As the FT noted yesterday:
The European Central Bank has added an extra €600bn to the bond-buying programme that it launched to support the eurozone's pandemic-stricken economy as it steps up its efforts to stop the region sliding into a deflationary spiral.
The move to increase the ECB's pandemic emergency purchase programme (PEPP) to a new total of €1.35tn was slightly larger than most economists' expectations and means the central bank is on track to buy a record total of more than €1.7tn of assets this year.
To contextualise this the FT noted that:
The ECB also extended the timeframe of its emergency bond-buying scheme until June 2021 and said it would “continue net asset purchases under the PEPP until it judges that the coronavirus crisis phase is over”.
And they added:
Some investors had worried that the bond-buying plan would not be sufficient to soak up the extra debt of between €1tn and €1.5tn that eurozone governments are expected to issue this year, leaving some of the worst-hit countries, such as Italy, facing a surge in their borrowing costs.
So what does this mean? Rocket science is not required to interpret this message. It is that the ECB has every intention if absorbing the entire cost of the coronavirus crisis to EU member states on its own balance sheet by the creation of new euros that will be used to cover that cost.
The intention is very obvious: net EU government debt will not rise this year despite the very obvious increase in notional borrowing that countries will appear to taken on because the ECB will ensure that none of it, in effect, reaches the bond market.
So, when the question is asked ‘who will pay for the EU's coronavirus crisis?' the very obvious answer is that ‘the European Central Bank will'. And that is right. It will.
That's what modern monetary theory does: it lets us take such crises in our stride and move in, without fuss, and without wholly unnecessary long term economic suffering resulting from austerity, because the cost will have already been covered which is what the ECB is doing.
It's just time that this was acknowledged.
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“It’s just time that this was acknowledged.” – yes but then we move into “Emperor’s new clothes” territory & thus a recognition by EU institutions of a reality they would prefer not to acknowledge – because to do so would then lead to a collapse of the current “mirage” (ECB buys from “the market”). Logic would then (one hopes inexorably) drive the institutions towards letting the ECB buy bonds directly (said action accompanied by shrieks of protest from interested parties such as large banks etc). The cynic in me says that it won’t happen, the optimist hopes that it does. 🙂
I am ever the optimist
So what happened in 2008 was political then – austerity for Greece being the headline, I know Ireland are still “paying back” the 2008 crisis under the universal charge tax now on everyone’s PAYE docket that has yet to go away. It’s that kind of stealth tax that never seems to be wound up that concerns me about how governments and the EU have approached things in the past. Can they do a quantum leap and put right what once went wrong ?
[…] crisis she said very clearly that in the US the Federal government was, which is true, just as the ECB is in Europe and the Bank of England will in the […]
MMT in the Eurozone is theoretically tricky. It is also politically tricky for some countries.
The ECB is doing the pragmatic and correct thing….. but will the national governments follow with all the additional spending that is needed and possible…. or will the “deficit extremists” seize control again? Interestingly, Germany is not the hardliner here and the “frugal four” are, I think, losing the battle.
I think Germany has realised that Black Zero is over…
I hope others follow suit
Still having difficulty following this.
The bonds or gilts lie on the balance sheets of the holders so they already form part of their equity formations. The purchase,or repurchase, of the instruments by the central authority simply replaces an investment with cash, it does not improve the equity position of the holder but it does increase liquidity. I was under the impression that the theory was that the holder (a bank or lending entity) would then increase its investment in riskier loans thus replacing a safe but inactive asset with a riskier active asset.
Can’t see yet how this equates to printing money. I can see that in substance (which we are told to account for) that (in the case of the UK) total debt can now be reduced on a consolidated account basis and that on this basis the government can borrow more. However the circularity of the transaction then recommences.
What I can see is that the increase in net government spending is not being covered by increases in taxation or (again in substance) by increased borrowing since the state is buying back the instruments that it is issuing. On the one hand we have a spending side and on the other a balancing control account.
Why do economists have to invent a high faluting vocabulary to describe issues that are so vital to everyones understanding? It is as though they have a vested interest in confusion.
Final comment – surely this has now killed off Bitcoin as a national currency.
Your second para is correct
This equates to printing money because the money used to but the gilts is created by the BoE for that purpose
In effect new cash is created – and the credit is to, in effect, the seignorage account of the government
Well, yes. New cash is created.
But we’re just swapping one savings vehicle (private sector bonds) for another (stocks).
That’s where the “cash” will go. The mega-wealthy will be made whole on their stock market losses and everyone else can go take a running jump.
Its the 0.1% protecting the 0.1%.
It literally does nothing for Main St. In fact, if anything it simply pumps wealth inequality higher.
Its almost as if its by design….
So we need another form of QE
As I have long argued….since 2010 to be precise
Indeed it is the seigniorage account that benefits: in the case of the ECB, this means paying profits to member states central banks, whose profits in turn go to their government.. But the ECB only classifies the arbitrary 8% of note issue as seigniorage, while net income from interest on the bonds bought is simply called profit (at least on their website*). As far as I can see, this difference of terminology makes no practical difference. But are there accounting effects ?
*https://www.ecb.europa.eu/explainers/tell-me-more/html/ecb_profits.en.html
QE seigniorage is different from note and coin seigniorage. I have not had time to check your source. Sorry….Sometimes weekends create other demands even in lockdown
You’ll have seen this I presume…? Your thoughts wld be much appreciated….
http://scotgoespop.blogspot.com/2020/06/scot-goes-pop-panelbase-poll-yes-storms.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+ScotGoesPop+%28SCOT+goes+POP%21%29
I had, and it’s good news
No e-mail received so cannot (yet) confirm my e-mail address. Technical hitch or you don’t like me ? Sorry about this.
Sorry – but this system is automated and not in anyway under my control. Can I suggest that you try again? Sorry – there is nothing else I can do