Carline Lucas MP, the UK's sole Green MP, had an article in The Independent yesterday with this title:
Caroline Lucas' concern is that there is far too little funding for climate change, and the developing countries lose out as a result. In response she quoted Prime Minister Mia Amor Mottley of Barbados saying:
“The central banks of the wealthiest countries engaged in $25 trillion of quantitative easing in the last 13 years. Of that, $9 trillion was spent in the last 18 months to fight the pandemic. Had we used that $25 trillion to finance the energy transition we would now be reaching that 1.5 degrees limit that is so vital to us.”
Mottley is right of course.
Mottley wants more use of International Monetary Fund Special Drawing Rights as a result. So too does Lucas. But Caroline also notes:
Quantitative easing (QE) describes a particular form of government money creation in which a government's central bank, like the Bank of England in the UK, effectively creates new money for use by that government. Its impact has been significant. In the 2008/2009 crisis QE was used in the UK to bail out the banks. In the Covid crisis QE was used to fund furlough and other measures to ensure the economy did not grind to a halt when huge sectors had to be shut down.
Mottley is right. We urgently need to rethink the funding of global climate action. While investment is pouring into the renewable energy sector and delivering healthy profits, this is not happening in nature-based solutions where there is no clear financial profit to be had. Nor is sufficient funding forthcoming to address either adaptation measures or to cover Loss and Damage. Yet these are vital so we need to find alternative funding models now.
Two options stand out. One might be called “Climate QE”. The other is the Special Drawing Rights (SDRs) created by the International Monetary Fund (IMF) which can have much the same impact as QE for developing countries.
The UK government has created £895bn of new money using QE since 2009. In the process it effectively cancelled a similar amount of UK government debt. That means that the real level of government debt is not the £2,300bn that the government claims it to be, but something like £1,400bn. Importantly, this new QE-created money does not have to be repaid. This is because one arm of government, the Bank of England is electronically creating it to be used by another arm of the government, the Treasury, and that never has to be unwound.
When managed appropriately, this approach is not inflationary. In fact, around the world the QE era has been associated with exceptionally low inflation. The current inflationary spike has been more about supply chain disruption than money creation. But QE can only really work in countries where governments can borrow in their own currencies. Most developing countries are forced by the global financial system to borrow in currencies other than their own, usually in US dollars. So they can't deploy QE themselves.
Climate QE resolves this by making QE available to the global south. If the right partnerships were built at the next UN climate summit, Cop27 in Egypt, then money created in richer nations could be directed to developing countries to fund climate action. It's not the only approach. An alternative is the use of IMF Special Drawing Rights. These increase the amount of credit that a government has with the IMF, which it can then use to settle payments due to other countries. If SDRs could be directed towards mitigation and adaptation efforts and limited to those countries with the greatest financing need, they could, with climate QE, meet that funding challenge set out by Mottley in Glasgow when she called for an additional $500bn worth of SDRs to be issued every year for 20 years to unlock the carbon-cutting investments needed to limit heating to 1.5C.
As Caroline concludes:
The global financial crisis was a huge challenge for governments. So is the Covid pandemic. But they are both dwarfed by the impacts that we will face, and are facing, with the destruction of biodiversity and the breakdown of the climate system.
If the financial crisis and Covid were important enough for governments to do whatever it takes and find the money, then surely the climate and ecology crises demand a similar response.
Unsurprisingly, I agree.
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If Lucas keeps this up, there’ll be some point in voting Green. Given the numbers recently finding themselves disenfranchised from politics, well… we could be looking at a new political landscape before too long.
My only concern over such a proposal is that IMF money I think would be in dollars. That’s open to abuse by our American friends who have a proven reputation for making as much out of it for themselves as possible when money is issued in US $. That or either richer countries adopting the same American tactics.
I’d need assurances that this was not the case to whole heartedly go along with it. It’s any form of ‘creaming off’ that worries me and it’s not clear to me how this would be prevented. Sure – fight global warming but please, lets not leave these ‘developing countries’ heavily indebted too.
My concerns are from reading Michael Hudson’s detailed analysis of the U.S. trade and foreign aid policies using the US $ over the years so please forgive my overly cautious response.
IMF funds could be local currency
Well, that’s good to hear that it could be.
Why would the anyone need to the IMF if the borrowing was in a local currency? Where would the IMF get it from to start with?
They create it…
Why involve the IMF though when we can create the pounds ourselves?
We can do without the conditions they are likely to impose.
Jim
Please follow what is being said
This is about developing countries…
“….. but something like £1,400bn. Importantly, this new QE-created money does not have to be repaid……. This is because one arm of government, the Bank of England is electronically creating it to be used by another arm of the government, the Treasury, and that never has to be unwound. ”
Maybe I misread it, but I did take this to mean she was talking about creating hundreds of billions of GBP and not the currency of a developing country. This may or may not be “appropriate” and may or may not be inflationary. Just because it wasn’t inflationary after the GFC or during the Pandemic doesn’t mean it won’t be inflationary at some future time. We just don’t know that yet.
Do you think Ms Lucas has a good enough grasp of MMT to be able to say differently?
Yes
She has good advisers
And I am bored by your sniping
Plus the misogyny in the last comment
I assume she has been reading you, Richard or, at the very least, Stephanie Kelton? Would it be an idea to expand her understanding of the false character of the so called national debt, because her failure to mention any of the other distortions suggests she simply lacks the knowledge. Even allowing for a focussed article, mentioning national savings would have been the minimum to be expected. She is, I think, a genuinely progressive politician unlike Rachel Reeves who is in post expressly to defend ultra orthodox economic policy.
We talk…
Sounds like a good idea but like PSR there are questions about any strings. The IMF (and World Bank) usually have insisted on “structural reforms”. “Developing countries” are struggling under an ever growing mountain of debt.
SDRs are not worked in that way…
And there are genuine reformists in both institutions now
And yes, some who are not too…
On the issue of QE I found Paul Tucker’s evidence to the House of Lords select committee on 2nd Feb particularly interesting. Tucker seemed to imply that the BoE somewhat reluctantly engaged in QE because the UK government was doing nothing to prevent economic collapse. Tucker seems to suggest that it would have been much better if the government had engaged in direct fiscal action.
Here’s the reference:
https://committees.parliament.uk/event/3582/formal-meeting-oral-evidence-session/
I think monetary authorities the world over (bar a few like Bailey) have been looking for a fiscal response for about a decade, they recognise that interest rates only do so much. QE was all they had left so they did it…. but it acts at two levels – first, in theory, by driving down interest rates across the yield curve and then driving the price of other assets up….. until eventually “animal spirits” are conjured up and investment kicks in and growth resumes. Except, of course, that investment did not kick in!
On a second level, it allows governments to spend without issuing bonds and it only with COVID that this has happened in a serious way…. let’s hope lessons have been learned. We must rely on Government to make the investment we need.
More broadly, I agree with you (Richard) – I think Central Banks, IMF, OECD are all “ahead” of politicians with regards to Climate Change, COVID spending, tax etc. Now, they are not perfect (some are still hoping that market mechanisms will solve our problems), but it is politicians that are dragging their feet.
Thanks, as usual
Are LP politicians dragging their feet because they are not progressive or because they struggle to understand the MMT arguments? I suspect the largely the latter. I think this MMTish move by Lucas must put pressure on Labour to cease agonizing about the size of the national debt when attempting to solve real problems.
There’s an interesting attempt in LabourAffairs to try and explain to Labour MPs how to reply to the ‘How to Pay for It’ question.
I’m not sure if they got the arguments right but the idea of having ‘How to Pay for it’ broadsheets for Labour MPs, so that they could correctly respond to the ‘How to Pay for It’ question on UC, NHS, GND, housing etc seems very useful. Richard could probably write them in his sleep.
Here’s the reference
https://labouraffairs.com/2021/12/05/how-to-pay-for-it-the-case-of-universal-credit/
It would be more logical to introduce a holding fee on cash and let the front end of the yield curve fall into negative territory and the long term end of the yield curve fall to 0% interest through supply and demand. Rather than blasting the economy with yet more liquidity, you force the liquidity to make itself available through long term deposits. Under such a system there is no reason to not pay off debts. Deflation doesn’t matter because the holding free acts as an impulse for circulation.
This needs a lot more explanation
I rather think that right now you are letting theory run away with what is required in practice
China, India, Brazil, Indonesia, South Africa, and many other “developing” countries large and small have their own currencies so can all do their own QE funding if they have the political understanding of the climate crisis and the political will to put in the major programmes that are needed. True, if the IMF can organise a scheme as suggested, then all to the good. The major problem really is the huge corporations who dominate the world economy and their refusal to act because immediate profit motive is their only criteria and long term ecological concerns, if recognised at all by senior executives, are greenwashed out of the picture, preventing the really radical actions needed.
Wrong
They can rarely borrow in their own currencies
That makes them dual currency states
Actually, most of these countries do have pretty large local currency government bond markets but their demand for capital (by the very nature of them being “developing”) exceeds local savings; they need to attract foreign capital. Some of this will come from USD denominated bonds (to tap an investor base that does not want to take FX risk in these markets) and some from local currency equity and (to a lesser extent) local currency bonds. In practice, most of the countries you list have had at various times some difficulties accessing USD debt markets; all have suffered from “hot money” flows causing instability in FX and local currency asset markets.
So, in practice, of the countries you mention are not able to operate on an “MMT theoretical basis”….. and I think it comes down to
(1) Confidence in local political institutions
(2) Savings rates (that are linked to demographics and cultural issues)
(3) Openness (ie how large a part trade plays in their economy, FX and capital controls etc.)
So, more thinking to be done about MMT in the real world!
If only there was a way to urge Labour – Reeves or maybe some outrider- to publicly engage with the same issues
Reeves worked for the Bank of England for 10 years prior to her present job in the Labour Party. She understands very well MMT theory and I would doubt she has any positive views on that economic framework. Also, the idea of an all encompassing welfare state with a publicly owned infrastructure does not accord with the present, LP leadership ideology. Emphasis on fiscal rather than monetary policy runs counter to the beliefs of a previous banker. Thus this is not about lack of knowledge or awareness but about ideology. The present LP Leadership is closer to Johnson and Co in this respect than to Beveridge and others who helped to create the British welfare state after WW2.
Britain needs a true, Social Democratic Party and leader who is devoted to the recreation and extension of a fully functioning and financed welfare state. Starmer is NOT in that camp. Nor was Blair and friends.
I agree with your last paragraph. It seems to me that this and many more intractable political/economic issues frequently discussed on here come back to the voting system. PR is not a silver bullet but it’s the only thing that has a chance of producing change afaics.
I’m not sure that Caroline Lucas has fully grasped the point about government deficit spending. The spending after the 2008 crash was to make up for the lack of spending by everyone else. It should have been more to keep the economy from slumping. It was the same during the Covid pandemic. The economy had to be kept moving when spending levels fell.
It’s fair enough to argue that some of the extra spending should be on green projects and CO2 reduction measures. However, unless concern for CO2 emissions in the private sector causes everyone to slow their spending in a similar fashion the situation will not be the same in future. Some tax rises will very likely be necessary.
Caroline was delivering one very specific message in a way a newspaper was likely to publish
Your extrapolation is absurd
See how you would get in with getting anything published if you tried your approach, nit least because everyone who publishes knows, the rule is one idea, one article, and vice versa
I’m lost.
How is QE “money creation” ?
It is, AFAIK, a swap of securities for bank reserves.
No new pounds are created in this process.
It is, in fact, merely a debt term transformation. The BOE still has a liability, all that has changed is the duration.
Cheers,
Wilson.
I find extremist MMT enthusiasts as crass as the far-right and Trots
I have explained this to you before
If you continue to think that cancelling £895 billion of government debt and replacing it with £895 billion of cash is not creating new money that’s fine
But it makes you very stupid
Please do not call again
As I say, I have little time for idiots who deny reality from whatever place they come
Why bother with yet more QE if all you have to do is implement a holding fee on cash and thereby lock up liquid deposits via certificates of deposits?
In my opinion QE makes sense to a certain extent but as it is right now, the real problem is that people are doing the financial equivalent of parking their car on the highway and blocking the traffic and QE is the financial equivalent of building more physically separated lanes that will be blocked again eventually. Just fine the people that are blocking the road, offer them free parking (0% interest loans) and let everyone drive on the original lane.
I have to admit that you need to be a lot clearer about what you are proposing because it is not at all obvious
Wow – quite a giant political leap there! I congratulate Caroline Lucas and her economic advisor, whoever that might be.
I suppose the best that hard-core MMTers would say about QE is that it gives the lie to the need for the government to “fund ” its spending by “borrowing “in the first place. But this is a far from trivial lesson and it seems to me that it is shifting the “acceptable” limits of economic discourse.
Agreed