This is the third in a series of videos on why I think that the UK should move away from conventional quantitative easing towards what I call green QE.
I know that there are many who are proponents of modern monetary theory who have reservations about this suggestion. I understand why. In this video I explain what the basis of that reservation is. I then go on to suggest that since MMT is unlikely to be accepted at present as the basis for the management of the UK economy we have to live with what we can do if our greater goal is to provide the funding that is required for programmess like the green new deal which will, inevitably, be necessary and will provide the stimulus that we need to get over the crisis created by coronavirus.
So, I explain the pragmatic reason for green QE and how its underpinnings are, in any case, based on the power that MMT has, applied in a way that delivers those benefits to the best possible effect at present.
I will never be accused of delivering perfection. I am aware that theory and practice do not always coincide. Green QE may not be as good as MMT, but it is certainly a lot better than conventional QE and that compromise is one I can live with.
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Something you should know?
‘We’ have ten years?
“ . . . our best estimate is that the net energy
33:33 per barrel available for the global
33:36 economy was about eight percent
33:38 and that in over the next few years it
33:42 will go down to zero percent
33:44 uh best estimate at the moment is that
33:46 actually the
33:47 per average barrel of sweet crude
33:51 uh we had the zero percent around 2022
33:56 but there are ways and means of
33:58 extending that so to be on the safe side
34:00 here on our diagram
34:02 we say that zero percent is definitely
34:05 around 2030 . . .
we
34:43 need net energy from oil and [if] it goes
34:46 down to zero
34:48 uh well we have collapsed not just
34:50 collapse of the oil industry
34:52 we have collapsed globally of the global
34:54 industrial civilization this is what we
34:56 are looking at at the moment . . . “
https://www.youtube.com/watch?v=BxinAu8ORxM&feature=emb_logo
I think your pragmatic approach is correct, politics is the “art of the possible” (although I do wonder if anything is possible with the current mob in power).
QE, as originally conducted in response to the financial crisis, was all about adding liquidity to the financial system and bringing (long term) interest rates down. As a response to a crisis it was effective in those narrow terms and, importantly, was widely accepted by the financial community as legitimate tool for the BoE to use. The problem is that low long term rates has had very little effect on the real economy – the “transmission mechanism” of policy was/is broken. Rather than encourage investment in real, new projects it has encouraged people to buy existing assets and drive up the price and we see this in house and share prices. Theory says that higher asset prices then encourages new activity but the fact is that that this is scarcely happening.
Now, in 2021, QE is no longer about encouraging investment. The BoE might pretend there is “nothing to see here” but everyone knows it is allowing the government to spend in the pandemic without upsetting the gilt market. It is, in effect the Treasury running an overdraft at the BoE without rubbing the traditionalists’ noses in it… and that is fine – I am not after intellectual satisfaction, just better policy!
I guess my point (up to this point) is that the tools are all in place for policy to operate in an MMT way even if the Establishment has not quite realised it yet (or is prepared to admit yet).
So, what now?
First, the Government needs to identify the projects and “get on with it”. They will spend the money into the economy and can do this with no net issuance of bonds (any gilts the DMO sells the BoE buys). This money is going into the pockets of workers and companies and that is a good thing. Indeed, this money cascades through the economy to the benefit of all – and that is a good thing. BUT eventually it ends up as savings for someone and with interest rates at zero they are pushed to buy other assets and push up the prices of houses and other things.
So, the obvious answer is to keep spending on green projects but drain money from asset markets by issuing bonds – any old bonds would do. This would push longer term gilt yields up and would certainly discourage speculation and offer savers a safe place for their money with a rate of interest that might preserve its value over time. Given the complete breakdown of monetary transmission, I doubt that a 30 year gilt yield at 2% would materially affect the real economy (indeed, under current rules for pension liability accounting, higher rates might actually help companies!)
The twist you suggest (and I like) it is to issue green bonds. I think the correct analogy is with War Bonds. In WW1 there was significant inflation as the spending on the war effort pushed up prices sharply – pre-war inflation was about 1.5% and average annual inflation in 1914-18 was 15%. Under Keynes guidance inflation in WW2 was just 4% per annum and this was in part due to issuance of War Bonds to “mop up” the excess cash that had been put into the economy (although tax and price controls were also important). War Bonds also introduced a whole new group of savers to the joys of bonds.
Green Bonds could pay a similar role in 2021 and raise the profile of the battle against climate change….. and your idea of tax incentives might make sense. If we are unwilling to abolish ISAs (my preference) we could at least direct the savings in a useful direction.
Taking a step back, we have two types of inflation – asset price inflation and CPI inflation…. and under MMT we have two levers. We can control asset prices with interest rate policy and CPI with tax policy. MMT proponents need to learn to love interest policy as an additional tool to achieve our goals.
Thanks Clive
Much to agree with
Some of that may makes its way into a blog…
I posted this comment on the Scottish Currency Group and Modern Money Scotland this morning……
“Richard Murphy posted this third video in a 4 part (?) series on QE, Green QE and MMT this morning. He obviously recognises that what he says is controversial in the MMT community. I happen to agree with him.
I think, however, that the issue of Green Bonds would not be done directly by government but would have to be done by a National Investment Bank with part of its remit to support the GND.
Of course MMT says this is not necessary because the government can simply finance a GND directly. This is true but the question is whether it is the right thing to do.
The answer to this question I think is political, not economic.
It depends on whether we want to run with a highly centralised system of government and economy or with a decentralised system of government and economy which embraces “subsidiarity”.
The issuing of bonds is the necessary means to facilitate the emergence and sustainability of a decentralised and mutualised banking system. Its all about how we design our money.
We have a choice – it just so happens that I support the idea of a decentralised system of government, economy and money and that is why I agree with Richard.”
Thanks
I know ful well this is not pure MMT and some will not forgive me for it, but then the GIMMS community and Bill Mitchell already do all they can to suggest I have no credibility on MMT and so I ignore that anyway. There must have been a reason why Stephanie Kelton wanted me to endorse hyper book – and it was her choice.
I do political economy – and this is political economy informed by MMT
MMT can do theory if it wishes. I do the real world
It seems like you do too
MMT “theorists” need to get off their high horses – they do not have a monopoly on wisdom. It seems common for creators to expend huge efforts defending the intellectual purity of their ideas against those wishing to develop and use them. It’s as if any alteration/development is seen as diminishing their original work. Of course, this is nonsense but it is a trap that is easily fallen in to. Those that claim “invention” of MMT must surely recognise that the key ideas of MMT were floating around long before the phrase MMT was coined and that nobody has the last word on anything.
The REAL challenge is to take what we know and suggest realistic policies that will be good for us all. It appears that some MMT-ers have taken “Government does not HAVE to issue bonds in order to spend” and turned it into “Governments SHOULD NOT issue bonds to spend”…. and “Inflation CAN be controlled by taxation” into “Inflation SHOULD be controlled ONLY by taxation”.
Meanwhile, in the real world……..
Quite so
And I have some experience of creating and letting go of ideas
In my opinion the weakness of advocates of “pure MMT” is that they think of economics as a pure science and is the source of all the answers we need- its a bit like physicists believe all the answers to the universe lie in physics. Stuart Kauffman – who is far away the most influential thinker in my life (he is an evolutionary biologist/complex system scientist) – has written a devastating critique of this thinking.
Pure MMT ignores history and if we were to follow it in an independent Scotland we will end up copying and pasting the Anglo-American banking and monetary system….and becoming a mini-UK…a “chip off the old block”.
I have been reading three books on the history of money lately – Christine Desan’s “Making Money”; Zach Carter’s “Price of Peace” which is a biography of Keynes as well as a historical account of Keynesianism and how it has suffered capture and reinterpretation by a variety of political forces since the 1940s. The other book is Christopher Shaw’s “Money, Power and the People” – a history of the political struggle by farmers and working people for banking reform in early 20th century America.
Money is the product of political struggle – pure MMT just ignores this and it will be fatal for progressives to adopt such a narrow perspective on money.
I am most of the way through Carter and rate it.
Desman is on my list.
Shaw sounds interesting.
I agree with your conclusion.
And that the real world is bloody messy.
Richard
listening to your video on pragmatism & popurasing MMT ideas
I was thinking
wherein stands our HMG Opposition ?
I cannot understand why the Labour Opposition doesn’t use part of the MMT lexicon to embarrass the Govt.
If it stuck to a couple of direct questions it could ( indirectly ?) support MMT
( ! ) If the Govt .doesn’t create money what has Sunak been doing for the last x months with QE ?.
( 2 ) Who is this so-called borrowing , well , ” borrowed ” from- apart from the Govt. itself ?
Labour doesn’t have to go any further
The front bench are politicians for God’s sake. They don’t need to answer any questions they don’t want to
See https://www.theguardian.com/business/2021/jan/24/labour-bids-to-be-seen-as-able-and-competent-not-bold-and-radical
I would recommend you read Shaw before Desan, Richard. I put Desan to one side for the time being once I had read the Intro to Shaw’s book. It really is relevant to today.
Why?
I forgot to mention this earlier – one of my takeaways from Zach Carter’s book and from the Epilogue of Shaw’s Book (I often read the Intro and Conclusions/Code/Epilogue of books before starting with the main chapters) is that popular movements campaigning for banking and monetary reform were much more active before FDR’s New Deal. What it suggests to me is that the centralised state when it delivers welfarism de-activates popular political movements.
FDR with his version of applied Keynsianism transformed the standard of living of the average citizen and anaesthetised a formerly politically active working class. This indicates to me that a centralised state is not the way to create sustainable prosperity – this requires a participatory and vibrant democracy and that requires a decentralised system of government, and devolved control of decision making and resources, including money – this is what the principle of “subsidiarity” is all about. So this is just more rationale for your approach on how MMT should be applied Richard….it is the condition for de-centralised banking (but still with a central bank and government acting to facilitate the whole structure. Hope this makes sense.
I get where you are going
[…] this final video in my series on quantitative easing, green QE and modern monetary theory, I moved towards the practical goals of policy. I am only ever […]
Can we stop calling for QE and start calling for Overt Monetary Financing (OMF) ?
Framing matters people !
It does
But no one has the slightest idea what OMF is
Marianna Mazzucato and Vince Cable on R4 at 0900 this am debating industrial strategy. When I hear people like Cable spitting out ‘Magic Money Tree’ with that note of derision in their voice, I fear that they are locked into a straitjacket that will prevent them from being able to tackle the problems we face. Even though he seems to recognise the damaging asset inflation that the post financial crisis QE generated, it seems that he like most of our current politicians, is unable or unwilling to see the scope for a form of Green QE.
If one adds together what needs to be spent to rebuild public services (local and national), tackle climate change with some form of Green New Deal, and build the kind of industries that will provide the decent jobs needed, taxes and conventional borrowing alone do not seem to me to be up to the job.
We tried very hard with Vince
He was Colin Hines’ MP and could not avoid him
He was dogmatically disinterested