Over the last day or so, I have seen or heard discussion on whether the government might revive quantitative easing as a way of easing the pressure on the UK economy in response to the crisis that Trump has created. The issue was, in fact, raised with the Prime Minister at yesterday‘s Liaison Committee hearing in the House of Commons, although he did not, of course, answer the question. I have also heard the same issue being raised in podcasts. It does, therefore, appear to need to be addressed.
The answer to the question is that no, we most definitely do not need another round of quantitative easing, because QE was quite emphatically the wrong thing for the government to have done in 2020, and may also have been wrong in 2008.
On the other hand, if the question is appropriately framed, and it is whether the government should provide direct funding through injection of new money into the UK economy, with such balances being left on account between HM Treasury and the Bank of England, then the answer is almost certainly going to be an emphatic yes.
As I have noted in the glossary to this blog, quantitative easing can be explained as follows:
Quantitative Easing
Quantitative easing (QE) is a form of unconventional monetary policy.
QE is used by a central bank to control the rate of inflation within the jurisdiction for which it is responsible when being at or near the zero bound prevents a central bank using conventional monetary policy and the control of bank base rate to achieve that goal.
When using quantitative easing a central bank buys the debt or bonds of the government of its jurisdiction (and occasionally commercially issued debt as well) in the open market and then holds those bonds under its ownership.
The objective of QE is to increase the price of government debt issued by the jurisdiction undertaking the exercise by reducing the quantity of that debt available for sale in financial markets, which scarcity inflates their value, which in turn reduces the effective rate of interest paid on it.
The theoretical justification for QE is that reducing the rate of return on government debt supposedly forces investors to seek an adequate return on their funds elsewhere. It is presumed that they will as a result invest them in risker assets, so providing money for investment in private markets. It is in turn presumed that this investment will stimulate growth in the GDP of the jurisdiction.
During the Covid crisis this did not, however, appear to be the motive of central banks using QE. Instead, those central banks appeared to be funding the expenditure of the governments that controlled or owned them during this period.
The practical consequence of quantitative easing is to increase the central bank reserve account balances of commercial banks held with the Bank of England, with the increase representing the amount that a central bank has paid to buy back the bonds previously issued by the government that owns or controls it.
Since the central bank reserve accounts held by commercial banks are a significant part of what is termed ‘base money' (see separate entry) the consequence is that QE increases that part of the money supply because the sums paid for the bonds purchased by the central bank inflate these balances, meaning that QE results in, or provides cover to, money creation by a central bank although many central banks appear to deny this, as do almost all politicians since this process proves the existence of what they call the magic money tree.
For a critique of quantitative easing see unconventional monetary policy.
As should be apparent from that explanation, QE is a sham.
The bonds that were issued by HM Treasury into the financial markets were acquired by market operators who knew that they would be able to sell them, or equivalent bonds, very shortly thereafter straight back to the Bank of England, having made a small profit in the process.
The Bank of England then owned the government bonds, but the Office for National Statistics has consistently refused to recognise this fact within the national accounts, pretending instead that these are owned by third-party entities.
The effective cancellation of the government debt, which this purchase of it by the Bank of England achieved, did then, however, result in the creation of new central bank reserve account balances between the Bank of England and the UK commercial banks. These were then described as deposits by those banks with the Bank of England, when they were no such thing. They were, in fact, a reflection of the injection of new funds by the Bank of England into the economy via those commercial banks.
The entirety of QE was, then, a gross accounting misrepresentation as to its nature. I would suggest that this was deliberately meant to deceive.
There were also wholly unnecessary costs created, for which we are paying many billions a year in wholly inappropriate interest rewards to UK commercial banks.
Of these rewards, the first was the margin paid to financial institutions that took part in the sham issues of debt by the treasury, immediately prior to the repurchase of debt by the Bank of England.
The second has been facilitated by the Office for National Statistics, who have persistently and deliberately put out totally misleading government accounts that misstate the true extent of government debt so that austerity and high interest rate policies can be maintained by governments intent on imposing these policies without there being economic necessity to do so.
Third, interest has been wholly unnecessarily paid on central bank reserve account balances, most especially since Bank of England base rate increased from 2021 onwards, when there was absolutely no requirement that the government pay commercial banks for gifting them with the liquidity that they needed to operate, whether that be in the aftermath of financial crisis in 2008 or in 2020 2020, during both of which episodes those institutions would most probably have failed but for that support provided to them by the state.
All this does, of course, mean that I am opposed to more quantitative easing. It represents transactions promoted to deceive at considerable cost to the people of the UK. I have, unsurprisingly, never been excited by the government committing fraud of this nature, and yet both our leading political parties have been engaged in those processes.
However, to pretend that the government is going to maintain its fiscal rules, and not raise taxes, and still stand behind the UK economy, as Starmer claimed it would in a facile speech he gave at Jaguar Land Rover this week, is quite obviously absurd. That is a claim that it is obviously impossible for any government to fulfil. In that case, it is inevitable that as this crisis develops - as it surely will - that there will be a need for more government support for the economy than tax alone can sustain.
The result is that the government will be faced with a straightforward choice. It could maintain the fiscal rule, and deliver 1930s-style depression, with all the consequences that we now know flow from that. Let's be clear; in a world as mad as this one, that is what they may decide to do.
Alternatively, they could suspend or replace their fiscal rule and decide that they will provide the means to ensure that the country can do all that is possible. In other words, they could make good the shortfall in demand that the natural lack of confidence that is going to hit the commercial and household sectors will create. This they would need to do by direct money creation, without in any way undertaking quantitative easing, thereby avoiding all the residual problems and costs that the deception implicit in that programme created.
When will Labour realise this? Inevitably, too late is the answer. I cannot be more specific than that. But it will happen, I am sure. I also fear they will use QE instead. That would be a massive mistake.
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Might the gullibility of most citizens, the cartel connivance of the main stream media and the deviousness of our Tweedledum, Tweedledee political parties be integral to the governance of “our” country?
Surely, this amounts to conspiracy ro defraud by the BoE, the Treasury and the banks involved? Not to mention the politicians?
Agreed. QE is a mechanism to protect private interests and bank profit.
The money is better spent on the NHS, and people directly. It is a better economic stimulus. But Starmer and Reeves have drunk from the cup of wealth creation and they like it.
QE? No! Lower rates? Yes.
It’s not rocket science…. just get on with it.
Agreed
Ouch! My head hurts! (But of course you are right.)
I need to work out a version of that for the omnibus, and that will take time, to work out lines that simplify some of the detail about interest rates and reserves, which no one on the omnibus cares two figs about (even though they ultimately shape/wreck their lives as things stand right now).
That isn’t a comment on the IQ of omnibus passengers btw. Lets face it, all those LINO & Tory MPs with Oxford PPE degrees & LSE Masters & PhDs don’t get it either, nor do the “economics” journalists/editors who interview them. For them “magic money tree” means a wealthy donor who gives them a bung.
So I (call me CHATRobertJ?) just have the one sentence summary so far.
“If the government needs to find more money, why doesn’t the BoE (which the government owns anyway) just create it and lend it to them, so they can spend it directly on what really needs doing – and tax it out of existence again (from the very wealthy, not the poor), if they are worried about inflation – instead of doing all that complicated QE stuff, involving to-ing and fro-ing with bonds and banks, where the BoE still “creates money”, but most of it seems to end up making rich people richer?”
I know that ignores all the important details about bonds, but bonds, QE and CBRs really don’t feature on omnibus conversations, except when Reform mentions them in a private members bill – I must check how they manage to slip QE into their demagoguery. If fascists can seem to make QE relevant to omnibus passengers then I want to see how they do it.
Good post, thank-you.
Very good
I like it
A small question.
“why doesn’t the BoE (which the government owns anyway) just create it and lend it to them,” Why is there any lending involved? That implies the BoE separately owns the money it creates, surely the government owns it?
Without a lan arrangement it is impossible to create money.
All money is a debt relationship.
It only exists because there is a borrower and a lender.
So, the Treasury has to borrow from the BoE even though it owns the latter. Otherwise money cannot exist.
RobertJ, if you post that up on LinkedIn, or anywhere, I will happily repost it. It’s very good.
Thank you! I appreciate the compliment.
I have pseodonymous accounts on mastodon and LinkedIn which I don’t want to link to here where I am much more identifiable.
Feel free to appropriate the quote, and attribute it to “a friend”. I’m more interested in it circulating than getting credit for it.
Thanks
Here’s a series of reports on Reform’s (insincere and ill-informed) flirtation with QE from last summer.
https://duckduckgo.com/?q=%22Farage%22+%26+%22QE%22&t=fpas&ia=web
The reason I include them is not so we can all rubbish it (tempting) but so we can better understand how Fa***e is trying to shoot both the Tory/Labour (STP) and MMT foxes, and what language and rhetoric he is using to do that, and how well his distortions and populist half-truths play with the voters (while Starmer bores them rigid).
Here is Reform UK’s offer (from just before the 2024 election) along with the MSM headlines it generated.
– raise income tax threshold to £20k – “a £40bn taxcut paid for by scrapping the interest paid to banks by the BoE”
– variable/tiered (lower) interest on Central Bank Reserves
– Richard Tice MP, said, “This is real cash, your money, being used to enrich the City of London.”
– “Nigel Fa***e wants to give Britain a £40bn tax cut”
– “Reform is eyeing a stealth levy.”
– “Mr Farage goes to Threadneedle St.” (FT headline!) – a bundle of catchy quotes here from FT article – https://www.ft.com/content/37f3e293-dd2d-4051-9459-c91681b2585a which focus on making “technical stuff ” populist. We need to see how Reform do this – how they get all those headlines about QE and tax cuts.
– this stuff here https://minutehack.com/news/farages-reform-uk-wants-40-billion-tax-cut-funded-by-qe-overhaul – outlines the frankly boring rebuttals of the Tory/Labour parties – zzzzzzzzzz!
Reform may have got the details hopelessly confused, but that doesn’t matter when they make QE and variable CBR interest rates as sexy as a £40bn tax cut, raising the tax threshold from £12,750 to £20,000.
They are good at dumbing down lies making them simple convincing and popular.
We have to get better at dumbing down “the truth” about the BoE, CBRs, interest rates, bonds, QE & QT, and making THAT popular, at the expense of bankers and PPE graduates.
The good news is – you DON’T have to mention small boats or immigration or hardworking toolmakers with agile whatchumacallits.
Richard is doing great work here educating US, and we have to make his TRUE STUFF as sexy and populist as Fa***e’s lies (or else watch Fa***e win).
Thanks
And, yes.
The problem with trying to tax the rich to reduce inflation is that their MPC is lower. In other words they save a large percentage of their income. Tax the wealthy by all means, but don’t pretend it will reduce inflation. It didn’t work for Harold Wilson and it won’t work now. We have to find other ways to reduce inflation.
How do you know it won’t work?
Their greatest desire oncevrich is to be rich.
Therefore, tax them and they will reduce consumption to maintain wealth.
All for taxing the rich. Whether this will put the brake on inflation depends on who is doing the spending . Having a lower marginal propensity to consume, taxing the rich or wealthy will be less useful in choking off demand. This does, of course , depend on the percentage of the population defined as being wealthy or rich.
I have already explained why this might work
TL;DR of this post: QE is ‘creative accounting’ with a vengeance.
As long as most people are economically illiterate the vested interests can keep deceiving the people, as they did before the Bible was translated and printed in English.
This blog is how I imagine people long ago felt when what the Bible’s words were revealed to them, the power to control diminished.
‘The secret of freedom lies in educating people, whereas the secret of tyranny is in keeping them ignorant.’
Isn’t it also reasonable to say that QE was was considered necessary last time because the usual lever for boosting the economy – lowering interest rates – was not really available because they were still near zero?
Since they’re well above most comparable central banks at the moment, it should be very clear that before QE is initiated that interest rates should be used first, and until at least 2% of rate reduction has been applied QE shouldn’t be on the table?
We could do that anyway – and I agree with Clive Parry that we should
But I am not arguing that we will need cash injections to influence the interest rate
We will need to do so to inflate the real economy. They are very differemnt tasks.
Government money is better spent on projects that benefit society, and putting money into the hands of people who will spend it.
Healthcare, infrastructure, nationalisations, manufacturing, pensions.
“Anything we can do, we can afford” (as evidenced by post-World War II Britain).
I learned recently that the only thing banks in the US are allowed to buy with reserves are bonds. Does anyone know if that is the case in the UK?
This depends on how you define reserves.
I thought all money issued by the central bank would be reserves and any money created by private banks making loans would be “bank” money.
Please read the glossary on base money.
Our current Labour Government is now highly predictable; it won’t take the sensible course of action in any situation. I would love to be proved wrong. They seem to see the world that the UK is in through distorting spectacles and need a new optician.
Now I must have a cuppa before going to the optician myself…..
Richard is quoted in the Wikipedia entry on ‘Peoples QE’,(1917?) where critics are quoted as saying it would be against EU rules.
Richard saying above that ‘they can decide that they will provide the means to ensure that the country can do all that is possible. ‘ seems entirely within the Keynes’s ‘anything we can actually do we can afford’.
It does seem that shifting the discussion towards the real society and the real economy we want to achieve and away from the endless esoterics of finance would be a good way to appeal to the public.
We aren’t in the EU….
Good post thanks. 🙂
And, yes, the Bank of England (BoE) should lower rates.
As I see it, QE is the disingenuous process of government issuing bonds/gilts, which are then repurchased by the BoE. The net result is that money is created which the government can spend. Issuing gilts which end up owned by the BoE, which in turn is owned by the government, avoids net payment of interest on those gilts (government does pay interest to the Bank but the Bank pays this back to it’s owner the government). This is all very convoluted and confusing as it is intended to be.
The problem is that the government spends that money into the economy and it, inevitably ends up as commercial bank reserves (there is nowhere else for it to go). Then the government foolishly pays interest on those reserves (which the commercial banks can’t avoid accumulating).
What should happen, as you say Richard, is that the government should borrow directly from the BoE. It still wouldn’t pay net interest on that borrowing. Yet money borrowed from the Bank would be spent in the economy and still end up increasing reserves.
As far as I can see, the only way for the government to reduce reserves is to tax them back. And this tax must be from the wealthy (otherwise the whole point of relating the economy is lost). And all governments seem very reluctant to tax back the money they have created. I suppose that is because the money they create ends up with the already wealthy who are terrified of giving up their windfalls (even though they don’t need them and did nothing to earn them).
Is this understanding consistent with your view?
Yes
Forgive my lack of understanding, but can you provide an idiots guide to QE and maybe a visual representation or flowchart or something.
I find the definition given here is too full of technical jargon and buzzwords for mere mortals and visual learners such as I to achieve a simple understanding.
Thank you.
There is no easy version of this
It is, quite simply, bloody hard
There is a version in my free download book Money For Nothing and My Tweets for Free (Google it)
To see how hard it is try this https://www.taxresearch.org.uk/Blog/2022/06/21/the-double-entry-behind-the-money-creation-in-the-central-bank-reserve-accounts/
Also chapter 14 of the Taxing Wealth Report – google it, you need the full version. It has diagrams. But they are not easy. This isn’t.
Much appreciated Richard. I will take a look.
Thank you.