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To QE or not to QE?

I was recently quoted in Management Today with some thoughts on current monetary policy:

The Bank of England’s policy rate has been historically low for some time now and this cannot continue indefinitely. The aim of low interest rates is to boost the economy by creating incentives to borrow money and invest. But higher capital requirements and policy uncertainty create counter forces that restrict bank lending.

In these circumstances the purported “benefits” of low interest rates fail to materialise, but the costs certainly do. These include the lack of an incentive to save (and actually rebuild banks’ balance sheets through voluntary lending), distortions to the capital structure of the economy (making white elephants like the HS2 line appear profitable) and the erosion of people’s savings.

The fact that real interest rates (the difference between inflation and the return you get on your savings accounts) is negative is a harmful confiscation of wealth.

When interest rates are close to zero policymakers look to alternatives, and quantitative easing has emerged as their favoured tool. However grateful banks and the financial community are in general to have an injection of freshly-printed money, it’s not clear how much this is helping the real economy. The aim shouldn’t be to preserve the status quo, but to find ways to allow banks to fail without exposing the general public to the fall-out.

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14 comments to To QE or not to QE?

  • Re the idea that lowering interest rates will boost economic activity, there are about a dozen flaws in this idea, of which this is just a selection.

    1. Long term investors look at long term rates, not short term rates. And changes to the latter do not have much effect on the former.
    2. The evidence is that changes in bank base rates have no effect on the rates charged by credit card operators.
    3. The Radcliffe Report in the 1960s into monetary policy in its conclusion said that “no reliance can be placed on interest rate adjustments for regulating demand”. (I’m quoting from memory, but I’m pretty sure I’ve got the wording about right.)
    4. The idea that there is a close relationship between interest rates and the ACTUAL AVAILABILITY OF CREDIT looks a bit silly in view of the howls of anguish we are currently hearing from SMEs claiming they cannot borrow.
    5. Lack of investment is not the problem (at least in the U.S.) See:

    http://online.wsj.com/article/SB10001424052970204468004577164710231081398.html?mod=WSJ_business_whatsNews&_nocache=1326870904997&user=welcome&mg=id-wsj

    Re Anthony Evans’s point that “it’s not clear how much (QE) is helping the real economy.” I’d put it slightly more forcefully, like, er:

    “If you ***** idiots in Westminster and the Bank of England thought that doling out cash to a small and wealthy section of the population (bond holders) would have much effect on real economy, then you’re mentally ******* sub-normal.”

  • Under the UK system, an injection of QE might actually result in an injection of money into something productive, but I doubt it.
    In the US , it does not.
    It merely blows up the balance sheet of the banks with excess reserves on which they collect a pinch of interest.

    The question that you do not seem to address is – what is the goal of the policy move?

    If it is to shore up the bankers against the pending cascading cross-defaults,then it might serve that purpose, at a cost to the public purse and society.

    But if the intent is to get people back to work, then what is needed is a money-flow that gets velocity back over 1, and aggregate demand in the economy on the increase.

    The only way to do that is not through QE, as the Central Bank is incapable of interaction with the consumer-driven economic demand.

    Rather, only the government can do this. It is time to remove the wild notion that the only way we can have any money is by issuing debt.

    Direct government expenditure, without the issuance of debt, as advocated by Lerner and others, is the only real solution to a debt-saturated, balance-sheet-reduction-based economic contraction.

    It’s time to get the economy moving again. And ONLY the government can do that.

  • Toby Baxendale

    If the government can only extract savings / money from people , that would spend the money freely, how can it then get the economy moving when at best , best, best, all we will see is one bit of spending not happening where the money has been taken from to where it is spent by the government .

    Also, note, if the persons who have their money extracted to be spent by the government , they are deprived of exercising their demand for new goods and services i.e. their prior production and savings that got them the money in the first place is the very new demand for more goods and services. With a government spending, you only have the consuming half of this and nothing set aside to produce other things to make useful products for exchange for other things.

    These cranky theories were exploded 200 years ago and every time a recession comes , the fallacy you advocate comes to light and it needs to be exposed again , like a zombie returning from the dead.

  • Thanks.
    Well, as I said, via the Lerner method for alleviating chronic unemployment and no economic movement in the private sector (for good reason), government payments directly into the economy for public services rendered would constitute new money and thus would not be extracted from anyone. Nor would it be inflationary. The expenditure is needed in the economy, and the government is thee only one that can deliver it.

    Or, perhaps monetary sovereignty is off limits here.

    Once that money is in the economy – immediately – it would lead to increases in aggregate demand and employment, which are two of the goals of monetary policy.

    Sorry to let you know that these ‘cranky theories’ were never exploded, they were merely overthrown, not by better theories but by private money power.

    Which has taken us to where we are now.
    With the internet and the economy in shambles.

    So, without abusing my privilege here, please let’s take a step back and agree that everything is always on the table.

    That would be a more scientific approach to the subject of money and of how our understandings about money come to shape our political economy.

    If we discuss the economic and political situation as it relates to money, then we are talking about the national monetary system. The sovereign national system of money.

    So, while discussing interest rate policy may be important to people who deal in great amounts of money, it matters little to zero to discussing the monetary policy needed to get the economy back on track, by increasing aggregate demand
    through public sector expenditure, without debt issuance, of a more permanent and stable money system.

    Once it is in the economy – immediately – it’s fair game for commerce, which commerce should welcome.

    So, just to clear from my end – the science of money is of the most unsettled and important items to be advanced. There will be no basking on historical accomplishments. This is now. Explode away.

    Thanks.

  • Toby Baxendale

    Morning Joebhed,

    Rest assured, you can discuss anything relevant you like here. There are many people like you who hold views akin to that of the mystic and witch doctor , they are called most economists and most politicians .

    I have spent 22 years in devotion to satisfying consumer demands and thus creating wealth and it is done as follows;

    • As an entrepreneur you look for the most urgent needs of consumers.
    • You work out how to fulfill those needs.
    • You painfully at the beginning of your enterprise , sometimes pay more to your staff, go without wages yourself and refrain from consumption, in short you save.
    • Thus you deploy your savings or borrow the savings of others to take command over the various factors of production, land, labour and capital and make them into better and more capital intensive combinations to provide the goods and services that the customers want .
    • Note more capital deployed in the right intensity creates more productively and thus cheaper produced goods and services.
    • This takes place over time.

    If there are more or less money units in circulation, this will effect my purchasing power up or down only . It will not create wealth. Granted, more money units may create the illusion of more wealth, the warm fuzzy feelings of happiness etc that may make you go out and be more positive about the world to go and do things, but illusions are well, just that: illusions. When revealed for what they are, you do rapidly go back to square one.

  • Toby, About 95% of economists are aware that money in a fiat money system has no intrinsic value. I.e. fiat money is simply a token that is widely accepted in payment for goods and services.

    That “zero intrinsic value” point does not invalidate Joebhed’s point that if government creates more of these tokens and spends them on roads, education, etc, then employment will rise, given excess unemployment. In contrast, if unemployment is at a more normal level, or at NAIRU, the money printing just results in inflation.

    In the U.S. at the moment, the private sector is hoarding these “tokens” instead of spending them. Hardly surprising given that many households had their fingers burnt in the credit crunch. If government does not step in the produce more tokens, then excess unemployment will persist.

    My only objection to Joebhed’s argument is that he assumed the extra spending and employment resulting from token production is used to boost the public sector. As Lerner rightly said, PRIVATE sector can equally well be boosted by creating extra tokens and cutting taxes (i.e. leaving tokens in household pockets).

    See bottom of p.39 here:

    http://k.web.umkc.edu/keltons/Papers/501/functional%20finance.pdf

  • Good morning, Toby,

    By starting out with “cranks” and moving on to “mystics and witch doctors”, your posture belies your statement that you are willing to seriously discuss the issues relating to the national system of money.

    So, how ‘bout we leave the name calling in our heads and only scribe stuff that might inform the readers? That would be helpful to me.

    Please be informed that my views cannot possibly be called “akin to most economists and politicians”. I will certainly try to do the same for yours, respectfully.

    Thanks for finally getting down to the money units. I think your analysis is flawed. The government would be adding to the demand in the economy by its expenditure of the non-debt based money units on the public sector projects. It would increase the money supply in the final analysis. Wasn’t that what the discussion of QE was about?

    May I ask why, in your opinion, the pay received by adding another bricklayer to the new school would not end up in the private bank account of the laborer and allow that laborer to become another customer in your Entrepreneurship 101 model and buy more of your carefully planned widgets?

    The question becomes whether the new school and buying another of your widgets and increasing YOUR purchasing power actually adds to the wealth of the national economy, or not. I would refer you to Soddy’s “Wealth, Virtual Wealth and Debt” for a proper consideration of that question.

    Toby, please don’t go getting all warm-and-fuzzy thinking here. I’m ready for your more serious challenges. Please, just explain why the monetary policy option of direct government expenditure is not superior to QE or whatever you may offer as an alternative to get the people back to work again.

    Which would be what, exactly, Toby?

    Thanks.

  • Toby Baxendale

    So, lets say there were 100 money units and our govt made 10 more. It spends the 10 on its projects and some of the people will hold those 10 money units and a lot will not. Their purchasing power goes up and those of the other group go down in relative terms right?

    Where is the wealth created?

    We have no more net new things, no more net goods and services.

    So back to my point, you need to not consume part of your production , save, and then put it to better uses, marshalling more factors of production in better combinations over time to produce more goods and services that people want .

    This produces more wealth . Money units , more of , created from no where , by the state and spent by them, never will.

  • Toby, Whence the assumption (19th Jan, 15.15) that when sundry private sector entities have 10 more money units, other entities have 10 less? If the government / central bank machine creates 10 units and spends them into the economy, that’s a net INCREASE in the number of units in the hands of the private sector.

    Re your question “Where is the wealth created?”, the answer is that the creation of money units itself does not of itself constitute increased wealth. That’s because as we all know, fiat money has no intrinsic value. However, possessing these money units is an inducement for those in possession of them to order more goods and services. And that DOES equal more wealth creation.

    Of course the above policy is potentially inflationary. As Lerner and the advocates of Modern Monetary Theory are well aware, governments need to be ready to put the above money creation into reverse when inflation looks like getting excessive.

    Re your point about saving being necessary in order to fund investment, that point is quite separate. Even if the amount of investment is less than optimum, that does not preclude full employment in that the combination of labour and capital equipment used in most forms of economic activity is fairly flexible. If Toby Baxendale doesn’t have a machine to pack fish, he’ll hire some extra labour to do the job manually, till the fish packing machine arrives.

  • Not sure if Toby replied to my question about what HIS alternative proposal for monetary policy action would be, or not.

    Assuming it was ……. and if I follow it, we can get people working again and stabilize prices only by not consuming. I think that’s a correct interpretation, if a seriously flawed monetary policy.

    Actually upon further read, I think it may be that we can only ‘create more wealth” by not consuming………by saving….. by NOT SPENDING.

    Well, I’ll wait right here and see how any of that goes, because right now we are adrift, further and further into the abyss of economic contraction cum debt-deflation, and nothing that I can see being offered here is doing anything about getting people back to work – which I think SHOULD be a goal of monetary policy.

    Good luck with having people not spending in order to achieve your monetary policy goals – which I must take are the creation of more “monetary” wealth for those most worried about interest rates, and not jobs.

    Were I to move to a more serious discussion – there exists surpluses of economic resources available to achieve economic growth and to produce REAL wealth. The entry into existence of say a straightforward half-a-trillion dollars would put some of those idle economic resources to work, producing real general wealth in someone else’s definition of the word than Toby’s.

    Again, please consult Soddy for the meaning of these economic conversions.

    Thanks.

    • Robert Sadler

      Hi Joebhed,

      I have to agree with Toby here and also point out that there is no need for an alternative monetary policy – simply abolish monetary policy and return money production to the market. That would very quickly eliminate the historically high levels of inflation and sharply reduce the length and severity of the recessions we have been experiencing.

      Furthermore, Toby is quite right about the fallacies inherent in both Keynesian and Monetarism. These fallacies were dismissed continuously back in the 19th century (see the French economist Bastiat for example). All Keynes did was dress these fallacies up in new clothes that politicians of the day could parade in front of the people in an apparently acceptable manner.

      At best, all the government can do by involving itself in the economy is bid up the prices of resources and waste the resources it accumulates.

      The ideas you support are fundamentally fascist (as Keynes stated himself) and if pursued to their ultimate conclusion will lead to ruin for us all.

  • Hi Robert.

    No problem. I see your point.
    Where “cranks, mystics and witch doctors” are not adequate to punish monetary system discussants, resort to fascism.
    That always works.
    Another of those “eye-of-the-beholder” traits, I’m afraid.

    A public money system is the obvious, natural outgrowth of an economic stew that combines a collective need and the sovereignty available to meet that need.

    That’s why the free Colonies developed public money systems which led to their prosperity.

    But, alas, rather than a meaningful rapport on how to move forward, your two-pronged approach may seem to do the job from your perspective.
    First, a dismissive reference to fascism to those seeking a wider discourse, and then the slam-dunker statement that no alternative monetary mechanism is necessary.

    Perhaps it is that “fascist-vision” problem that prevents you from seeing that abolishing state involvement in a legal national money system that is in existence, MUST be an alternative monetary mechanism and policy.

    We have one.
    We NEED another one.
    Why not leave the spiraling-negative rhetoric aside and say why what it is I propose here does not meet the needs of monetary policy today – that of getting people back to work and controlling inflation.

    Perhaps you can offer a solution for what Mr. Evans prescribed – a method for banks to fail without hurting the real economy.

    Thus, a resort to full-reserve banking.
    How do we get there?
    Without deriding the others.
    Thanks.

  • Toby Baxendale

    If I have £2k per month and spend this all on consuming things , I can never save to buy anything that costs more than £2k per month .

    So how to I buy a car?

    How do I buy a house?

    I can only do this by refraing from consumption on part of my income that will give me a deposit .

    Now is the penny dropping ?

    Think of a man on the front line from his trench shooting his gun with his loader constantly giving him a loaded gun. Now at some point in time if you do not stop to maintain the rifle , it will jam up an fail. Consume everthing and you will have nothing .

    Save to buy the big capital items that provide the long term jobs.

    Consume like mad and you will eat away your capital structure .

  • Toby,
    I’m not sure why you raise the issue of private household non-savings with me.
    I never mentioned it and it would play very little role for a monetarily sovereign, currency-issuing government in expanding the potentially growing economy.
    That economy would need more spending to achieve its growth potential. Not more savings. Only the government can spend the money into existence, as by Lerner.
    Given the plethora of outstanding economic resources available right now to grow the economy, why do your replies involve shooting guns and private individuals not saving?

    The QE question related to getting the economy moving again. That would be the national economy getting moving by national monetary policy initiatives.
    What I am proposing is not QE, nor Keynesianism. He limited his approach to the debt-based system of money and of needed government borrowing to fund economic expansion.

    This is far more radical that that. Just as radical as Austrian economics, in the best sense of the word.

    There is agreement on the need to “have” in order to to spend. But Austrians seem to ignore the basic reality that, when it comes to money, there is first the need to “issue in order for there to be the ability to have.

    Thanks.