In the FT this morning:
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Only Bank of England intervention can save the economy from meltdown
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Richard Murphy
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The effect of the energy price rises, and particular and general inflation, on ordinary families is very much, and understandably and correctly, focused on by most people. Of course. But the effects of massive cut-backs in discretionary spending by at least 20% of the adult population of Britain are going to be quite as massive and appalling for SMEs. Unless Truss (hah) does something to actually help ordinary people (hah, double hah) for that 20% or so, the cut-backs will be severe to total, depending on what counts as discretionary spending. But a further number – 20%, 30%? – will cut back spending, from amongst those who are not yet desperately broke. The example I usually use is of a local hairdresser (not that I have hair, you understand, to trouble a hairdresser with) – where a customer may go every 4 weeks (and I know some go more frequently than that), but that gets extended to every 6 weeks. The customer still goes, but the hairdresser’s income from that customer is slashed by a third. When all or most customers do that – all possible profit margins are gone. Add in the cost of energy rising for them too – and product prices… and that’s where all customers still go at least some of the time. For the last 30 years or so, to my notice at any rate, consumption, buoyed up by cheap credit, has been encouraged, perhaps especially since 2008, and GDP depends heavily on it here now. We’re not alone of course, but it is high. What goes up is certainly coming down fast now.
I assume the signatories had nothing to do with the writing of the headline. Because it’s incorrect and wilfully misleading to say that “only BoE intervention can save the economy from meltdown”.
On the contrary, only government can provide the funds which could avoid a possible crisis of liquidity and solvency among households, businesses, local government and public services (schools, hospitals etc.) caused by unaffordable energy prices.
All the BoE can do is reduce its short-term interest rate, resume QE to lower long-term interest rates and stand ready to act as lender of last resort when the financial system buckles.
We have no control over the headline – but I did reuse it
It works because the BoE is currently involved in this process
‘nationalising energy supply’
Are we talking about nationalising those who produce the energy or those who re-sell it, or both? Both would be my preference, whilst understanding the scale of the undertaking. There are some examples of privately owned energy producers genuinely investing in new technologies but I’m guessing that there are more that are not.
See Surviving 2023
But we cannot cover all production
The BoE can also play an important part in stabilizing the bond and currency markets after large-scale government spending and related bond issues by standing ready to buy bonds in the secondary market (if necessary most of any new issues).
Maybe ……
A number of people I know are in hospitality , leisure or retail. They tell stories of small businesses deeply in debt or facing arrears of rent. It would be really useful if these debts could be forgiven, at least in part. Them going out of business on a large scale benefits no one.
The banks have reserves in the B of E which are the result of QE. I had a fantasy of several hundred billion being transferred to the commercial banks which was used to write off these debts.
Businesses could survive, employ people, pay taxes , not get benefits, and be more hopeful for the future. The share price of banks would go down. Probably too good to be true but it is nice to dream.
I fear, just a dream
Might it be relevant that The Bank of England is a nationalised institution?
In what way?
Government spending will rise significantly over the winter in response to the C-O-L crisis and will be monetised directly via QE. The BoE just hasn’t announced (admitted) this yet.
How much is it the BoE and how much the Government that need to intervene? QE of the sort practised since 2008 is great for preserving the capitalisation of listed companies, but I can’t see it does much for small companies, sole traders, or vulnerable households. I would have thought the greater need is for targeted fiscal intervention by the Government.
QE funds tat intervention
QE is part of the money creation exercise (not even a necessary part, except for convention now)
Policy directs the money
Might the B oE’s being nationalised make it harder for H M G and the B o E to present the B o E as being independent?
Ditto make it evident that the responsibility for its actions, and lacks thereof, belongs to central government?
Ditto make it clearer that it’s duties are to support the citizenry rather than the finance industry?
It is not independent
Read section 19 of the Bank of England Act 1998
For too long financial “experts” have lost control. They always try to solve problems by creating (fiat) paper money. The real problem is the world-wide increasing cost of energy – and it will get worse.
You’d rather gold, and extreme poverty, I guess?
Raymond Waldron:
Can we be clear please?
There is nothing wrong with fiat money. Surely you can see that new money has to be created since existing money gets used or saved or hoarded (off shore)? It’s a called a flow – money flows.
The only thing wrong with fiat money is what it gets allocated to. Too much is allocated to producing credit and boosting the value of assets. Or helping stupid greedy banks to trust each other post 2008.
Not enough is being produced into other parts of the economy – especially since 2010. One such area is green energy which had this investment (fiat money) been made Government around 2010 would mean that we’d be in a better situation than we are now.
Stop blaming ideas; look at how and why they used/abused instead.
The problem with fiat money is that it is not based on value, but on a claim over value created ex nihilo by a risk intermediary. The outcome is a negative (deficit based) unit of account.
It is completely possible to monetise the utility of land, energy, IP & human capacity to provide goods & services directly.
This article https://bellacaledonia.org.uk/2018/08/21/energising-scotland-introducing-the-eco/ envisages Scottish energy-based currency with a positive unit of account.
In 1705 John Law proposed a land-backed currency for Scotland which could well have worked.
Sorry Chris – but that’s a very dangerous fantasy
Almost as bad as the gold standard
Money is and always has been debt
This article written at the time of the pandemic outlines a practical route to injecting purchasing power https://www.mutualinterest.coop/2020/08/purchasing-power-to-the-people-could-covercards-and-coverdrafts-help-heal-the-covid-crash
“Policy directs the money” Tick.
The top priority of government is to keep things working and people safe and well. It should be obvious that in the long term this costs less than doing anything else, unless you think death and destruction are OK.
There is no excuse for not having a big plan ready. This tops everything, especially the petty Tory leadership ‘race’. There was/is a Tory government in power. I despise them all.
“Sorry Chris – but that’s a very dangerous fantasy. Almost as bad as the gold standard. Money is and always has been debt”
This 2013 article “Myth of Debt” https://blogs.ucl.ac.uk/resilience/2013/03/11/the-myth-of-debt/ was published in the Sunday Herald.
Money is and always has been a credit instrument whereby the obligation of the issuer is to supply future goods and services against which this credit obligation may be fulfilled to an acceptor who has put his trust in the future performance of the issuer.
Where the acceptor of a credit obligation has the right to demand delivery of goods and services that gives rise to a forward/derivative obligation and where the acceptor has the right to demand delivery of a monetary object (the early form of commodity money) that gives rise to a debt obligation.
Minsky had it right: anyone can issue money – the difficulty is getting it accepted – and the key to acceptance is trust, which is achievable using the mutual risk, cost and production sharing agreements I have been developing for a decade.
There is a difference between a unit of currency (a generally acceptable credit obligation) and a conceptual unit of account (standard unit of measure for value like a metre for length). What makes a credit obligation generally acceptable is its objective utility – ie use value over time, such as the use value of land, energy, IP and so on.
The exchange value of assignable credit obligations is determined subjectively by reference to a unit of account via metrics such as need, scarcity, desire and so on. The mistake of monetarists is to assume that scarcity is necessary for fungibility rather than being its antithesis.
My core expertise gained over 30 years up to the highest level (I advise governments in relation to energy fintech – by which I do not mean blockchains and coins) is in markets generally and energy markets specifically over a period of 30 years. I was responsible inter alia for the legal design in 1995/6 of the UK natural gas NBP futures contract which was introduced to manage the risks of the bonkers ideologically driven UK gas market trading CH4 molecules for rentier profit.
The process of resolution and transition to a new generation of markets in services is just beginning and requires a paradigm shift in thinking on the subject of the institutions and instruments which professionals take for granted. My pre COP26 lecture to the 2021/22 Strathclyde University fintech masters cohort covered the online combination of law and accountancy in energy markets that is Energy Fintech.
https://www.slideshare.net/ChrisCook38/protocols-promises-power-201120
We should have a catch up some time at UCL ISRS https://www.isrs.org.uk/ where Steve Keen is also a research fellow
But everything you say appears to support my owne contention and not yours
I am not sure I follow in that case
But happy to catch up
Have a read about the biggest corruption and economic genocide of the century that I am sure 99% or maybe more of the Brits are not aware of:
https://www.thisismoney.co.uk/money/news/article-5851983/The-hedge-fund-moguls-real-winners-Brexit-roulette.html
The Tory party is an accomplice in this crime.