Intermezzo



No doubt you are all wondering why Coppola Comment has been quiet for the last two months. There are two reasons: the first is personal - my father is seriously ill and needs a lot of my time. But the second will I hope be music to your ears. I am writing a book.

My forthcoming book will be called "The Case For People's QE" and will be published by Polity, probably in Spring 2019. Yes, I know, the title makes it sound as if I have gone over to the dark side. But I assure you I have not become a Corbynista. My version of "People's QE" has a long and hallowed pedigree, running all the way from Keynes through Friedman to Willem Buiter, John Muelbauer, Paul McCulley, Zoltan Poszar and numerous other sensible people. It's really the outcome of much of my thinking and writing over the last eight years.

Coppola Comment will be back in due course. In the meantime, here is some music. Ice creams may be obtained from the kiosk in the foyer, and drinks are available at the bar.




Music is the Intermezzo from Mascagni's opera Cavalleria Rusticana.
Image is sunset over the Medway, photographed by me.

Comments

  1. Dark side? The lady doth presume too much, methinks. Some of us are coppolisti and corbynisti!

    Here's wishing you and your father the best possible route through the next period. With luck and a fair wind it may not be too hard for him, but it's going to be hard for you; remember to take care of yourself.

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  2. We’ve already had people’s QE.

    Over the past 10 years the government has spent more than planned, putting more money into people’s bank accounts. It’s also collected less in tax than planned, leaving more money in people’s accounts.

    In short, each year it has run a larger annual deficit than planned, which puts money into people’s bank accounts.

    Ordinarily, the government would drain all that extra money from people’s accounts by selling Gilts for the amount of the deficit each year. What QE has done, in a convoluted fashion (to be compliant with the TFEU) is to drain only some of that money, leaving a total of £435bn of what it has spent and/or not collected in tax in the bank accounts of the people.

    That’s people’s QE

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    Replies
    1. No. All of the government's deficit has been drained by issuing gilts. The Bank of England bought gilts on the secondary market, but the money did not go into the pockets of ordinary people. It went to the rich, who used it to pump up asset prices. QE is not the equivalent of unsterilized deficit spending as you imply. If it were, it would be a whole lot more inflationary than it is.

      The truth is that the UK government's fiscal austerity took money away from ordinary people. That money was then redistributed back to the rich via QE.

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    2. It all comes down to whether you believe that the the Treasury selling Gilts to the private sector one week and the BofE purchasing them from the private sector the next week achieves a fundamentally different outcome to the Treasury selling Gilts to the BofE directly.

      I don't.

      If you accept that the net result of the combined actions of the Treasury and the BofE is the same as if the Treasury had sold Gilts directly to the BofE then it's clear that the Government creates broad money in the bank accounts of the non-bank recipients of Government spending. It drains most of that broad money by destroying money in the accounts of those in the non-bank private sector that it collects tax from and it drains some, but not all, of the remaining balance by destroying money in the accounts of those in the non-bank private sector that it sells Gilts to.

      These are very rough numbers, but over the past 10 years the government has created about £6trn by spending. It has destroyed £5trn by collecting tax and it has destroyed a further £600bn by selling Gilts, leaving roughly an extra £400bn of broad money in circulation that wouldn't be there if it had destroyed the full £1trn by selling Gilts to the non-bank private sector.

      I don't see how you can say from this holistic view of the actions of the public sector that money has been taken away from ordinary people and redistributed to the rich.

      You can argue, as I would, that the government should have created more money by spending more and that it should have destroyed less of that money by collecting taxes and that possibly more of that money should have been left in circulation and not destroyed by selling Gilts to the non-bank private sector, but that's an argument in favour of more of the same, not less.

      Oh, and as to why that extra net £400bn or so of broad money put into the system by the government has not proven inflationary, I would argue that it is because of roughly the same amount of broad money being destroyed to create new bank equity, equity like liabilities and long dated bank liabilities that have been required to make our banking system safer.

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    3. The distributional effects are entirely different. If the BoE buys gilts on the secondary market, money goes into the pockets of asset holders, not back to the government. If the BoE buys bonds directly from the government, no money goes into the pockets of the rich, since this is the same as the BoE financing the government's deficit. Secondary market purchases therefore have regressive distributional effects that primary purchases (deficit financing) do not. This is in fact what the BoE's own research says.

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    4. the BofE research only looks at QE (and low rates) in isolation and only looks at the distributional effects of QE on money, not the distributional effect of QE on financial assets. QE, in isolation, simply takes one financial asset from what you refer to as 'the rich' (anyone with a pension fund, insurance policy or any other savings that might be invested in Gilts) and replaces it with another financial asset of the same value. That first asset was a Gilt and that second asset was a bank deposit, otherwise known as money.

      If you wished to be disingenuous you could simply highlight the 'money going into the pockets of asset holders' without making it clear that for that to happen, those asset holders have to give up an equal value of those assets.

      What I prefer to do, which the BofE didn't and you appear not to wish to do, is not to look at QE in isolation, but to look at it in conjunction with the other major effects of the financial crisis, without which we wouldn't have had QE in the first place - a much larger government deficit than otherwise had been forecast and a large increase in the equity and non-deposit liabilities of the banks.

      If I was to take your approach, there would be a logical argument that the destruction of bank deposits to create new bank equity and non-deposit bank liabilities had progressive distributional effects as it destroyed money in the bank accounts of those same institutions (pension funds and insurance companies mainly) that had money created for them by QE. Of course, to make that argument I would have to ignore the assets that the pension funds and insurance companies received in return for agreeing to the destruction of their money......

      Similarly, there is the argument that the Government running a larger deficit by spending more and taxing less leads to progressive distributional effects as the extra spending put more money into the bank accounts of ordinary people, cuts to VAT and the rise in the personal allowance left more of that money in the accounts of ordinary people and the increased Gilt sales destroyed more money in the accounts of the 'rich' pension funds and insurance companies that typically buy Gilts. As I mentioned earlier, I would argue that the Government should have been running an even larger deficit than it was and that Osborne's efforts to reduce the deficit were mistaken. Post crisis there was clearly demand from the private sector to hold safe net financial assets, whether this was Gilts or bank deposits isn't too important, the fact is net financial assets can only be supplied to the private sector by the public sector and the public sector should have been meeting this demand. Now, if the demand for net financial assets from the private sector was evidently demand for long dated Gilts ONLY, that is what the public sector should have supplied - there would have been no need for QE. But because there was demand from the private sector for long dated Gilts AND money, that is what the public sector supplied (not enough in my opinion).

      I would also urge you to think hard about whether there is a difference in outcome between the Treasury selling a Gilt to a private sector institution one week, with the BofE buying that Gilt from that institution the next week and the Treasury selling the Gilt directly to the BofE. Your whole argument seems predicated on there being a world of difference between the two - but there really isn't. What if that institution was a bank, buying one week and selling the next (every GEMM was doing this during the latter stages of QE)? Because a bank transacts with the DMO and the BofE using reserves, there isn't any creation and destruction of broad money at all - so how can there be any distributional effects?

      That leads on to a final interesting question, which I don't have space for, but will pose in another comment if I may.

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    5. That leads on to a final interesting question: If, over the past ten years the government had created £6trn of broad money by spending, destroyed £5trn by collecting taxes, destroyed another £600bn by selling Gilts to non-bank institutions, but had sold the balancing £400bn directly to banks who then held onto those Gilts (which would have had no effect on broad money), would you be writing your book? The balance sheets of the private sector (banks, non banks and 'ordinary people') would be more or less the same as they are now, but I guarantee we wouldn't be having the discussions in the press about 'printing money' or effects on inequality that we are having now and have had over the past few years.

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  3. Sure I’ll buy your book! My best regard for your father

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  4. Can't wait to read your book Frances. All the best for your father.

    A big hug for you.

    Alessandro
    @alexdelprete

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  5. Sorry to hear of your Father. I hope he gets the treatment or palliative care that he needs.

    I remember you writing about your Mother's death some time ago. Your experiences were very similar to mine when my Mother died recently. And my memories of them were a great help in ensuring that she had a beautiful death.

    And put me down for a signed first edition of your book.

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