not all the bonds purchased, either by the ECB or BoE are government bonds. What the purchase of a government bond does when carried out by the Central Bank is to move the contents of a term savings account at the Central Bank (which is what the government bond actually is) into a current (cheque) account instead. So that has no effect at all. It is only what happens to what is now in the current account at the Central Bank (i.e. your bank’s reserve account) that may have an effect. That is only going to occur if the holder does something else with the money. They could of course just put it back into another government bond, but it is probably equally likely to go into some other financial asset. What is unlikely, given it was there as ‘savings’ is that the holder will spend it on goods and services. So the observed effects are mostly financial and very little on the real economy.
Now if the ECB instead purchased €1 trillion of bonds issued by the European Investment Bank, and the bank then funded the completion of a Europe wide high speed rail network, and / or green power (getting rid of coal – hallo Germany!), etc etc then it is still QE, but almost all the impact would be on the real economy and almost none on the finance sector (except in so far as the economy would be booming).
It is not creating money that is the issue – it is what you spend it on that is crucial.
Also worth bearing in mind given the discussion about pensions that if we want folk to save 8% of income, for example, then given that private sector savings = government sector deficit, then you clearly can not have 8% private saving and 3% government deficit without a severely depressed economy.
Thanks Tim
Spot on
“But, we also know that QE has failed because it has promoted asset bubbles and wealth inflation and so created increasing social division within the EU and elsewhere.”
My more cynical take is that QE has succeeded in achieving exactly what it set out to achieve. When you look at the reports of the ECB’s corporate bond buying program it is very difficult to come to the conclusion that the program was going to do anything other than entrench existing inequalities. That QE was ever going to be unwound was a clear lie from the beginning and the complete ambivalence with which the media and our political class has responded to the cancellation of the unwinding highlights not only the dishonesty of fiscal conservatives but the power of corporate interests.
My question is now how far can QE be pushed to keep balance sheets healthy? There has been no recovery from 2008 for the vast majority of British, American or European citizens. It now appears that immediate future is an eroding real economy for the majority and a state of permanent bailout under the guise of QE with liquidity being provided to financial institutions and preferred corporate interests as required.
The GND is about defeating inequality and promoting jobs in every constituency
That is how individual balance sheets will be rebuilt
Exactly. Previous QE was targeted too finely on the financial sector because all the banks were wondering who was holding the biggest bag of shitty assets at around 2008.
All Daniel was doing was trying to ram established practice down our throats on behalf of the usual self interested constituency. The Luddites are still with us – in the private finance sector especially.
https://www.avivainvestors.com/en-gb/views/aiq-investment-thinking/2019/06/modern-monetary-theory-could-it-go-mainstream/
FYI
I can uibble with it re the GND
But well worth reading
Thanks
Richard – Though Collins did not mention Green – his analysis compliments yours
https://medium.com/iipp-blog/better-coordination-with-government-not-helicopters-is-needed-for-monetary-policy-to-find-its-e743770b8ca1