Simon (Jenkins) says ‘QE is the biggest confidence trick of all time’:
Has Simon got the wrong end of the stick?
Frankly, it depends … listening to politicians in the media, it is clear that (shamefully) most of them understand very little about economics. They regular confuse government debt and the structural deficit. (2) For the most part, they and our journalists are steeped in the strait-jacket of monetarism and the mythologies of neoclassical economics. TINA still prevails in mainstream thinking…. But in 2008, there was a horrified realisation that the economy was not working as predicted and that the financial system was bringing about its own Armageddon. Since that point, the public have only been offered the impenetrability of economist-speak to explain QE, which may be spoken in good faith or to deliberately obfuscate the listener.
However, MMT-er Professor Bill Mitchell explains:
‘Does quantitative easing work? The mainstream belief is that quantitative easing will stimulate the economy sufficiently to put a brake on the downward spiral of lost production and the increasing unemployment.
It is based on the erroneous belief that the banks need reserves before they can lend and that quantitative easing provides those reserves. That is a major misrepresentation of the way the banking system actually operates. But the mainstream position asserts (wrongly) that banks only lend if they have prior reserves. The illusion is that a bank is an institution that accepts deposits to build up reserves and then on-lends them at a margin to make money. The conceptualisation suggests that if it doesn’t have adequate reserves then it cannot lend. So the presupposition is that by adding to bank reserves, quantitative easing will help lending.’ (3)
In other words, the mainstream assumption is that the bank is simply a ‘middle-man’ between those who put money in, and those who want to borrow… but that is neither what is happening, nor actually resembles the way in which banks work.
New Economics Foundation – ‘Where does money come from?’
Simon (Jenkins) says:
‘Osborne and Cable still utter strangled cries for banks to do “more lending to small and medium-sized businesses”. They formulate endless schemes to “kickstart the economy”. They know that none of these works, but we still have such flops as Project Merlin, the regional growth fund and the business growth fund. The British economy is in a classic Keynesian liquidity trap. It is starved of demand, but nothing is done to boost it.’ (1)
Simon Jenkins is absolutely correct to identify the lack of demand… and that is why big business is not investing (4), and they are not going to start investing unless they see the return of demand.
‘… the weirdest assumption of all is that business will invest massively more? Why will they do that? Their customers – whether here, or the government, or abroad – are all going to be consuming less but it’s assumed business will invest substantially more. That is utterly implausible. They just aren’t that irrational. They want a return before they invest – and since this forecast clearly says none will be forthcoming then that isn’t going to happen.’ (5)
The Bears also agree with Simon (Jenkins) that Quantitative Easing does not do what the Federal Reserve and the Bank of England say it will do! … But is it possible that there is another intention? Could the ‘cheat, scam, and fiddle’ be a completely different ‘cheat, scam, and fiddle’ from that identified by Simon Jenkins?
Could QE be removing government debt with just a magic click on the mouse?
‘… QE obviously isn’t working in the way it is intended. The credits given to banks are not finding their way into the real economy. QE is simply not stimulating growth in the money supply in the way it is intended to…..
Is there a silver lining though? (6)
The Bank of England can obviously create money from thin air without creating a parallel debt anywhere else and this money could be used to clear Government debt.
QE works thus – the Bank of England creates £75 billion electronically as it is a central bank and can credit its reserves with as much money as it likes. The Bank lends this £75 billion to a Special Purpose Vehicle – a wholly Government owned PLC called the Asset Purchase Facility. The APF then buys £75 billion of outstanding Government gilts from banks, pension funds and other institutional investors. The banks all make huge profits from the sales and get cash credited on their central bank reserves. The APF takes on the government gilts. So far so good as no money created or destroyed.
What is intriguing is that this offers a chance to destroy government debt with no inflationary risk or build up of debts anywhere.
How? The AFP is sitting on £75 billion of government debt. It is wholly owned by the government. If it just retires the debts by communicating that they no longer exists. Job done. There is no further inflation or loss of investor confidence.
Already we have a situation where over a third of the outstanding National debt is sitting in the Government owned Bank and another section of the Government, the Debt Management Office – an arm of HMT – is paying interest to the Bank which is again just sitting there unused. It would be more honest to monetize this debt and just retire it.
It is very, very likely that the debts will have to be monetised anyway. With the Bank sitting on £325 billion (and some estimating this will rise to half government total debt or £500 billion) it just simply will not be possible to sell this at any time before the gilts mature and expire naturally. How on earth could the government fund its normal gilt issues when the Bank was dumping out £200 or potentially £500 billion worth of gilts from the APF.
This certainly won’t happen whilst the government still runs a deficit and needs to borrow and it certainly can’t happen when and if we have recovered. At this point, the banks will be creating enough lending to allow the money supply to widen at its normal rate. Dumping an additional £200 -500 billion of liquidity out on the market at this point will cause rampant inflation.
Until then we are left with a ridiculous situation where the Tories are moaning about huge and “unaffordable” government credit card bills. At the same time over a third of the debt they are moaning about is stuck in the government owned Bank of England with no hope of it ever being anything other than cancelled and retired. (7)
Richard Murphy of Tax Research blog puts the case even more simply:
‘.. the Bank of England, which is owned by the government, has paid HM Treasury, which is part of the machinery of government, £325 billion to buy debt issued by the government …. as I have explained before, this means that in any proper accounting system that produced a single set of accounts for the government .. debt that was repurchased would have been considered to be cancelled. That’s because you can’t meaningfully owe yourself money, and yet that is precisely what is happening here. The Treasury owes the Bank of England money but as it, in effect, owns the Bank of England, it therefore owes itself the money and as such the debt has simply been cancelled….
I am saying that the arrangements used in QE hide this economic reality and that [when] all the mumbo jumbo is cleared away what is happening in QE is that money is being printed to clear the government’s deficit and that debt is not really being issued at all …
But that also means that … we haven’t got national debt of just over a trillion now, it’s just under £700 billion. Now that’s a lot, but it’s only 45% of GDP and that was so commonplace during, for example, the Thatcher years that no one noticed it. (8)
Jim Leavis argues much the same point and poses the following question in an article intended for Investment professionals:
‘If the government simply cancelled the £300 billion of QE gilts held by the Bank of England, who would be unhappy?
No default [would have] taken place (no CDS trigger, no D from the ratings agencies who are only interested in failure to pay private investors), the UK’s public finances become sustainable, the economy gets a boost from the knowledge that the QE cash injected will stay there for the foreseeable future, and a mechanism exists to remove cash from the economy should inflation return.’ (9)
So why would the government want to hide such positive news? What would be the consequences of the Treasury and the Bank of England acknowledging that QE is a means to eliminate the huge hike in government debt which resulted from the socialization of banking losses? (10)
Clearly, there would be political consequences:
‘…. If the population broadly understands that a sovereign government can never run out of money and can always make these electronic transactions then the questions they might ask their politicians will change and force the latter to be more accountable for their political choices….’ *UE is needed rather than QE (11)
… it means the whole debt paranoia is wrong. Debt is not rising at the level claimed by the government. Secondly, the focus can then move onto paying for services. That kicks in the tax gap debate. Third, it means Labour can honestly say it is not constrained by having to repay debt to future generations – because well over half of all debt issued since 2008 has already been repaid. (8)
In other words, this would be of enormous political significance, because such knowledge would undermine the ‘Austerity’ argument of George Osborne, the EU troika and the IMF .. and would demonstrate that the dismantling of the NHS, and public services, was an entirely ideological decision.. namely the ideology of the Washington Consensus.
The misnamed ‘deficit-deniers’ would be thoroughly vindicated!
Simon Jenkins was right to say QE is ‘a cheat, a scam, a fiddle, a bankers’ ramp, a revenge of big money against an ungrateful world’….. but for the wrong reason. The QE ‘confidence trick’ is that it hides the ‘inconvenient’ truth that sovereign governments can never run out of money. The cuts are not, and were not, ever necessary.
Post-script: In the light of the above, George Osborne’s speech is misleading to say the least.
Speaking at an investment conference in London, the chancellor admitted that the 0.7% plunge in growth in the three months to June was “disappointing” but insisted that the Treasury would stick to the course set two years ago.
“You will hear those arguing that we should abandon our plan and spend and borrow our way out of debt,” Osborne said in response to widespread calls for the coalition to do more to lift Britain out of double-dip recession.
“You hear that argument again today. These are the siren voices luring Britain onto the rock. We won’t go there.”
(6) Mervyn King has turned our leaders into zombie puppets 12 july 2012
*UE = Unemployment Easing