I was on Talk Radio yesterday talking about the threat of a run on the pound if Labour was elected. You can hear it here.
The key question Julia Hartley-Brewer (no friend of Labour) put to me was what could actually be done by John McDonnell to manage this situation? My response was simple. One of the major mechanisms I suggested that might be used to engineer an attack on sterling would be a large scale sale of government bonds (gilts). This would indicate a withdrawal from sterling, a lack of confidence in the government, a signal that the market would not lend what Labour wanted, and would (because interest rates are the inverse of price in the case of gilts) force interest rates up (which is the surest indicator of there being a run on the pound) by forcing prices down.
But, I said, any Labour government could now manage this. What it could say, even before it was elected, was that it would actively intervene in the bond markets by requiring that the Bank of England intervene to buy any amount of gilts that the market wished to dispose of in the event of its election using newly created money that would be put into use by the Bank of England for this specific purpose. As a result any seller would find a willing buyer, and the price would not go down after all. None of the signals the attack would be meant to deliver would arise in the market as a result. In that way any market storm could be ridden out, interest rates could be kept stable, the debt market would be kept in good order, there would be no pressure on base rates and within days the hysteria would have dissipated and the identity of the party really in control of the markets (the Labour government) would have been firmly etablished.
Julia Hartley-Brewer suggested that this would be hypocritical as Labour had criticised QE for its harmful social effects. I made clear that this was not QE intended for permanent use: it would simply be undertaken to deliver market stability, which is a government responsibility, and in this case I would expect reversal of the QE policy as market balance was restored.
I am not saying this is the only answer. I am saying that Labour can beat the type of nonsense that the Right are so keen to propagate on issues such as this with just a little aforethought. And as I said, and as Hartley-Brewer acknowledged (to her own surprise) John McDonnell is right to be working on this as a result.
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:
Thanks for this Richard. I was lucky enough to go to Bill Mitchell’s talk in Brighton this week and very much agree that the disaster pound run narrative helps support the neolib TINA assault on our collective imaginations. If states stop being slaves to capital and do their proper job, there are always alternatives.
I have a practical question though. Given tech means market transactions happen so quickly, and a Labour government could not intervene until it was ‘in power’. How much damage could be done just before and on the day and night of an election? When is a newly elected government legally able to intervene?
Good question
A new government could not intervene until in office – and then the BoE might resist (although a Governor can be suspended)
But even sending out the message might be enough. There’s no point in trying if you know it’s going to a) fail b) prove you dd not have the power after all
Cathys,
you are I suppose right to acknowledge that TINA is not quite dead yet, but she’s definitely in pretty terminal shape. (A large and overwhelming malignant tumour and rampant necrosis seems irreversible.)
We have a new and rising star in the political firmament: TATIANA.
That Actually There Is An Alternative.
(Credit to Yanis Varoufakis for his talent spotting. And you, Richard for supporting and publicising her career so far)
If Gilt holders decided en-masse to dump them on the eve of an election that anticipated a Labour win, would they not risk losing huge amounts of money as the price of Gilts dropped below the price they were purchased at, in a massive rush to sell?
Another point Bill Mitchell made on Monday (re: market re-investment in post-default Argentina) is that international markets are nowhere near as ideological as the right likes to pretend they are – they’re always up for trying to make a buck if the opportunity arises, and the corollary would be that they would equally not be up for losing one, just because they wanted to pre-emptively punish Jeremy and John.
As the leading article in the Indy says today, the two parties are now clearly setting out their ideologically diametrically opposed positions – and that’s a good thing, not before time.
“Which side are you on?”
All good points
Superb stuff (said in a very measured, non-cultish way).
I do hope that McDonnell and Co do some scenario testing on this.
Simon Wren-Lewis is quite upbeat and thinks Stirling will appreciate https://mainlymacro.blogspot.co.uk/2017/09/a-labour-run-on-sterling.html
I think he is right but his discussion is more regarding the more sensible macroeconomic policy rather than the immediate shock.
I made the same point in my interview that I would expect after the hyperbole is done that sterling will rise
Richard
I’ve listened to this interview, and I thought you were extremely good: clear, rational, and measured throughout. I’ve no time for J H-B’s opinions, but on this occasion I thought she actually listened to, and processed your answers. And, because of that, she could do nothing but “nod along” with your points.
It was interesting that she corrected herself about the percentage of (income) tax paid by the rich before you had time to do it. She knows the correct facts – let’s see if she spouts the wrong one again in the future.
I have to admit that I have found the Professor tag useful in interviews – people listen more, it seems
Which is bizarre
I too attended Bill Mitchell’s talk on Monday where he pointed out that the one country that survived the Asian financial crisis of the nineties with it’s currency un-crashed was Malaysia, which was the only country that introduced capital controls.
A run on sterling would be just the kind of ‘catastrophe’ that would be ripe to exploit to reintroduce them, very likely to the benefit of us all. Call it ‘Disaster Socialism’ if you like, but why should the devil have all the best tunes. I hope this scenario is being tested too.
Never heard J H-B before so no preconceptions of what to expect.
It seemed a balanced, and enquiring interview and the interviewer was listening and making appropriate responses.
Too many interviews seem to have the sole purpose of getting the interviewee to produce a potentially damning and misleading soundbite for a headline. Jeremy Paxman interviews with party leaders before the GE was an embarrassing example of this process. Shameful I thought, and quite uninformative as a result though it enormously cranked-up my respect for JC in particular because he just didn’t fall for it without being shifty about avoiding the questions.
Good interview, Richard. Lucid. Pity it wasn’t prime time BBC, but I hope you are preparing to become a mainstream commentator! It’s time one of the TV companies offered Robert Peston a game show. He’s worked hard for it. Good to see that Ed Miliband has found his level at last as a trivia quiz master.
Respect for titles is not bizarre exactly. It’s hard-wired into the British psyche. We respect an attributable quotation from a past master because as JK Galbraith observed deference to a higher authority gives weight. I call it the Moses strategy.
increases rather than diminishes the authority.
This is pretty much the first time I’ve heard of someone suggest you can increase the price of an asset by creating more of it.
To an extent the government could prop up the gilt market by buying back gilts via QE, but this would only last so long. The massive influx of new cash and new spending would drive inflation higher and the secondary market would quickly price gilts higher, more so if it felt the government was simply trying to monetize it’s debt stock.
Likewise, the currency would also plummet. Investors having sold their gilts would be unlikely to leave their cash in GBP, and simply move it into other currencies. With the government printing lots more GBP in your plan, that would also force it’s value down.
The net effect would be to force the value of the pound down, and inflation higher. Which would eventually force interest rates higher to deal with it.
This is basic economics really – supply and demand. If you dramatically increase the supply of something it’s value is likely to go down. Not only that. but if you start monetising debt, any form of fiscal prudence is lost and the markets will take note.
Do you know what has happened to QE funds?
And you know they are, inevitably, still sterling?
A lot of QE funds are not still Sterling – hence the long term downtrend in the value of the GBP. But i digress.
What I am really interested in is your opinion that somehow you and the Labour party can defy basic economic reality – supply and demand. That you can fill the markets with huge amounts of new debt and currency and control it, without any adverse effects. Simply put, people have tried and it has NEVER suceeded.
If you increase spending in the way Labour is suggesting, it is going to be inflationary. No two ways about it. That will force interest rates up.
If you then try and force rates lower again by the government buying back it’s debt and cancelling it (which is not how QE works, by the way) with newly printed M0 money supply, you will suddenly have lots more GBP in existence, which is again inflationary. Interest rates will again go up as people become unwilling to hold government debt which is becoming more unsafe, and is getting inflated away at a faster rate. In the end the government simply can’t issue debt to the market at low rates, so is forced to monetise it. Which is inflationary.
Either way, your plan seems to leave out the biggest problem – that it is hugely inflationary. And as we (well, maybe not you) know, inflation eats away at people’s incomes, making them poorer.
You seem to think that there really is a magic money tree. That we can simply turn on some electronic printing press and suddenly all be richer. We would never need to borrow again, but could build as many schools and hospitals etc as we want. There could be no limit on state spending. Of course, this is simply not true. You can print as much of something as you like – in this case a currency – but that doesn’t make it worth something. You can’t print value.
Indeed, going back to the basic economics of supply and demand, the more you create of it the less it is worth. Saying otherwise is akin to trying to defy the laws of gravity.
First, sterling remains sterling. It does not disappear when a currency is traded. It just changes value.
Second, let’s stop being silly, shall we? No one anywhere has said Labour will create new money without limit
I have written extensively on the limits to PQE, and there is one. It is full employment. We do not have that: we have a veneer of it which disguises massive underemployment. There is ample capacity to spare. When it’s full we get inflation.
I have no desire to create excessive inflation. It’s a fiction of your imagination that I have ever suggested anything else or that I have ignored the issue.
So now discuss the issues within the parameters that I have actually suggested exist. But that does require that you also recognise that there i the ability to create money out of thin air – because denying that is akin to being a flat earther and I don’t have much time for them.
Get real then, or stop wasting my time. I suggest you do some serious reading. Ann Pettifor and my Joy of Tax is where you might start.
And you will then realise that refusing to create money to release productive potential is absurd. But that’s what you want to do
No, the new currency you have created doesn’t disappear. But nor does it holds it’s value when people are selling it because you have created too much of it. Not only that, but interest rates are forced higher to compensate for the falling value. Losing control of the money supply by printing it is a death warrant for any fiat currency.
Labour are saying they want to spend about 300bn off the bat, with many more unfunded spending commitments beyond that I’m sure. The taxes they’ve talked about raising will only cover a fraction of that.
So what is this limit? You are saying there is ample capacity to spare because of underemployment, but I note that this is not an observable metric. It’s just a hand wavy guesstimate, based on very little information it seems. Unemployment is at 4.5%, in economic terms, full. What statistics or data would you need to see for the government to stop printing money, or for interest rates to go up? Would you ever suggest the government reverse the money printing they have done?
And sure, governments can create money out of thin air. It is called monetisation. And has been a universal disaster every time it has been tried. Mostly because of the inflation it inherently creates.
As I said before, you can print as much money as you like, but that doesn’t mean you have created any value. That seems to be something you are totally missing in this whole debate.
Let’s deal with some facts
All new money is created in the same way which ever bank does it
Despite QE m4 has fallen
Rates gave not risen
Infkation was stagnant barring asset prices until Brexit
So £435 billion did not do what you wanted
And you have ignored what I actually said Re full employment
So we have had massive monetisation and it has not delivered what you suggested
The same is true the world over
When does reality play a part in your logic?
Guy,
I have always wondered why people with no particular knowledge (and therefore no keen interest) in a topic occasionally feel compelled to have such strident opinions. For someone that actually used the phrase “magic money tree” (a standing joke) and who demonstrated a complete and evident lack of familiarity with this subject, I think that you received a remarkably patient answer from the host of this blog.
I hope that you appreciate that. If you had a sound knowledge you would be aware that the kind of BoE, intervention that Richard describes is similar to actions that central banks have taken with both bond and currency markets in the past (by the way, QE actually does involve the BoE buying bonds). Sometimes all that central banks need to do is signal their willingness or capacity to intervene and that is enough to keep bond markets and currency markets under control.
To that end I recommend some reading (see below), Failing that, I recommend that you at least take a quick look at Graph 1 of the Reserve Bank Of Australia Bulletin article below and see if you can gauge the scale of what they did to stabilise their currency in 2001 and 2008. Then be aware that there was no controversy involved in the relevant interventions
http://aei.pitt.edu/31741/1/WD_346_De_Grauwe_on_Eurozone_Governance-1.pdf (pages 1-5)
http://www.rba.gov.au/publications/bulletin/2011/dec/7.html
http://www.bbc.com/news/business-12787285
Thanks
QE is not monetizing debt. Quite specifically so. When the debt bought through QE matures it has to be retired (and the QE therefore unwound) or refinanced through new debt issuance.
What you are suggesting, that QE debt can simply be cancelled is pure monetization. I’m not sure why you even go through the bother of trying to camouflage it with the QE part. This is the magic money tree part – the idea that you can monetize debt and this creates new value out of nothing.
In answer to the other points.
M4 has not fallen post QE. QE was in part designed to stop any fall.
Inflation isn’t that high at the moment, but then again we aren’t monetizing debt at the moment either. QE specifically does not monetize debt. It is known, in the business, as a sterilized transaction. Debt is swapped for cash. An asset swap. Central banks balance sheets are full of the bonds, and now QE and these balance sheets are going to be wound down.
I asked you what specific measure of unemployment or underemployment you would use as a measure of when to tighten policy. I assume that given this seems to be your metric for controlling the monetization of debt you would also have an idea about when you would turn the taps off?
But why should I know this. After all years spent at the EIB, IMF and ECB clearly have left me bereft of practical experience in the matter. I now consult and lecture, so let me give you the textbook example, for undergrads who don’t seem to understand monetization.
An island nation uses a type or rare sea shell as currency. They are essentially a fixed supply as these creatures have long since become extinct. The 1000 shells serve well as tokens of exchange – a fiat currency.
One day a terrible storm hots the island. Houses are destroyed and crops razed. However thousands more of these rare shells are deposited on the island by the storm, essentially mirroring money printing through monetization.
Are the islanders now richer or poorer after the storm?
Richard Murphy and his ilk would have you believe that the islanders are richer. Money has been created. Unfortunately it is simply snake oil as whilst there might be more currency available, no value has been created. Which is why people call it the magic money tree. You are trying to “magic” more valuable assets out of the air.
And I know Richard will now say that banks do it all the time, but credit creation and therefore the bulk of the broad money supply is not created out of thin air. Unlike what Murphy is suggesting with people’s QE bank (where assets appear with no liabilities, hence we all magically get richer) bank credit creation has both asset and an offsetting liability.
The last point you mention is central bank intervention. It can work, but in the long term rarely does and can lead to dangerous imbalances. Currency pegs almost always break (see the Swiss for a good example, or the pound crashing out of the ERM) or they spool up large issues with the current account (again see the Swiss but also can look at Japan or China).
Likewise a CB can intervene in rate markets, most directly through the base rate and reverse repo operations, but as we have seen also through QE. QE’s very purpose is to lower long term rates, not print money as Murphy seems to think. However again there are limits. Short term rates set by CB’s have limited effects on long term rates and QE distorts asset prices leading to various tail risks, let alone the burden and risks associated with carrying a large balance sheet. We are yet to fully see how big those risks are given that QE has been more or less an emergency experiment, but I can assure there are risks, quite the contrary to the riskless base Murphy gives it – and he is suggesting we go even further still and monetize debt.
You described a commodity currency not a fiat one. You might need to learn the difference.
A fiat one is debt based – the token is irrelevant.mit us the entry in the ledger that matters and is currency.
If you don’t get that then thank goodness you are no longer at the institutions in question. And I feel sorry for your poor students.
But let’s deal with monetisation. QE means government debt is owned by the government. Respectfully, as its own accounts show, that cancels it.
And as the BoE say new money is created.
Is that monetisation? Sure as heck it is.
Those are the facts. I suggest you acquaint yourself with them
And the fact that all money is effectively created out of tin air. As the BoE agrees.
Guy,
Sorry to come back in late (and I note that others have already covered some of the points that I would’ve made so I will try to be be brief).
1. The Reserve Bank of Australia interventions were highly regarded successes and I chose those examples because they were so clear and easily cited. There are plenty of other such examples to choose from.
2. As for this suggestion: “credit creation and therefore the bulk of the broad money supply is not created out of thin air” – these people seem to disagree: http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf
and your ‘point’ about the “asset” and “offsetting liability” doesn’t change that. It merely describes an accounting detail that follows the ex-nihilo creation.
3. You say that: “QE and these balance sheets are going to be wound down”.
Well, they are getting a bit big for that. I don’t know anyone (academics included) that believes that is actually ever going to happen. If it ever does please let us know.
Precisely
Buybacks to infinity … and you don’t think the resultant money printing would be inflationary?
would be entertaining to see…
Who was saying to infinity?
Richard, for once I think you are out of your depth and it shows in your exchange with ‘Guy’.
There is specific expertise (which you seem to lack, or have not time to employ) which allows the unwinding of deep seated brainwashing.
Patience alone is not enough, and will inevitably lead to frustration.
🙂
A commodity currency you say? That term is usually reserved for fiat currencies of countries with large commodity export industries. It isn’t a type of currency as of and in itself. You probably meant asset backed, but no, it isn’t that either.
The example I described is the very basic form of fiat currency. The medium itself has no intrinsic value other than as a token of value. Or in other words a promise to pay – a debt.
I would have hoped a professor of economics would know this.
I note that you have also failed to say if those islanders would be richer. Under your logic they would be. Because they now have more money!
I also ask again what data or metrics of under or unemployment you would use as a basis to control your people’s QE money supply.
If QE debt is cancelled, why does it still show in government borrowing figures? Or on central bank balance sheets? Or why would central banks need to reverse QE, which is starting to happen (though it seems you have said it will never do so).
Money can be created out of thin air. What you don’t seem to understand is that value cannot be. You can print as much money as you feel like but that simply does not make anyone richer – as the islanders example shows us. All you will do is cause the value of the currency to plummet. It also suggests that you don’t understand the basic mechanisms of credit creation, or indeed the difference between money and credit.
Indeed, you even say above that a fiat currency system is debt based. But only you have found a way to circumvent basic economics and create new money debt free, with no other drawbacks! Which is it? Either the “new money” has a liability attached to it, at which point it is not “free” or you are simply printing money. Which is hardly a new idea, and has been tested to literal destruction MANY times over.
Instead you seem to have resorted to simply being rude. You seem unable to answer basic questions when pressed and resort to bluster to cover your obvious lack of expertise. Looking at your CV you don’t seem to have any real qualifications past accountancy and being a tax campaigner. I can’t seem to find relevant experience regarding economics of finance and even your papers seem to be published without obvious peer review and a good number of the references in them refer to…yourself! This might explain your lack of understanding and plain old jumbled thinking.
I actually only looked at this blog after it was brought up by one of my students. After looking at It, all I can say is that you have quite an unbelievable lack of basic economic understanding for one claiming to be a professor.
You described the pollen of gold
Now stop wasting my time with your deeply ill -informed comments
Let me assure you, you’d fail on my courses
In the context of which, why not tell us where you are since you’re so keen to hurl the abuse about my professorship, which is not a claim but a fact
And maybe you should also find out what a professor of practice is: it’s another issue you’re unacquainted with, very obviously
Richard, the CV says it.
I’m not sure about the EIB, but both ECB and IMF are political institutions.
Sea shells indeed. Where can I get a copy of the Ladybird book of economics?