Yves here. Richard Murphy’s observations about QE hitting its limits are clearly relevant to the US. Sadly, things will have to get worse before ideas like a job guarantee or Green New Deal-type work schemes even get a hearing.
By Richard Murphy, a chartered accountant and a political economist. He has been described by the Guardian newspaper as an “anti-poverty campaigner and tax expert”. He is Professor of Practice in International Political Economy at City University, London and Director of Tax Research UK. He is a non-executive director of Cambridge Econometrics. He is a member of the Progressive Economy Forum. Originally published at Tax Research UK
The Bank of England has just announced that:
At its meeting ending on 17 June 2020, the MPC voted unanimously to maintain Bank Rate at 0.1%.
The Committee voted unanimously for the Bank of England to continue with the existing programme of £200 billion of UK government bond and sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves.
The Committee voted by a majority of 8-1 for the Bank of England to increase the target stock of purchased UK government bonds, financed by the issuance of central bank reserves, by an additional £100 billion, to take the total stock of asset purchases to £745 billion.
So QE is to increase by £100 billion, and the total corporate debt owned is to be left at £10 billion, meaning that the Bank of England will now own £735 billion of UK government debt.
To put that in context, even assuming £300 billion more debt will be issued this year (by no coincidence, the exact sum that the Bank has agreed to buy) this means that the Bank will now own more than a third of UK national debt.
And, as importantly, this also means that all the government deficit for this year will be funded by the Bank of England and none by private savers, which appears to be a quite extraordinary move when it would seem as if financial markets are anxious for that debt.
So what is happening here? First, there is direct monetary finance of the government by the Bank of England going on, whatever the Bank and the government might like to say.
Second, because quantitative easing is being used private markets are involved and a rake-off from the QE programme will go to the financial services sector, entirely unnecessarily.
Third, quantitative easing does have a history of inflating private sector asset prices, and so of massively contributing to growth in inequality in the last decade. This is likely to happen again.
Fourth, it would seem likely that there are now too few gilts in the market to meet private demand: that may leave private savers exposed to unnecessary risk right now.
Fifth, the charade that the government is not funding itself goes on, and so the pressure for austerity is wholly unnecessarily maintained.
Sixth, nothing in this programme requires that actual investment takes place: this is merely a money generation programme. That is, of course, what MMT says a government can do – albeit it would much prefer that it did not happen behind these sham arrangements and was instead out in the open for all to see – but what MMT also says is that such programmes need to be targetted to work. That means that they need to be designed to have an impact in the real world where people work, whoever their employer might be. And so far there appears to be no plan to back up this level of spend, which is what is troubling about it.
And that is why I think that QE is running out of road. I have used the word unnecessarily in this post a surprising number of times. That is because that is precisely what quantitative easing is: unnecessary.
What we need is an honest economic policy that explains precisely how in the current situation government is funded, so that people know the truth. And what people need to know is precisely how the government is going to spend to support them in the crisis that we are facing. QE lets the government hide from this degree of honesty, and that is unacceptable when very high trust is required right now.
QE has done its job.
Can we now have some honesty about how we move on from here?
And might we then talk about green QE and direct funding for the government? Because that way the government cannot hide from accountability for what it is doing.
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“Grind the peasants into dust” is the policy both in the USA and the UK.
And add Canada too. We have joined the QE club, lucky us /sar!
Somebody please forward this on to the House, the Senate and the Dept. of the Treasury. It doesn’t get any clearer than this.
They know. It is simply not in their immediate financial interests to do so. Their privileged clients will remain protected through financial calamity as the majority suffer through another Capitalist-induced shock.
Pretending that our leaders and their financial backers are ignorant or incompetent or both? Enables them.
I was somewhat surprised by Steve Keen’s recommendations to help the financial system during Covid-19:
https://www.patreon.com/posts/modern-jubilee-34537282
“Extraordinary measures are needed now to stop the health effects of the Coronavirus triggering a financial crisis that could in turn make the Coronavirus worse. All of these actions can be undertaken by Central Banks and financial regulators, once they have been given permission by governments. Two of these measures are already being undertaken by some Central Banks:”
” A per capita payment to all citizens …”
“Normal bankruptcy rules for companies and especially banks should be suspended.”
But the third recommendation was:
“Central Banks should buy shares directly to support share prices, rather than simply buying bonds under Quantitative Easing, to prevent a stock market collapse undermining both business and banks (Japan’s Central Bank is already doing this, though for other reasons).”
So Keen suggests the stock market price level must be maintained to avoid “undermining business and banks”.
Do the UK banks have a lot of risk exposure to stocks (margin loans?) and are UK businesses attempting to raise funds via new equity issuance?
From what I’ve read, little activity in the stock market involves raising new funds for businesses, so a falling market price of a corporation’s stock should not affect the business’s ongoing operations.
Wow! Has Keen lost his mind? I would rather see the stock market disappear than be artificially supported ad infinitum. There must have been a time when there was no stock market and it can be reclaimed.
The UK BoE is a currency issuer. It should be able to do this without huge damage if done well, according to the economic theory of MMT (as I understand it).
At least this proposal includes not only stock prices and corporate debt and rentiers but also includes Main Street and individuals and customers.
In the US the Congress is really only supporting Wall St and rentiers, while letting Main Street and individuals – aka ‘customers’ – wither.
There’s really no reason why the money to prevent economic collapse must be funneled through the banks and they in turn take their skim. To be MMT this money should go directly from Congress/Treasury to the institutions that need the money – direct spending – which is not debt. It’s such an emergency that the Fed – keeper of the stable economy – is tasked with whatever it takes and the only mechanism the Fed has is to feed Seymour. They use the same old methods of funding the banks which entails Treasury bonding. Right? So the financial system could simply be given money like the rest of the country, no bonding necessary. Altho it looks like those bonds are in high demand.
Regarding the request for share price support, I’m no expert on these things, but I’m reading Adam Tooze’s magisterial Crashed, and what leaps to my mind is collateral: shares are used to support repo funding in the short term money markets that many of the biggest banks are perhaps overdependent on for daily liquidity. If there is a widespread decline in share prices more or better quality collateral will be needed, and that might take us back to systemic liquidity lock down times, which wouldn’t be very nice.
This suggests that both banks and the collateral they accepted must be supported by the Central Bank.
Is there not a way to funnel money directly to banks without providing a government price support to the overall stock market?
One could suggest that once this is known, even riskier collateral will be accepted in the future.
Furthermore, share price support implies that a share owner will be selling their stock to the central bank who probably won’t be voting the central bank’s shares in the public’s interest despite exposure to potential losses.
The Central bank may be completely unconcerned that in the future it sells its holdings at a large loss, the loss representing a direct subsidy to the frequently wealthy owners of stock.
The world’s financial system appears extremely complex and cross-coupled.
Complexity and reliability usually do not go hand-in-hand.
The world did not achieve “making banking boring again”.
May be a dawning if belated recognition at the Fed that the road on this policy has already run out. Money quote in the last paragraph:
https://wolfstreet.com/2020/06/18/fed-ends-qe-total-assets-drop-liquidity-injection-ends/
When I last looked, the Treasury was sitting on over $1.5 Trillion in Cash in its general account at the Fed, so it would not seem to need more right away.
Treasury and the Fed should publish their agreement(s) related to the offset accounting they are planning. And subject Treasury and Fed discussions to the rules of the Federal Advisory Committee Act (they are acting as a joint committee in fact, but without benefit of lawful authorization to do that outside public knowledge and scrutiny).
They have been offsetting the Treasury cash as securities mature. The Fed and Treasury could offset erase the need to borrow to replace maturing debt (really this is simply erasing the securities). Or they can combine these approaches.
Agree – make these matters known and plain.
Then ask the monetary theorist economists to write about what this all means (should be interesting reading, revisionist too!).
JF
Fourth, it would seem likely that there are now too few gilts in the market to meet private demand: that may leave private savers exposed to unnecessary risk right now. Richard Murphy
Speaking of honesty, let’s admit that positive (indeed, non-negative if overhead costs are considered) returns on the inherently risk-free debt of a monetary sovereign like the UK constitutes welfare proportional to account balance.
IF UK debt (including bank reserves) were priced honestly, the UK Government should be happy to issue it since the finance cost would be ZERO at most and a revenue EARNER in the case of the debt with shorter maturities (with bank reserves, having zero maturity wait earning the most for government).
Or does the above exceed your taste for honesty? More heat necessary before some see the light?
The economics of globalisation has always had an Achilles’ heel.
In the US, the 1920s roared with debt based consumption and speculation until it all tipped over into the debt deflation of the Great Depression. No one realised the problems that were building up in the economy as they used an economics that doesn’t look at debt, neoclassical economics.
Not considering debt is the Achilles’ heel of neoclassical economics.
Neoclassical economics leaves all policymakers completely clueless, even Chinese policymakers.
They made the same mistake as everyone else.
When you use this economics, policymakers run the economy on debt until they get a financial crisis.
Policymakers don’t realise it’s the money creation of bank loans that is making the economy boom as they head towards a financial crisis.
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf
At 25.30 mins you can see the super imposed private debt-to-GDP ratios.
https://www.youtube.com/watch?v=vAStZJCKmbU&list=PLmtuEaMvhDZZQLxg24CAiFgZYldtoCR-R&index=6
Policymakers run the economy on debt until they get a financial crisis.
1929 – US
1991 – Japan
2008 – US, UK and Euro-zone
The PBoC saw the Chinese Minsky Moment coming and you can too by looking at the chart above.
Japan saved the banks to avoid a Great Depression.
Japan left the debt in place, which caused a balance sheet recession.
Richard Koo had studied what had happened in Japan and knew the same would happen in the West after 2008. He explains the processes at work in the Japanese economy since the 1990s, which are at now at work throughout the global economy.
https://www.youtube.com/watch?v=8YTyJzmiHGk
Debt repayments to banks destroy money, this is the problem.
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf
Debt is still the problem and we are using an economics that doesn’t consider debt to try and fix it.
Twelve people were officially recognised by Bezemer in 2009 as having seen 2008 coming, announcing it publicly beforehand and having good reasoning behind their predictions.
What do they say?
You can’t solve a debt problem with more debt.
What have we been trying to do?
Solve a debt problem with more debt.
This is how monetary stimulus works, as it can only get into the real economy through borrowing from banks.
It gets worse …….
Austerity is the worst thing you can do in a balance sheet recession.
QE can’t get into the real economy due to a lack of borrowers.
The banks are ready to lend, but there are too few borrowers as they are struggling with the debt they have already taken on.
(We saved the banks, but left the debt in place)
QE can get into financial markets, so the gap between the markets and economic fundamentals widens, and by 2019 the US stock market was at 1929 levels.
We are sowing the seeds for another financial crisis, with a ponzi scheme of inflated asset prices.
This is mad.
It could all have been so different, and we could have had a successful globalisation.
Unfortunately, Hayek turned up at the University of Chicago in the 1950s.
He started throwing his weight around and forced them to accept his own half-baked ideas about the markets.
In the 1930s, Hayek was as the London School of Economics trying to put a new slant on old ideas.
While Hayek was at the LSE, the free market thinkers at the University of Chicago were working out where it all went wrong in the 1920s.
The Chicago Plan was named after its strongest proponent, Henry Simons, from the University of Chicago.
He wanted free markets in every other area, but Government created money.
To get meaningful price signals from the markets they had to take away the bank’s ability to create money.
Henry Simons was a founder member of the Chicago School of Economics and he had worked out what was wrong with his beliefs in free markets in the 1930s.
Banks can inflate asset prices with the money they create from bank loans.
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf
Henry Simons and Irving Fisher supported the Chicago Plan to take away the bankers ability to create money.
“Simons envisioned banks that would have a choice of two types of holdings: long-term bonds and cash. Simultaneously, they would hold increased reserves, up to 100%. Simons saw this as beneficial in that its ultimate consequences would be the prevention of “bank-financed inflation of securities and real estate” through the leveraged creation of secondary forms of money.”
https://www.newworldencyclopedia.org/entry/Henry_Calvert_Simons
Real estate lending was actually the biggest problem lending category leading to 1929.
Richard Vague had noticed real estate lending balloon from 5 trillion to 10 trillion from 2001 – 2007 and went back to look at the data before 1929.
Henry Simons and Irving Fisher supported the Chicago Plan to take away the bankers ability to create money.
“Stocks have reached what looks like a permanently high plateau.” Irving Fisher 1929.
This 1920’s neoclassical economist that believed in free markets knew this was a stable equilibrium. He became a laughing stock, but worked out where he had gone wrong.
Banks can inflate asset prices with the money they create from bank loans, and he knew his belief in free markets was dependent on the Chicago Plan, as he had worked out the cause of his earlier mistake.
Margin lending had inflated the US stock market to ridiculous levels.
The IMF re-visited the Chicago plan after 2008.
https://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf
Another factor
It could all have been so different, and we could have had a successful globalisation.
If only the economists had remembered what GDP actually is.
In the 1930s, they pondered over where all that wealth had gone to in 1929 and realised inflating asset prices doesn’t create real wealth, they came up with the GDP measure to track real wealth creation in the economy.
The transfer of existing assets, like stocks and real estate, doesn’t create real wealth and therefore does not add to GDP. The real wealth creation in the economy is measured by GDP.
Inflated asset prices aren’t real wealth, and this can disappear almost over-night, as it did in 1929 and 2008.
Real wealth creation involves real work, producing new goods and services in the economy.
There were hardly any financial crises in the Keynesian era when economist’s memories were still fresh.
We need to direct statistics agencies to report GDP with the financial system flows separated into a separate report, so we report GDP as it is reported now and also in the separated, more apt, version (let us call that version the ‘productive-GDP report’).
Much policy analyses should focus on the productive-GDP version of the statistical series.
JF
As I understand it, the Governments mentioned are slowly being backed into Central Planning — That is “What do we fund with our fiat currency?”
The order of precedence?
First: Protect the rich – but the rich live off the earnings of the middle and poor.
Second: Buy off starvation of the proles? It is almost a certainty the rich will not pay the proles.
This too, from a Tory Government, theoretically a right wing Government.
Marx must be rolling in laughter in his Highgate grave!
A consumer economy appears dependent on the proles having enough pay (money) to spend to support the economy. I do not discern that thinking in our beloved leaders focus.