General / Off-Topic People's QE

[huwthomas]

I'm far from being a leftist but it does seem to me that Jeremy Corbyn's idea for "people's QE" does not deserve the instant dismissal it receives in the press. Funding a hostital or a nuclear plant through PFI is generally accepted, funding it through a "people's QE" would not be substantively different -- both methods leave future taxpayers funding a stream of payments. At least QE would mean the taxpayer owned the infrastructure being purchased, and would not be funding private-sector profits or financing charges.

The only financial difference is that the PFI is not counted as government borrowing, but that in itself is bizarre.

FWIW previous nationalisations were done by issuing bonds, which is comparable to modern QE. When the Bank of England was taken out of private hands, for example, the previous owners were compensated by being given freshly issued bonds, that were recently repaid. If the country issues debt, and uses it to acquire fairly-priced assets, its overall "national balance sheet" is not changed.

 

[Surfinjo]

People's QE is representative of the next step. Capitalism has failed and it's time to move on.

The essence of capitalism is to use interest rates to generate the economy when it goes into recession. But modern capitalism has all but eliminated interest rates, reducing the incentive to invest and so the economy stagnates.

For the last 10 years or so, the approach has been Quantitative Easing, where additional funds are created then given directly to the banks, so they can then lend to support growth.

But at the start of the current recession, banks lost huge amounts of capital from risky investment. This was not, in itself the cause of the recession, that was going to happen anyway. It did however leave the banks feeling very sore along with the rest of us.

So now, instead if using the extra funds to finance ventures and business expansion, banks are hoarding to rebuild their own financial base.

People QE means that the funds will be made directly available for capital projects, roads, railways, communications, housing and so on.

The only reason modern capitalism has managed to last so long is the climate of fear generated by those who refuse to admit they are wrong. Terms such as looney left and bad old days are frequently bandied about. Along with increasingly inconsistent and qualified stories of threats to national security, whatever that is, be it from starving frightened civilians feeling was or attacks from North Korea!

The SNP has shown that ordinary people are no-longer so willing to be swayed by such scaremongering. Support shows no sign of slowing. Corbyn and his supporters have realised this and chosen to rise above the many, generally silly scares, even managing to fend off references to past support for Palestine and republicanism.

So far, it seems to be working.

 

[beelbeebub]

If I understand correctly, standard QE is the BoE accepting bonds from banks in exchange for cash, which it is then hoped the banks will lend to productive enterprises to help the economy, rather than chucking the money into property.
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JC's PQE is for the BoE to buy the bonds to be bought directly from projects (like a road or hospital) that the gov deem worthy, missing out the banks.
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Have I got that right?
:
As I understand it, the objection to PQE vs QE is that
->it would undermine the BoE's independence
-> thus confidence that the BoE will really keep a tight reign on the money supply to control inflation
-> thus make investing in or lending in GBP more risky
-> thus increasing the interest rate for gov and commercial lending
:
IMHO this presupposes that the gov would create more money via PQE than QE.
:
If the BoE decided independently​ the amount of QE money it was going to create in a given month (as it does now) then, rather than give to commercial banks in the hope they will lend it to something useful, give it to gov appointed infrastructure projects (i.e. projects that will help increase productivity like railways, roads, PowerStation, r&d etc) rather than current spending (e.g. welfare) then the economic risk of inflation would be no worse with PQE than QE as the same amount of money is being "printed", it just arrives in the economy in a different place, e.g in a bridge construction company's pocket to pay contractors and suppliers rather than in some obscure property investment vehicle.

 

[huwthomas]

If I understand correctly, standard QE is the BoE accepting bonds from banks in exchange for cash, which it is then hoped the banks will lend to productive enterprises to help the economy, rather than chucking the money into property.

It's the BoE creating new money to purchase gilts and other assets. I don't think there's any specific intention for the money not to be lent against property, in fact I would think one of the intentions of QE was to stave off deflation in property prices as well as more generally, so I imagine the BoE would have been happy to see some of the newly created money going into that purpose.

JC's PQE is for the BoE to buy the bonds to be bought directly from projects (like a road or hospital) that the gov deem worthy, missing out the banks.
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Have I got that right?

Broadly speaking yes, but the bonds would be issued by the govt and then bought by the BoE with money it QE'd into existence.

- govt decides to build a railway which it reckons will add 10 billion to the value of UK plc, and issues 10 billion in bonds to finance it (so far, so normal)
- the BoE creates 10 billion and uses it to buy the bonds.

Instead of having to pay interest to private bondholders, the govt would pay interest to the BoE (which is nationalised, so in a way the govt is paying the interest to itself).

At the end of the operation:

govt owns a 10 billion asset and owes on a 10 billion bond -- balances
BoE owns a 10 billion bond and has an extra 10 billion of QE outstanding -- balances.

As I understand it, the objection to PQE vs QE is that
->it would undermine the BoE's independence
-> thus confidence that the BoE will really keep a tight reign on the money supply to control inflation
-> thus make investing in or lending in GBP more risky
-> thus increasing the interest rate for gov and commercial lending
:
IMHO this presupposes that the gov would create more money via PQE than QE.

The part about BoE independence is certainly true. Then again, it only became independent following New Labour's win in 1997, arguably the non-independent BoE had a better record of avoiding ruinous outcomes than the independent one

If the BoE decided independently​ the amount of QE money it was going to create in a given month (as it does now) then, rather than give to commercial banks in the hope they will lend it to something useful, give it to gov appointed infrastructure projects (i.e. projects that will help increase productivity like railways, roads, PowerStation, r&d etc) rather than current spending (e.g. welfare) then the economic risk of inflation would be no worse with PQE than QE as the same amount of money is being "printed", it just arrives in the economy in a different place, e.g in a bridge construction company's pocket to pay contractors and suppliers rather than in some obscure property investment vehicle.

Bear in mind that the Bank is given targets and then independently uses the levers it has to try to meet them. A target could be given relating to PQE, aiming for a particular level of growth would be an obvious one though tricky to hit, particularly since inflation would still need to be targeted.

 

[Surfinjo]

:
As I understand it, the objection to PQE vs QE is that
->it would undermine the BoE's independence
-> thus confidence that the BoE will really keep a tight reign on the money supply to control inflation
-> thus make investing in or lending in GBP more risky
-> thus increasing the interest rate for gov and commercial lending
:

I won't go into endless rounds of counter claims simply because I don't have sufficient knowledge of economics and I doubt anyone else does either.

But I will say this.

The current economic system has been going since about 1980 with the innovations of Thatcher and Reagan. I well recall much of the opposition then and for several years after, that it would lead to greed, profiteering, a traffic jam economy where inflation and interest rates were almost eliminated and so on. Every one of those has come true.

The economic system, after some initial successes had ground to a halt in a major traffic jam.

But one of the most important aspects of capitalism throughout the 20th century has been the need to divert huge amounts of capital away from the economy, because it was argued that allowing that to enter into the trickle down system would lead to resentment and a lack of incentive to innovate. The way that had traditionally been achieved was by financing expensive wars. The Americans tried to divert a lot into scientific research and latterly, into space research. Many European countries tried diverting much of their surpluses into social health care. But these have all been subject to repeated curtailing because they are generally seen as being of little importance compared to other emerging needs. So there has been a return to the traditional luxury of war. The consequences of war is evident in the tens of thousands of desperate people not flooding E Europe.

The system isn't working. We need something new.

If anyone suggests there are any guarantees then they are lying, frankly. But the current system simply cannot continue. The situation in E Europe is actually explosive and could conceivably result in a tragedy reminiscent of WW2.

I will add that, with many reservations, I actually supported the economic system championed by Thatcher Reagan. In 1981, I attended a large public forum in Edinburgh discussing the future of Scottish Independence. I was still very much in favour of course, the augment for ending the UK remains sound. But I did speak strongly in favour of a pro capitalist agenda.

I was wrong.

 

[ProVox]

Huwthomas:

"Instead of having to pay interest to private bondholders, thegovt would pay interest to the BoE (which is nationalised, so in a way the govtis paying the interest to itself)."

As understood Corbyn’s proposal, it was for the BoE toact just as commercial banks do now i.e. create currency out of thin air. They would then transfer this newly createdcurrency to a State Investment Bank who would then spend it into the economy byfinancing infrastructure and other state projects. That would mean that the BoEwould effectively be ‘printing’ electroniccurrency just as they do with note and coin, it would be a perpetual currency, wouldbe without debt and therefore without interest.(as you relate to above)

The currency recovered as is normal, through taxation,would be re-used by the Government and unlike the present system where it isused to write down the Government Debt, (thatdid not exist until the BoE created it) it is re-fed into the economy andthus the requirement for QE stops there. There is no need for the government to raise further capital as what wascreated is now an integral part of currency circulation i.e. it does not haveto be repaid as it was not raised as debt aid in the first place.

Of course extend the principal and the Banks could havereal problems! If the Government can raise money without debt for infrastructure projects, why not do the same for allGovernment financial needs? Let the BoEcreate all the ‘electronic’ currencyout of thin air and treat the commercial banks as borrowers, just as thepresent commercial bank customers (borrowers) are treated? Remove the ability for commercial banks tocreate currency by prohibiting fractional reserve ‘money’ creation. The banks would have to borrow the currencythey required from the BoE to make loans as opposed to just extending credit(i.e. creating Debt), and the BoE in turn would control lending and inflationby using interest rates as the tool.

It seems to make sense to me .......... but maybe I have misunderstood what his proposal for PQE was . Although, PQE is apparently not a correct description. It would be morecorrect to refer to it as Overt Money Financing (OMF) or even, Overt CurrencyFinancing (OCF).

Surfinjo:

"The current economic system has been going since about1980 with the innovations of Thatcher and Reagan. I well recall much of theopposition then and for several years after, that it would lead to greed,profiteering, a traffic jam economy where inflation and interest rates werealmost eliminated and so on. Every oneof those has come true.

The system isn't working. We need something new. But the current system simply cannot continue. "

Absolutely! Never a truer word said.

 

[Surfinjo]

Huwthomas:

"Instead of having to pay interest to private bondholders, thegovt would pay interest to the BoE (which is nationalised, so in a way the govtis paying the interest to itself)."

As understood Corbyn’s proposal, it was for the BoE toact just as commercial banks do now i.e. create currency out of thin air.

Not quite.

This video explains it rather better:

[video=youtube;vKv48n4MzII]https://www.youtube.com/watch?v=vKv48n4MzII[/video]

 

[ProVox]

Surfinjo:
I watched the video .... several times .... and what he saidIMO was not altogether strictly accurate.

He says that on low or zero interest, savings move frombuying government bonds to being invested in Stocks/Shares/Property/Hedge Fundsetc. and thus boosts the economy. That is not true as Investing in these doesNOT boost the economy it merely boosts asset values which does nothing at allfor the economy. They are a meanswhereby they effectively take the currency out of the economy! For instance, rising share prices havevirtually no effect on the real economy and this we have seen happening overthe last 5 years or so, as share prices have risen greatly although economies stagnate. It has caused a growth in asset valuesand that is all it has done, it did’nt/does’nt boost the economy .
The same applies toproperty ...... make loans cheap and the money goes into boosting the perceivedvalue of a static assets. It does not promotegrowth or create jobs or boost industrial production. When the bubble bursts the value of the assetdrops below the outstanding loan and the asset backed securities (REAL wealth) areseized by the lenders ..... banks.
He repeatedly refers to ‘buyingGovernment Bonds’ but these bonds are only required as security for aloan. If as I believe Corbyn is proposing, the money goes straight fromthe BoE as an INVESTMENT in UK Ltd., it is NOT a loan, it is an investment justlike buying a share. The return on theinvestment comes from boosting the economy and eventually recovering most ofthe invested amount through taxation. This gets reinvested into the real economy, not just being used it torepay a loan with interest to private commercial banks. If the BoE acts as a regulator for theTreasury, they directly control the amount of new currency being injected intothe economy. Like buying a share, it isan investment that is a perpetual investment in UK Ltd. and the need for a further‘money-from-thin-air’ QE requirementis reduced enormously.
I cannot for the life of me understand why if the people(Government) own its independent Central Bank (BoE) it needs to issue bonds(IOU’s) to itself at interest as security for a ‘loan’! What this video proposes is that the basicprincipal of ‘money’ creation will remainunchanged. i.e. the BoE receives Bonds (IOU’s)from the Government, auctions them off the banks who create the currency theybuy them with ....... out of thin air. This creates Government debt which has to be repaid by recovering this ‘loaned’currency through taxation paying it to commercial banks, who then just write itoff their books as a ledger entry. Thebanks have no liability to repay this loan to any other party because they createdit from nothing in the first place!
This takes out of the economy the very currency that wasraised to boost that economy in the first place. It does not return into the economy, it isdestroyed when this ‘loan’ is repaid. Thenthe banks create it again at interest against more government bonds manifestingitself as even more and ever expanding government debt.
If Corbyn allows ONLY the BoE to create currency there is noneed for debt or a requirement to pay interest to private banks. The currency is spent into the economy andthus boosts spending power because more people are employed and paying taxes. This creates more SME’s, who employ more people,who spend and pay more taxes ...... and so on. These taxes all eventually returnto the Treasury to be re-spent into the economy ...... i.e. perpetual currency.(This does not take into accountimport/export spending and income)
I would be interested in yours and any other views whetherthey agree or disagree with the above and why.

 

[Surfinjo]

Firstly, it's not my place to defend Paul Mason or Jeremy Corbyn. I can only present their opinions as they are available and add comments of my own. That much we all can.

He says that on low or zero interest, savings move from buying government bonds to being invested in Stocks/Shares/Property/Hedge Funds etc. and thus boosts the economy.That is not true as Investing in these does NOT boost the economy it merely boosts asset values which does nothing at all for the economy.They are a means whereby they effectively take the currency out of the economy!For instance, rising share prices have virtually no effect on the real economy and this we have seen happening over the last 5 years or so, as share prices have risen greatly although economies stagnate.It has caused a growth in asset values and that is all it has done, it did’nt/does’nt boost the economy .

The entire basis of the free enterprise economy has been based upon the notion that spending provides funds for investment. Investment creates jobs and income, income is spent providing funds for investment. Income also results in tax which pays for public services which in turn, allow individuals the best opportunity to inovate, create, work and increase their own personal incomes, thus improve their own spending / investment power and the levels of taxation they pay.

I know there are other systems, but they all result in a drastically reduced standard of living.

He repeatedly refers to ‘buying Government Bonds’ but these bonds are only required as security for a loan.If as I believe Corbyn is proposing, the money goes straight from the BoE as an INVESTMENT in UK Ltd., it is NOT a loan,

I'm sorry but it is. The purpose of Government bonds is partly to raise finance for capital projects and also to demonstrate to outside investors the health of the economy. Rather like the hose with the biggest car must be doing better.

What this video proposes is that the basic principal of ‘money’ creation will remain unchanged .i.e. the BoE receives Bonds (IOU’s)from the Government, auctions them off the banks who create the currency they buy them with ....... out of thin air.

No. money creation is through economic growth. The reason this responsibility has, for several hundred years been handed to a bank, and more recently moves toward that bank being independent from government is that governments all governments, everywhere, have shown repeatedly over the years, they simply cannot be trusted to act responsibly when it comes to handling the issuing of additional currency. They invariably find excuses to add too much, leading to inflation, devaluation and loss of external investment, leading to economic depression. The US has had an independent central bank which, with some notable exceptions, has acted responsibly. The result is the US economy is strong while other, similar economies in terms of resources are patetically weak. Russia for example, stronger than the US by several factors of 10, miserably poor.



I'm having a lot of problems reading your texts. I suspect you are creating these on a word processor then cut and pasting them here. May I suggest you turn off your formatting or better still, create your texts on Notepad?

 

[ProVox]

Corbyn's PQE

I find this format for replying difficult to use!

Quote: Surfinjo

The entire basis of the free enterprise economy has been based upon the notion that spending provides funds for investment. Investment creates jobs and income, income is spent providing funds for investment. Income also results in tax which pays for public services which in turn, allow individuals the best opportunity to innovate, create, work and increase their own personal incomes, thus improve their own spending / investment power and the levels of taxation they pay.

I have no argument with that at all. But spending by borrowing puts it into a different light.

Quote: ProVox

He repeatedly refers to ‘buying Government Bonds’ but these bonds are only required as security for a loan if ,as I believe Corbyn is proposing, the money goes straight from the BoE as an INVESTMENT in UK Ltd., it is NOT a loan.

Reply: Surfinjo

I'm sorry but it is. The purpose of Government bonds is partly to raise finance for capital projects and also to demonstrate to outside investors the health of the economy.

I disagree with you on that but only when it is applied to currency creation by the central bank as opposed to that as currently created by the commercial banks. A bond is no more than an IOU and an IOU is a promise to pay. If the currency is raised by the BoE creating it as currency directly into a State Investment Bank, then it is exactly the same as the Central Bank making an investment into shares. A share certificate is not an IOU it is a receipt for your investment of currency into a company, or in this case a non-market traded receipt of investment into a State owned enterprise. The currency has been paid out, never to be repaid (as is the original purchase price of a share, where the ‘trading’ is then on the value placed on the receipt by The Markets) and the return to the investor, in this case the State owned Central Bank .... i.e. you and me, comes from the 'dividends' of the investment ....... the creation of wealth in the resultant boosted economy.

The current system just allows the commercial banks to create the investment currency needed to purchase the bonds, out of nothing. They do this simply by offering credit (Debt) and when the government spends the credit, hey presto the bank has created new currency to the credit limit when those benefitting from the investment pay it into their accounts. That is how currency is created according to the BoE. Quote ‘Every time a bank creates a loan, it creates at the same time an equal deposit of currency in another account(s)’ they go on to say ‘Every time a loan is repaid it destroys that amount of currency by removing it from the economy to write off the debt.’ (Ref: BoE Bulletin 1st Quarter 2014 – The creation of money in the modern economy’)

Quote:Surfinjo

No. money creation is through economic growth.

I think you are confusing 'wealth' with 'currency/money'?

Currency and money are similar but not the same thing. Money has one quality that currency does not have ..... it is a store of value over time. Currency is nothing more than an IOU and has no intrinsic value. We work to create wealth and this manifests itself as a deposit in our bank account but even this is not money, it is actually an IOU from the bank ....... who have just 'borrowed' your currency deposit to use as part of their reserves. This is why depositors are unsecured creditors of a bank (As Cypriots found out when the Troika imposed the infamous 'Bail In').

Put simply the only 'money' (actually currency ... not money) the bank has is your and my deposit’s which is why to a bank, deposits are a liability, they have to be repaid at some time. (Unless you happen to have it in a Cyprus Bank, then it is optional!)

They then use their reserves to generate currency (FIAT Currency) applying the principal of fractional reserve banking, by creating debt (They call them loans but they don't actually loan anything) but they do not and cannot lend their reserves. It is a common misconception that banks loan depositor’s accounts to borrowers. It is the other way round .... loans create deposits!

We can in theory convert our currency into wealth by spending it on tangible assets such as Kruger Rand, gold sovereigns, gold/silver, land/property as these, like real money hold relative value over time but these are finite resources.

It is the commercial banks not the BoE that has been creating currency through QE. The BoE only sells the Govt. IOU's (Bonds) to the commercial banks and then passes the sale proceeds back to the Treasury. The bonds are now bank assets as they expect to receive back the currency they have created, to write off the debt they created for the Government. Banks only make a profit out of the interest not the return/repayment of the capital ........ that is a simply a book keeping exercise.

What went wrong with the UK’s QE was that the banks were in a position to create loans but there were few takers. So they put much of it into shares and bonds, which boosted share/bond markets, not the economy and the only significant loans taken up were for house buyers, the collateral being the property which would continually increase in value all the time the banks could lend at very low rates of interest. When interest rates rise people cannot afford the mortgages and they default and as a result property values drop. (The bubble bursts ..... 2008 sub-prime mortgages?)


I honestly feel that not enough has been done to educate the general population on how the ‘money’ they spend is created in the first place. I have tried and have found that even relatively intelligent people find the concept of private commercial banks creating 98% of currency in circulation out of thin air ..... find it difficult to accept that that is a fact ..... not a ‘conspiracy theory’. When I asked one very well educated friend why it felt that it was not true, he replied “Well .... it’s obvious!” i.e. he didn’t know why it was obvious only that it runs against common sense so that alone makes it ‘obvious’.



S'jo .... still having problems! This was pasted from Note book but the paragraph breaks have all disappeared although the gaps between words seems OK now.

 

[Surfinjo]

I honestly feel that not enough has been done to educate the general population on how the ‘money’ they spend is created in the first place.



S'jo .... still having problems! This was pasted from Note book but the paragraph breaks have all disappeared although the gaps between words seems OK now.

At a guess, I would think the problem is few can agree on these issues.

It reads fine.