What are the economics behind “QE for the people”?

A clear feature of the credit crunch era has been the advent of Quantitative Easing on a grand scale. Beforehand only the Bank of Japan of the major central banks had dipped its toe into that particular lake but now the list gets ever longer. This year has seen the European Central Bank join the party in terms of scale (previous efforts being much smaller) and also more and more similar moves in China as it tries to deal with its own slow down.

Also the countries which were earlier players in this particular game have found themselves unable so far to reverse what they have done. Readers of my blog will recall that from the early days I argued that central bankers had no exit strategy and that is how it has turned out. Only on Thursday I pointed this out in respect of the Bank of England which announced this..

the Committee agreed to re-invest the £16.9 billion of cash flows associated with the redemption of the September 2015 gilt held by the Asset Purchase Facility.

So it is stuck with the same £375 billion stock of QE and in fact is extending the maturity of it in a “QE Forever” way ( the last such effort saw a Gilt maturing in 2068 purchased ) which is similar to what is happening in the United States. This has been labelled under the banner of Operation Twist. Bank of England Governor Mark Carney was rather vague about the exit strategy last week showing that it is a can which has been kicked to some indeterminate date in the future. Waiting until interest-rates rise has first the issue of when will they? But also as they rise so probably will yields as we look to sell Gilts. So much for market awareness!

Is it a type of junkie culture?

My argument on this is two fold and let me open by pointing out something which is often forgotten using a chart provided by RBS.

Anybody spot a trend here?! One way of considering QE is central banks trying to continue the sequence of “hits” we have been getting. Another is that they felt under pressure to “do something” and it was there. This of course ignores the fact that the record of the country which had tried it (Japan) was between poor and disappointing.

If we look at the chart again there is a begged question over such a policy of trying to reduce bond yield which is that the trend line will need to go below zero. That is just the UK experience and we have seen Germany and Switzerland in particular actually do so especially at the opening of this year.

What good has it done?

This is rather patchy as even in the case of bond yields it is not clear-cut. Yes they are lower overall but there are other reasons for that to take into account. In general we have an expectations effect which reduces yields but as often as not the reality sees them edge higher in a type of “overshooting” described by Rudiger Dornbusch back in 1976. The purchase of mortgage-backed securities in the US seems to have boosted the housing market but in the UK higher inflation eroded real wages and was a downwards effect. So but for the sums involved one might say “meh”.

If you want a sub-plot of the recovery I noted that other day a report which pointed out that all 15 OECD countries which had raised interest-rates post credit crunch have since cut them again. Not much of a general recovery there!

However one pretty clear winner has been equity markets and one example is the US S&P 500 which fell to a closing low of 734 in January 2009 and is now 2077. Abenomics in Japan helped push the Nikkei 225 from around 8,600 or so back when it was expected to around 20,800 now.

That is the problem which is that the financial economy has benefited with markets higher and QE has kept banks going even if these days they are like vampires on life support. But the clear-cut economic effect has been much less sure and of course we have the image of rentiers and indeed the 0.1% benefitting but what about the rest of us?

Step Forwards QE For The People

The problem posed by QE looking to have benefited large investors rather than the ordinary person or indeed economies has led to considerable dissatisfaction. Along the way there have been suggestions of QE being adjusted to provide a direct benefit by using the funds to buy real things rather than financial assets. Usually this has meant suggestions of infrastructure investment.

In the UK we have this evolving as Labour party leadership candidate Jeremy Corbyn adopted to ideas mostly previously put forwards by Richard Murphy.

One option would be for the Bank of England to be given a new mandate to upgrade our economy to invest in new large scale housing, energy, transport and digital pro- jects:

Quantitative easing for people instead of banks.

The description of what this means from Richard Murphy is unwieldy but let me extract the meat from it.

People’s quantitative easing is  instead a highly directed process where the debt that is repurchased has been deliberately created and issued either by a green investment bank or by local authorities, health trusts and other such agencies for the specific purpose of funding new investment in the economy.

That is debt monetisation in just about its purest form. What I mean by that is the Bank of England will be buying debt which has been specifically created for that purpose. As we stand it has kept its distance from that and has bought general bonds and also not bought them at issue

Who will do the investing?

I suspect I am not the only person breathing a sigh of relief at the thought it will not be the Bank of England! Here we do get a problem in a world where we have “ghost cities” in China and Ciudad Real airport in Spain which cost over 1 billion Euros and was just sold for 10,000 of them. In the UK we have the plans for HS2 rail project about which the only certainty is that it would be extremely expensive.

The Financial Times provides some support but if you read the sentence below what it is actually telling us is that if it works it will work!

If Corbyn’s preferred investments are useful, they could help restore some of the lost ground in productivity and lead to higher real wages for Britons.

So if they are not useful it will not work?! As ever I prefer to avoid the politics but we are on familiar ground for my analysis as we need to consider what is output and how good a guide GDP is. I fear what politicians would do with a “green investment bank” for example as cases in the past such as the National Enterprise Board had more vanity projects than successful ones. Concorde was a stunningly beautiful plane which looked glorious in the air but it was an economic failure. Also the “greenwash” of such issues is intriguing if we compare it to the usual reality of projects such as an unused airport which could not be much less green.

Do you need the Bank of England at all?

As the UK can borrow extremely cheaply right now do we need the Bank of England to buy the debt? After all you could issue thirty-year debt at a yield of 2.5% so why not do that? After all if a project cannot generate some 2.5% a year as a return it seems to be weak in the first place.

What about inflation?

We are assured that there will not be any. From Richard Murphy.

Third,  printing money is not inflationary when there is a shortage of money in the economy.

Yet previous QE efforts are critiqued on these grounds.

Instead it flowed into the house price and asset speculation.

Whilst it is missing for the headline inflation numbers, that sure looks like inflation to me! As the economy is growing the danger is that such projects see cost overruns and are badly managed and the spiral begins again.

Also there is the technical issue of debt monetisation and the effect on the exchange rate. The nearest case to this I have looked at in the credit crunch era has been Ghana where the Cedi dropped like a stone and generated considerable inflation. Now to coin a phrase we are not Ghana! But that does not mean that some of that would not affect us and we know from Russia,Brazil and Ukraine that it is a tough nut to crack once it starts.

Comment

The concept of “People’s QE” opens favourably both emotionally and on the grounds that it looks to move away from the financial economy to the real one. However the next part is the issue of how successful this sort of command style effort in an economy is.? I am sure that everybody reading this can thing of worthwhile projects that are viable at the current ultra-low bond yields around. If we skip over the bit as to whether that needs Bank of England involvement we have the issue of whether you believe that politicians will wholly or at least mainly invest in them. In the past that has not gone so well and that includes the recent past. In the UK a lot of this seems to involves the railways which have been a problem child whatever solution has been tried and involves the belief that they are the future. I have my doubts and will be interested in what readers think on that.

Moving onto other issues then we have a potential direct inflationary impact in a growing economy plus a possibly stronger effect if the exchange rate us affected adversely. In the UK the latter effect has been a strong one over time. As to the Bank of England it would make its loss of independence more explicit and it would be a question of what would happen should the Gilt market hit difficult times of the sort our economic history has had no shortage.

One thing we do learn is a reinforcement of one of the themes of this blog. The lyrics below seem to be as appropriate for QE as they are for Greece and the Euro.

You can check-out any time you like,
But you can never leave!

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21 thoughts on “What are the economics behind “QE for the people”?

  1. Rick Astley would seem a good choice for exiting QE, and also the British Govts’ mutualistic symbiotic relationship:

    As for our govt. doing ANYTHING for the people? Aye, right!

  2. Hi Shaun

    It is interesting that we have morphed from “open market operations” which are a defensible form of monetary management; meant to be two way (buying and selling) and, by implication, in the context of “reasonable” fiscal deficits or surpluses into QE which, to me, is outright debt monetisation by a fancy name and with virtually no intention of being reversed anytime soon. What would have seemed intellectually rather disreputable a few years ago has now become the conventional wisdom where one debates which type of currency debasement is the best!

    It seems the central bankers know no shame anymore where they are prepared to defend what is debt monetisation and regard it as a normal part of monetary management! It just shows how far down the slope we have travelled!

    As for the comments by Richard Murphy they are surprising to say the least. To all appearances he is condoning money printing on the egregious grounds that there is a shortage of money, but over what time period? Just because there is a shortage now doesn’t mean that printing more is not inflationary; it is a question of time horizons.

    Let’s face it if the printing press is the source of wealth, which appears to be what many now assume, why do we bother working!

    Your blog post is a serious and reasonable analysis of the issues but it also demonstrates how corrupted the debate has become.

    • Q: How can you have money if none of you actually produce anything? It doesn’t grow on trees you know?

      A:Since we decided a few weeks ago to adopt leaves as legal tender, we have, of course all become immensely rich.

      (we have also run into a small inflation problem on account of the high level of leaf availability – in order to obviate this problem and effectively revalue the leaf, we are about to embark on an extensive defoliation campaign, and um, burn down all the forests. )

      I think that’s a sensible move don’t you?

      Sorry Bob J but the Golgafrincham B-Arkers are in control and you might as well sit back and enjoy the popcorn …..

      Forbin

  3. Hello Shaun,

    I think the question really lies in what you’ve mentioned before . OK the crisis is abated , now how do we unwind the QE without causing another crisis

    Ofcourse I stipulate that we’re still in the crisis as the base rate dictates and that the current interest rates and other fiscal measures such as QE are in place to prevent another 1930’s style recession

    I leave it to the reader to decide if such measures are actually working and crucially , will still continue to work , given that the the Banks are still bust and that assets prices are way too high that any reasonable Gerry Mandered inflation will not make a dent on debt.

    And a super cycle theory goes , we;re due another crash

    then what ?

    Oh, not forgetting any growth has been either caused by fairy dust or unicorn poo, or even just “imputed ” sex & drugs trade …… ( honestly , that such a measure went past MSM without a squeak beggars belief – must have been a good episode of EastCorriDale on that week !!)

    Ok this it , big debt ,no growth to speak of but so far no iceberg in site ……..

    Oh as for predictions , Yogi was right , I am amazed that oil and LTO from the states, production has held up so , considering the basics but then again , I should have remembered , theres a lot of Gerry Mandering going on in the markets these days – so much for Capitalism !

    Forbin,

    will I need more popcorn before the next recession ? most likely !

    • LTO producers have been driving down their costs rapidly/ Profitable price for large parts of the Bakken field is now $60/barrel. That’s the trouble with assuming ceteris paribus, it rarely happens!

    • Hi Forbin

      Actually my argument goes a step further on the subject of QE. It is that one should decide the ways you will unwind QE before you start it. After all who takes off in a plane without first having a plan around how to land safely?

  4. If politicians and civil servants were ideal candidates to be entrepreneurs, venture capitalists and investment bankers, the question that must be asked, why aren’t they? There is much more money to be made with these than in politics if you are successful. The simple answer is that most career politicians have become politicians, because they have little to offer most businesses outside of being good talkers. This explains politicians mainly poor records for running the country and even bigger disasters when trying to do what private industry does better than them. In the UK 65 million brains making decisions from a vast wealth of experience and backgrounds will always outclass all decisions being made by an all too often ill informed elitist few!

    After all if the 0.001% elitist top were all knowing and seeing then when put in such positions to totally run economies in countries like Russia, North Korea, Cuba and pre-Capitalist China, why weren’t they successful? They didn’t just fail, they spectacularly failed, where they struggled to even feed their populations and it is not even worth going there when it comes to wealth creation, ever rising living standards, health and age spans, along with an abundance of mass market choices and a vastness of consumer goods.

    Like of not compared to all other systems, capitalism has delivered wealth not only to the few but for 1000’s of years with ever rising standards of living and age spans, since the start of the first industrial revolution in late 18th century Britain. The world has changed from a very rich few, slavery and mass poverty to a much bigger rich pool and increasing wealth for the many.

    History is not on the side of those that tell us, next time it will be different because you only need to analyze what went wrong before to know that these are unavoidable pitfalls for any centrally run, state owned, command system.

    • you had me up to the point of

      “capitalism has delivered wealth not only to the few but for 1000’s of years …”

      capitalism is not that old , and some would say it died in 2008 , if not earlier

      As for 18th century Britain., yah right , Irish potato famine, Scotland highland clearances , the Boers in early 1900’s and thats just our contribution for that kind of capitalism

      the kind we;re going back to if nobody stands up ….

      The capitalism that lead to higher works standards was the Wests answer to the Soviet countries since WW2 . And since the said Soviet countries are now “defeated” and taken on a version/ parody of us , then the dismantling of that capitalism has been going ahead.

      A Feudal style system with Kings and Queens has been to long standing political solution for most on humanity’s brief history – go and read the first chapters of Harry Harrison’s Homeworld.

      others may wish to add their comments

      Forbin

      PS: comfortable sofa and a bag of popcorn – sit back peeps , this is going to be quite the ride!!

      • Forbin
        You are quite correct. The default system for ruling the peasantry is feudalism, and that is where we are heading back to. A fairly benign, techno-rich version as long as you are a ‘good’ peasant, but lethal if you are not ( and probably not if you are over 75 or so , soon).
        What QE, and debt monetisation has made very apparent is the mythology of ‘money’ being a reward for ‘hard work’. Fiat currency is just a means of power and control. Everyone in debt to the few. Corbyn’s friends overseas leave a lot to be desired, but there is nothing fundamentally different about QE for the people as QE for the Banks. Especially when the 50% point is breached. Never going to happen of course, the FED/US Treasury would not let ‘the City’ step so far out of line. Unfortunate ‘accidents’ to key players etc.

    • Crowdsourcing, like Swiss refrendums will foster better governance. The obvious solution is to make referendums mandatory where a petition gains a suitable level of support and make the results BINDING !

    • Politicians are interested firstand foremost in power. Money comes apoor second although they decide to line their pockets whilst in power. Civil Servants are the same, except they can’t line their pockets.

      • ??? The wealth of bureaucrats east of the EU has to be seen to be believed. A certain Russian has had his private jet grounded (at least where rules are enforced) by US embargo on parts & service

        When opposition leaders can get gunned down with impunity, the fate of journalists often doesn’t even get reported in the west – with the exception of Georgi Kinkladze

        • Yes quite right therrawbuzzin. Rods2 managed to hoodwink me there for a while, but in my defence I was speed reading and rushing off comments as usual as can be seen from the typos in other comments I made on this page.

  5. Railways were a very good way of moving heavy goods like coal or ore from a mine to a harbour at a time before macadamisation and the internal combustion engine, fixed point to fixed point. It is 18th c. technology not originally designed for moving people. As far as people are concerned railways move very few of them from where they are to where they want to be with the exception of a small proportion of those who commute . That is why we drive cars. In the future, technology will allow us to fit far more cars and coaches onto the available road space at higher average speeds in far greater safety at any hour of the day or night. I would be astounded if the capital and running costs were not far cheaper. We have the infrastructure already and the driverless cars are just around the corner.

    • I agree.

      The Japanese and Chinese are developing very high speed Maglev trains which overcome the maximum practical speed limit of steel rails which is around 200mph and also many of the high maintenance costs associated with this Victorian technology.

      These and other developing technologies like the hyperloop in the US will make high speed long distance steel rail technology like HS2 obsolete.

      Intelligent convoys of HGVs and cars and finally driverless cars is going to profoundly change the economics of moving goods and people around. Railways currently can’t compete with road freight, so this is only going to get worse.

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