After more than a decade of use we should be getting familiar with quantitative easing. But like so many aspects to the economy, and almost anything to do with money and government funding, it remains a dark mystery to many.
The daily evidence that it provides that a central bank - in the UK's case the Bank of England - can fund government spending - is also frequently denied, even by the Bank itself, for wholly political purposes. So, this video is relevant when there will be no less than £300 billion of QE this year:
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Another informative video. Thanks, Richard.
What I’m not clear about is the relationship between QE and the open market operations through which central banks have long been able to create money.
Is QE just a re-branding of open market operations, or open market operations on a larger scale?
Or or is there a more fundamental difference?
The fundamental difference is scale
OMO is short term cash flow management
This is fundamental long term financing
OMO is like a corporate credit card
QE is like share capital
Thanks for that.
Thanks for that.
QE still doesn’t quite make sense to me — though the credit card & share capital analogy helps.
QE gives the new money to the bankers & City. Nothing new there !
But how would MMTers in power put new money into the system in this emergency. I gather you’re not in favour of UBI
Money is simply spent into use
There is no other way to do it
Richard
If you can just spend it into use . why bother with QE ?
i,e, why not by-pass the banks & distribute it to those of us who need it ?
i,e. give credit to the Tory Chancellor ( I never thought I’d ever type these words )
& then hammer him with this nonsense & duplicity about ” renewed squeeze on pay ” & need to ” find cost savings ”
Maybe, you know, this could be MMT’s ” poll tax ” moment — we all see through the lies. & realise we’ve been taken for a ride — or a car crash.
Perhaps it won’t be called our ” QE ” moment, as such !
EU law did not permit it was the argument….
It’s never been clear that the claim was true
I don’t know if the following comment fits here or whether you agree proff – but I am a little bit optimistic this morning!
‘What doesn’t kill you, makes you stronger’
The Nietzschen principle rings out across the EU!
For whom do they toll?
‘Merkel said the British departure had changed the balance among the remaining 27 members and created a new dynamic’.
Anyone else? Yup the old Atlantic Alliance whores (‘frugal four’!!) and the new wannabe prostitutes, Hungary and Poland.
How?
‘.. a rule of law mechanism…with agreement to be made by a qualified majority of member states.’
–––-
That for dumb BrexShiteers is game, set and match point for the EU’s continued evolution towards a ever closer Union – with the creation of what everyone has been saying was impossible to do!
It took merely 5 days, after and 5 months of Covid and 5 years of BS’ers and 50 years fighting off the Atlantists and their alt-right trillionaire funded ‘kipper’ clone mobs.
Yes, the EU can ‘borrow’ collectively ; Yes, it can be ‘magic money’ to helicopter it where it is needed;
The shattered ‘red wall’ will now witness the Corbynite 7/10 ‘good EU’, could and has been improved, to at least 8/10. That it was possible and the EU is not going to abandon its poorest, nor self destruct at the hands of the bankers of the world – even if they were able to get a few hundred billion in ‘loans’ this time. The massive grants have been sounded like Joshuas horns around their ancient City’s walls, as cracks spread through them – its great plan to survive and rule as a offshore island fortress Singapore on Thames – defeated by the masterful muttis wiles to install rule of law by a qualified majority!
Rejoice!
Amazing, isn’t it?
Hate to dash your optimism DunGroanin but Yanis Varoufakis isn’t impressed and he knows more about the inner workings of EU institutions than most of us. https://www.yanisvaroufakis.eu/2020/07/18/while-eu-leaders-squabble-the-elephant-in-the-room-remains-unnoticed/
Half of the covid19 recovery funds is to be in the form of loans and half non-repayable grants. More austerity in the EU is only around the corner by the look of it……and there are “conditionalities” attached too, which Varoufakis thinks will give any member state a veto over the terms of any particular package to any other state.
No, I hate to disappoint YOU.
I have long been ambivalent about Varoufakis. He came across as anti EU in his pomp in Greece and seemed uninterested in whether Greece remained a member or not. His personal background has never seemed to be of someone interested in making the EU work from the inside. He was more famous for his game theory than his ‘economics’ which isn’t taxation or Money – I have no idea what he thinks of mmt – having banking connections probably not a lot (but I may be assuming too much in that).
Anyway he may know something about how the EU ‘works’ but he is not a worker for the EU – last I looked he was trying to form an ‘alternative EU’ as a ‘socialist’ alliance of European countries – hardly a inclusive project.
I’ll stick with my moment of optimism, thanks.
I agree re Varoufakis
Another way of explaining QE, perhaps, is through the idea that tax and bonds are used to remove money from the economy to create the “space” for more government spending.
(In the case of bonds, this is for a set period of time. Tax destroys money)
With QE, the BoE is buying up/removing existing bonds from the financial sector. (With new money it creates)
The financial sector still needs bonds to invest in, so they go out and buy some more from the government with the money they got from selling their existing bonds to the BoE.
This creates more/new “space” in the economy for the government to spend into.
That works
To extrapolate further.
The “space” created by tax and bonds can be filled by two sources.
1. Government money created through spending.
2. High Street Bank money created through the issuing of loans.
Is the debate about the “merits/rivalry” between the State and Private Sectors, really a debate about who’s money fills the hole?
Banks want as much of their money to filling the “space” as possible. This is how they make money.
Any reduction in government spending is a boost to Private Banks. High government spending reduced the amount of money that Banks can create without triggering inflation.
If two thirds of GDP is driven by consumer spending, then this, in turn, is driven by Bank lending. For Banks to fill the “space” private debt has to go up. Was this not the case pre-covid?
When members of the government come from careers in the banking, is it no wonder that Bank money is prioritised over Government money?
Vinnie
I do not agree
Thew space is a real space – to a financial one
Tacx and bonds cut demand
That releases real resources for public works
Richard, I’m still not fully understanding QE.
Taxation and bonds remove money from the real economy, thus freeing up real resources.
Taxation is mandatory and the tax money is destroyed, thus it cannot be used to buy real resources.
Bonds are savings and thus a choice. The money used to buy bonds wasn’t needed to buy real resources in the first place, otherwise it wouldn’t have been invested in bonds. There’s the issue of the return on bonds but this only gives you more money, not resources, unless the interest rate is zero or negative. Plus the money invested in bonds plus any interest is only available to buy real resources at some future point.
So if the BoE does QE, they’re returning savings to whoever they buy the bond from. It seems to me that the entity selling the bonds will reinvest in some other savings mechanism. I’m sure you e mentioned investment in shares.
This doesn’t mean the entity with the new QE cash will invest in jobs, infrastructure or anything real, so I don’t see how that helps the real economy get out of any recession. Investment in shares doesn’t mean those companies will invest in the real economy either. Further the government has no control over where the money is invested.
The only change is that the debt to GDP percentage goes down. However as you’ve pointed out, the way the government shows this means not even this happens. I’m referring to the 85% debt to GDP actually being 50+% if QE is removed.
So, is this a perception issue? Does it boost confidence to show debt to GDP percent below a certain figure? Or is there an actual debt to GDP figure that above which causes economic strain? I can’t see why but I don’t know.
Why doesn’t the government not do direct monetary financing, and forget QE? Is it because in reality they don’t actually want to invest in the country at all?
There must be something fundamental that I’m not getting about this subject.
Thanks.
Apologies for missing this for some time
You exactly summarise all that is wrong it’s QE
It’s aim is to push money into shares
No employment is created as a result
It is why I have always argued for Green QE and not this hopeless stimulus to stock exchanges
“He came across as anti EU in his pomp in Greece and seemed uninterested in whether Greece remained a member or not. His personal background has never seemed to be of someone interested in making the EU work from the inside.”
This comment suggests to me that you have not read Varoufakis’s books. When he was the Finance Minister his stated objective was to keep Greece in both the EU and in the Eurozone – thats what the people of Greece wanted but he recognised that it was essential to prepare the country for a forced Grexit. It is clear that he does detest the EU establishment and understands the EU as as corporatist institution. It is obvious from his experience that you can;t make the EU work “from the inside” as to do so you have to become an “insider”, which requires acceptance of the views of the establishment on the “inside”…..he is a EU reformer and was opposed to Brexit…..as am I. Whether he is an open advocate of MMT is not clear but from what I can recall in his “The Adults in the Room” book he describes a plan to link the creation of a new Greek currency in the event of a forced Grexit to the tax system, which implies to me that he gets the point about tax giving value to the currency.
Hang on…
If I understand this at all, you are suggesting that the direct link between taxation and spending is not as direct as recent chancellors have insisted. How can that be?
If taxes are not there to fund public spending, what on earth are they for?
There is no direct link
As I have explained many times, tax exist mainly to control inflation – by taking the money spent by government out of circulation. They also give that money its value, redistribute income and wealth, reprice market failure, permit fiscal policy and promote democratic accountability.
Rob.
Tax also creates the demand for the government’s money.
Try paying your tax with anything other than government created money.
Or try not paying tax at all and see where that gets you.
We all have to get our mitts on that government created money.
If we don’t, we go to jail.
Taxes also determine from which bits of the economy, money is removed/destroyed.
If tax is used to remove money from the economy to create the “space” for more government spending, which bits would you remove it from?
Which bits of the economy that get taxed and which do not, helps to steer the economy in a particular direction.
Tax breaks for renewables verses high tax for fossils fuel industry for example.
Agreed