My Finance for the Future colleague, Colin Hines, has this letter in the FT today:
Dear Sir,
Your editorial (Ministers should be clear: there are limits to their largesse Sunday Times May 22nd) is guilty of the ‘lazy cry' that no new money can be created. Overcoming the banking and covid crisis was predominantly paid for by the Bank of England's quantitative easing (QE) programme: between 2009 and 2021, £895 billion of new money was created, with no resulting inflation.
It's time for QE3
Yours faithfully,
Colin Hines
The last paragraph as submitted said:
To help solve today's cost of living crisis, level up inadequate social provision and tackle climate change it's time for QE3. Any additional funding required could come from government incentivised savings, such as pensions and ISAs, plus a fairer taxation scheme.
The message is clear though: new money is part of the solution to our problems and is not a problem in itself.
The letter was sent in response to Mervyn King's claim that QE had caused inflation, which we dispute.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Buy me a coffee!
Once again, all I see is a concerted effort to ensure that the money supply is kept as private as possible in order to keep the rich and the architecture that supports them as powerful as possible.
King & Co are disgusting people who think they know what side of their bread is buttered.
There’s been the recent example of Sri Lanka going to ruin for explicitly following the MMT prescription.
But leaving that aside we have to ask the Tom Sowell question which is ‘Compared to what?’
Inflation between 2009-2021 was higher than the 12 year period from 1997-2009. You can argue that QE meant we had the right amount of inflation, but I didn’t read that into what you wrote. What you endorsed is the claim that we didn’t have resulting inflation. And that is with the greatest of respect cojonios.
Sri Lanka borrowed in foreign currency – exactly what MMT says don’t do. In other words you got that claim 100% wrong. MMT would have saved Sri Lanka. http://www.erd.gov.lk/index.php?option=com_content&view=article&id=102&Itemid=308&lang=en
And re your other claim. Look at the previous 30 years. No QE and much higher inflation. At your very basic level of analysis I could conclude QE solved inflation. I won’t but that’s your level of sophistication.
Thanks for rebutting this, Richard. This kind of specific example seems to me exactly the sort of objection that many will raise, so dealing with them seems essential. Hope you will do this in the book you are working on too.
you don’t think QE3 or increasing the money supply has any impact on AD?
If I know what AD was it would help
As a professor of political economy, You don’t know that AD stands for aggregate demand ?
Anno domini in my book
And you clearly know nothing of political economy
Or that I am no longer a prof in it
So I suggest you don’t call again
AD could also be Active Directory – a Microsoft-ism.
You say that QE hasn’t caused inflation. But what kind of inflation?
As I understand (largely from you!) the BoE has carried out QE by buying back government bonds, and presumably that had the effect of increasing the market prices of bonds beyond what they would otherwise have been. My understanding is that bonds are traded more or less interchangeably with shares by the big institutions like pension funds and insurance companies plus a few very rich individuals, which means it will raise share prices too. So one question is whether there has been any inflation caused by QE in share and bond prices?
A second question is whether and how fast QE-funded increases in share and bond values would trickle into the general money supply used for household purchases of the sorts of things that register in CPI, since that is what people usually mean by “inflation”. Some of it certainly will, the whole point of assets held by pension funds is that they will at some point be used to finance the payment of pensions to individual spenders. So what is the likely lag, and has CPI (or its cousins) increased by an amount and with a timing that might be explained by the QE starting in around 2009?
There is a somewhat similar question of whether and how fast that new share and bond wealth becomes interconvertible with other types of asset such as property or rare collectibles. And then whether that increased value trickles into general inflation (for example in housing costs).
But overall, I can’t see why QE should be an exception to what you have described so well on your blog about an increase in the money supply needing to be balanced by sufficient withdrawal in tax (probably less than the money created) to stop it being inflationary. It isn’t even clear (to me) that increased asset values would have the sort of multiplier effect that benefits the wider economy and increases tax revenue without needing imposition of new taxation. In that case QE will in the end require increased taxation to prevent inflation, just the same as any other government increase in money supply. Please put me right if wrong. But at the same time, the logical implication to me is that increasing money supply via QE to raise asset prices (or wealth) can only be dealt with by taxation on wealth.
I have long argued that QE of the sort used from 2009 – 2016 has created asset price inflation but this has not spilled over into consumer price inflation
I see no reason for that to have changed in 2020/21
I cannot see why the lag suddenly needed either – especially when it is so obvious other factors drove inflation
But this does not mean that QE could not have been better done: it could have been
And wealth tax can correct what happened, as you say
I learned 50 years ago that Economics is not a science. this debate is all the proof you need
This what we are up against:
https://www.theguardian.com/commentisfree/2022/may/30/age-of-inflation-economy-rentier-capitalism
Agreed
It’s not capitalism at all
It’s a captured state