This is from the Guardian this morning:
This is a definition of economic insanity.
We are still in a pandemic.
The economy has far from recovered.
We face massive economic uncertainties this coming year.
However, UK stock markets are at a record high.
Why is that? It is because of quantitative easing, or QE. Instead of the government investing the new money it created to address the economic crisis the pandemic created so that it might deliver a positive outcome from it, it did instead permit the funds created to be used by financial institutions in an6y way they chose. They chose to speculate it.
As a result we have no silver lining from Covid spending.
We are no better prepared for the climate crisis.
And inequality has increased, dramatically.
What dies the government propose to do about that? Precisely nothing at all.
If ever there was a moment for increased taxation of wealth this was it. But this government would rather see people on average and lower earnings suffer instead.
One day we will learn the lessons from this.
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And yet there are many, for whom the nearest they will ever come to owning any shares will be by contributing to a pension fund that owns some, who will see this as a sign that the economy and hence their own well being is improving.
A new peak in the Stock Market is not a vote of confidence in the economy, it is a recognition that interest rates will stay low “forever”. Tesco 10 year bonds yield about 2% but their equity is on a P/E of 20 (or earning at 5%) and paying a dividend of 3%. Investors are betting that Tesco will make money whatever the weather and that their 3% dividend is fairly safe. They might be right, they might be wrong…. but it is not an absurd idea.
The problem is that the “extra” spending that QE permits (for a given level of gilt yields) gives the government a chance to make, say, furlough payments (a good idea, in my view)….. but, once that money is out there it eventually finds its way to savers who (in the absence of reasonable bond yields) then bid up other assets (stocks, houses, etc.) – but they do not create anything new, merely bid up the price of existing assets.
So, yes, QE permits furlough but then means that ordinary folk are squeezed out of the housing market and the investment that we need to tackle climate change goes undone.
Readers of this blog will know the solution – wealth taxes and the Green New Deal…. but I would like to consider an additional (not alternative) suggestion – higher rates!! Before you choke on your coffee I would remind you that this is already part of the Green New Deal with sensible rates being offered to savers (perhaps via NS&I) and the money put to good use. I would go further and regulate banks’ loan books more heavily. Right now they are lazy – lending against collateral does not require any effort and the collateral protects them (they hope); lending to real businesses is harder, it requires understanding/relationship/patience etc. If banks were required to have half their loan book as “productive” lending we could see the situation where we DO see real business financed at low rates and unproductive lending financed at higher rates.
Lots of issues here but we really MUST find away to drain excess savings and direct them into something useful. Wealth taxes are important but there is some other stuff that makes sense around the edges that is, perhaps, politically easier.
I agree entirely
Hence the work I am doing on how to divert savings t09 social use
That seems to be vital to me
I have no hesitation in suggesting more taxes on weraklth
But they alone cannot solve this problem
Buyback needs to be outlawed.
Agreed – it most certainly does.
And I have to add, yet again, that Starmer expressly ruled out wealth tax and that is why the shadow front bench does not discuss it. This has nothing to do with red wall votes, which are spectacularly low on the wealth scale, but everything to do with continued reassurance that Labour is now in ‘safe’ hands. I have yet to read the Libdem view on this.
I agree, Labour could do better on this.
But you don’t have to go near a wealth tax as a first step – how about
(1) abolishing NI and rolling it all into income tax?
(2) equalising taxes on capital gains and income
(3) ensuring a level playing field between individuals paying income tax as an employee or those using a company.
These three things are, to my way of thinking, an obvious policy for Labour as it plays to the “fairness” and “one rule for them” narrative that Labour must build up.
See my series on this
http://taxresearch.org.uk/Wiki/2021/11/24/taxing-the-multimillionaires/
Clive, before wealth taxes, which might be difficult politically, could Labour not earn win votes and bring in much needed revenues by:
1 Pledging to clamp down seriously on tax evasion – not just tinkering at the edges which this government has done?
2. Clamp down on tax avoidance by closing the hundreds of corporate and personal loopholes?
Robert
Taxing wealth more is not politically difficult -0 most people support it
Nor is it hard – see http://taxresearch.org.uk/Wiki/2021/11/24/taxing-the-multimillionaires/ for may ideas on how to do it
As for evasion – the answer is in regulating UK companies vastly better – the absence of control, there allows systematic and systemic abuse
Tackling avoidance is the same as tackling wealth
Richard
There are reports on the Web, sky news and Guardian, 21st Sept 2021,where Starmer supports the concept but is not revealing how.
What is needed is a range of ‘Green New Deal’ financial products that can mop up excess liquidiy in the financial markets, rather in the way that Richard advocates with taxation to curb in this case assett price inflation.
I can only agree…..
I agree with all of the posts here, but find myself confused about the original piece.
QE creates extra money, but that money is spent by the government (on furlough, dodgy PPE contracts etc etc), and I can see Clive’s point that without suitable taxation this creates a trickle up effect where money coagulates at the top leading to increases in asset prices. But what does this have to do with speculation by financial institutions? You say “… it did instead permit the funds created to be used by financial institutions in any way they chose.”, but how did QE create extra funds for the financial institutions (other than by trickle up effect) – the government could have chosen to spend the money more wisely but it would have still ended up in the economy and would still have trickled to the top – what was the alternative? As Grasshopper would say: I don’t understand master.
QE buys gilts from financial institutions, meaning that they have a reduced supply of them to invest in forcing them into riskier assets in which they then speculate.
The BoE advertised this as an objective of the programme.
But aren’t the gilts that are bought ones that have just been created for that purpose?
I understood QE to be: BoE creates new government debt (gilts I guess) which it sells to the financial markets; money moves from the financial markets to the BoE and is passed on to the government; the BoE creates new money; the BoE buys government debt so money moves from the BoE to the financial markets.
Doesn’t that mean that from the financial markets point of view there is the same amount of gilts and the same amount of money available as there was before the QE process began?
Actually, no, they weren’t…most gilts bought were much older
And give me time to get to this please….I am finite and have the day job to do as well