PQE, inflation and the problem of voter power

I have repeatedly said that I do not support Jeremy Corbyn's "People's QE". But there seems to be considerable confusion about what exactly I oppose. And that is for one simple reason: the deliberate conflation of government investment spending and QE by the architect of this scheme.

PQE is composed of two separate and distinct strands:

1. Government spending to finance investment in infrastructure, innovation, R&D and housing

2. Bank of England purchases of government bonds. 

Despite the insistence of the scheme's creator that one is impossible without the other, these two strands are actually not interdependent. In fact they are unconnected. As the UK is a member of the EU and a signatory of the Lisbon Treaty, it is not possible for Strand 1 to be directly financed with money from the Bank of England. But there is nothing to stop the government issuing "Corbyn bonds" to the UK private sector for Strand 1, either directly itself or via a National Investment Bank. It would therefore be entirely possible for Strand 1 to proceed on its own, and indeed many people - including me - think that it should. 

So why do we need Strand 2?

Strand 2 appears to be based upon the following assumptions:
  • there would be insufficient demand in the UK private sector for the bonds
  • the interest rate that would have to be paid to the private sector for the bonds is too high
  • the UK economy will soon need a QE programme
None of these assumptions are warranted. 

Firstly, very low market rates tell us that there is plenty of demand in the private sector for UK government bonds. I find it hard to believe that say 2bn of 30-year Corbyn bonds at 3% per annum (just above the current yield on 30-year gilts) would not sell.

Secondly, the cost argument is entirely spurious. Interest paid to the UK private sector is simply new money which will be spent into the economy either now or later. We can regard it as tax credits or a basic income. It is not in any normal sense a "cost" for the government: it should properly be regarded as another form of stimulus, akin to "helicopter money". The interest rate is therefore irrelevant. Personally I would offer bonds directly to small UK-resident savers at above-market interest rates. 

Finally, it really isn't possible to forecast either the timing or the depth of UK recessions. We do not know what effect, if any, the problems in China will have on the UK economy, but the Bank of England isn't predicting a downturn at the moment. I have argued that an austerity programme of the scale planned by the Conservative government would be likely to cause a recession: but the Chancellor's plans already envisage fiscal easing towards the end of the parliament, so it may be that the UK would be on its way out of any recession by the time of the election. If so, then waiting for the Bank of England to do QE before increasing investment expenditure would be like waiting for Godot

The truth is that there is no operational justification for Strand 2 at all. The "QE" part of PQE is wholly unnecessary. It is the investment spending that matters. 

Strand 2 would, however, mean that the debt incurred as a result of the new investment spending did not appear on the Government's balance sheet. The way this works is this. The Bank of England is wholly owned by the UK Government. Its balance sheet can therefore be consolidated into the Government balance sheet in the same way as a subsidiary is consolidated into a parent company. Indeed the Whole of Government Accounts do consolidate the Bank of England with the rest of government. 

When a subsidiary is consolidated with a parent, debt owed by the parent to the subsidiary or vice versa "disappears". After all, you can't owe a debt to yourself. So the Bank of England's holdings of gilts, which are government debt, simply vanish in the consolidation. As the Bank of England currently holds around 30% of gilts in issue, this has the effect of significantly reducing nominal debt on the Government's balance sheet. However, after consolidation the Bank of England's liabilities, which are base money (currency and bank reserves) remain in full on the Government balance sheet. The effect is therefore that government debt has been converted into money. We call this "debt monetisation".

Central banks around the world have monetised debt in this fashion ever since the financial crisis and in some cases (Japan) for far longer with no impact on inflation. It is therefore unlikely that monetisation of Corbyn bonds would cause inflation. What could cause inflation is the investment spending itself. But as Paddy implied in the now infamous "snake oil" post, a determined central bank with an inflation-targeting mandate would simply raise interest rates to counter any inflationary effect of government spending. It would do so even if compelled to buy the investment bonds. Indeed, it would be answerable to Corbyn's Chancellor if it failed to do so. 

Of course, inflation is well below target at the moment, so any inflationary effect from investment spending would be welcome. And the inflation target could be raised to say 4%, allowing more room for investment spending without monetary offset. The possibility of inflation is emphatically not a reason for failing to increase government investment spending. 

The author of the scheme says that the purpose of Strand 2 is to enable the Government to increase investment spending substantially without it appearing on the Government's books. Personally I regard this as underhand. I am disappointed that anti-austerity politicians and policy makers are too scared to confront the current hysteria around debt and deficits directly, so are resorting to smoke and mirrors to evade it. I would rather have openness, honesty and transparency. But perhaps more importantly, I don't think this will work as a political message. 

The principal drivers of the austerity agenda are older voters, who are terrified that high government debt and deficits will mean the loss of their wealth. But they lived through the last serious inflation in the UK. They are equally terrified that inflation will erode their wealth. Any proposal that fails to take inflation seriously is therefore unlikely to be welcomed.

But in order to justify the "QE" element of his scheme, the author has suggested (comments) that the Bank of England's inflation mandate should be ended and its operational independence eliminated:
So let’s get the rest clear. First, I would have thought it obvious if I did not believe in BoE independence that I did not also believe in the primacy of inflation as an economic target, but maybe I am guilty of not having spelt this out sufficiently: I would do so, and soon.
How this is supposed to encourage people to vote for Corbyn I don't know. The principal reason for the Bank of England's inflation target is the fact that an awful lot of people are very scared of inflation, and the principal reason for its operational independence is the fact that an awful lot of people don't trust government to keep inflation under control. 

If the views of voters on government debt are too entrenched to be challenged, then surely the views of voters on inflation are too. This scheme tries to assuage popular fears about high government debt by adopting a technique that is popularly associated with high inflation, while removing the principal obstacle to high inflation. I fail to see how this can be a vote winner.

Related reading:

Green QE and the Juncker Plan

Image: "Waiting for Godot" at The Albany, courtesy of exeuntmagazine.com


  1. "resorting to smoke and mirrors to evade it. I would rather have openness, honesty and transparency."

    No no no no no, it appears that it's QE which is the smoke and mirrors, because economists, governments and central banks EVERYWHERE are going out of their way to convince everyone that QE is in fact NOT monetization. But you (and various others) seem to suggest that central bank practice is in fact monetization after all (just in a very convoluted way). I do not support Murphy or his ideas of PQE, especially his scary implications for central bank independence as Yates points out - but I do support helicopter drops in the way people like Woodford and Turner suggest. If we ARE in fact monetizing debt, but in a very convoluted way and refusing to admit it - therefore creating huge market uncertainty and scaring the public with our huge debt burdens - why NOT just be upfront about the fact that we are monetizing the debt or give central bank the tools to declare the debt monetized explicitly?

    1. QE should correctly be regarded as TEMPORARY debt monetization. I've emphasised "temporary" because that is the essential difference between "conventional" QE and Corbyn's PQE. The bonds in PQE would be purchased in order to cancel them. The bonds in conventional QE are purchased in order to be held for re-sale back to the private sector at an appropriate time. We can debate whether, because of the scale of QE, all the bonds would ever be sold back to the private sector. But that's the intention, which is very different from explicitly cancelling bonds.

      I am no fan of QE, as I''m sure you know if you've read my work. And I am a fan of helicopter drops. They are proper "people's QE". Bungs to big construction companies paid for by the Bank of England are not.

    2. But temporary monetization seems almost like an oxymoron. Debt held by the central bank is still treated as debt owed by the government, rather than debt it doesn't have to worry about. It's unclear if central banks currently would cancel them, or have the power to cancel them. And political capital is important, politicians don't like debt, the higher they think the debt burden is, the more likely they will advocate austerity, and the less likely they'll approve of more spending. So as long as the public, and politicians especially, regard the debt burden as including debt held by the CB, then that debt for all intents and purposes has not been monetized, as far as I'm concerned.

      Just out of interest, how would you implement helicopter drops?

    3. In this post I was onlly discussing the accounting. From a consolidated accounting point of view. QE is debt monetisation. The architect of the PQE scheme (who is an accountant) insists that QE is debt monetisation and has called for QE gilts to be eliminated from reported debt/GDP figures. He sees no difference between QE (in which bonds are not cancelled) and his PQE scheme (in which they are).

      In reality, QE bonds are not cancelled and remain in the vaults of the Bank of England until either they mature or they are sold. They therefore correctly remain in published debt/GDP figures. By contrast, the PQE bonds would actually be cancelled.

      My point though was that whether or not the bonds are cancelled, the monetisation of existing debt (i.e. replacement of bonds in circulation with base money in circulation) does not appear to be inflationary. But in the public's mind, it is.

      Helicopter drops are an increase in central bank liabilities. The balancing asset is a loan from the Treasury to the Bank. This disappears in consolidation and the balancing asset then becomes future tax receipts and/or national assets.

    4. "Helicopter drops are an increase in central bank liabilities. The balancing asset is a loan from the Treasury to the Bank. This disappears in consolidation and the balancing asset then becomes future tax receipts and/or national assets. "

      I'm not an accountant, this language confuses me. Could you possibly phrase this in a different way?

      A helicopter drop should adhere to the point of Friedman's original analogy, which is an *unconditional* injection of money into the hands of the public. Liabilities and more debt do not signal unconditionality to me.

    5. I;m sorry, it really does have to be explained in accounting terms. Balance sheets must balance - even government ones.

      Money sits on the "liability" side of the consolidated government balance sheet. The "liability" side of a balance sheet is made up of debt (or liabilities) and owner's equity. It is an interesting question whether money is liability or equity. As it does not have to be repaid (i.e. is unconditional), it is perhaps more like equity than liability.

    6. Okay, but I'm still curious what specific operations you think the government + CB should take if it were to embark on a helicopter drop policy. "An increase in central bank liabilities" is not exactly informative.

  2. /me scrunches face...

    Let's do some Gordian Knot cutting.

    People (some of them) tend to support balanced budgets and are deficit scolds as a cover for their support of state sanctioned/supported social violence against those lower than them in hierarchy.

    Elites and the media that support them, encourage this dynamic so as to undermine public spending and allow transfers to their private bank accounts.

    Currently, we're in a situation where most western countries are politically frozen from doing any fiscal remediation of said economies (aside from Belgium, for perverse reasons, but they'll get theirs), and a total reliance on monetary remediation that has reach the end of its utility. Of course, instead of admitting that fiscal measures are imperative, we talk of this loopy People's QE. We talk of building back in monetary effectiveness by raising interest rates when the economy is weak--just so we have the option of lowering them when the resulting recession makes it effect known in data!

    We refuse, though, to consider that people might need more hospitals, repaired aged infrastructure, mental health rollouts, etc. It's not because people are afraid of deficit spending. It's because, as I point out above, people are afraid that the wrong sort of people would benefit, and that the distinction between them and people they despise are decreased. Not to mention wage inflation and increased labor power which would diminish the psychic rewards of being "The Boss". Of course, the rich wants to keep society transferring wealth to them, regardless of how sustainable that is.

    I think all this needs to be said because there is a constant reinforcement in the media about how much voters care about the deficit. Same as the game with Greeks and euros. Most people are just a lot more nuanced than that, and care most about creating effective policies that improve well-being. Any politician that dares to say that "Hey! We've got a crisis right now in *policyarea-x-*, we've gotta do what it takes to fix that, and we'll worry about how to pay for it later!", well, assuming that the voters care about that particular issue, they *will* prefer fixing that problem to lowering deficits numbers. Deficit scolding is a means of corralling populist sentiment, even when a populist idea might actually be a good one.

    Corbyn was just wasting time trying to unpick all of this instead of just bringing out the meat cleaver.

    1. Thought it was a sword, not a meat cleaver?!

    2. You have to admit that a heavy cleaver is more suited for cutting knots than a sword, at least for those of us unskilled in the arts of swinging such sharp long things. Corbyn with a broadsword in his hands is a frightful thought...

  3. Cannot think of any instance where voting influenced strategic government policy.
    The UK is perhaps the most centralised government apparatus imaginable.
    It is not and never was a functional democracy.
    You state the UK owns the BoE
    But you cannot seriously state that resident UK automans have a equity stake in the UK as they do not own the money - they just use it.
    The question then is who owns the UK.

    Ballot box democracy is a entirely fake apparatus of control.
    Indeed the UK parliament is or at least prior to the EU period the forum in which the now centralised resources( using tax and scarcity management) were redistributed based on the whims of the post enclosure oligarchy creating the artifical Uk society we know today.
    Not only have this oligarchy inflicted this capitalist model of control on England but it has become the model on which the western world and now entire worldhas been built upon
    Creating today's world crisis of monetary value vs real value with monetary value blotting out all humanity in its wake.

    Gee thanks.

  4. Recovering socialists need to understand what inflation is.
    It provides capitalists with the higher prices needed to spur growth, to dig more stuff out of the ground, to employ more people inside the satanic mill be it a ford factory or a call center.
    The objective of inflation is growth by itself detached from human level demand.

    But if they were told there is a mechanism to print money which could increase deflation and thus increase purchasing power.......
    What then????
    And I am not talking of using deflation to increase the purchasing power of the connected capitalists.
    One of their many weapons of monetary war.

    I am talking about deflation for all.
    The compensated price mechanism.

    Capitalism is currently having trouble digging more stuff out of the ground.
    We have entered a new phase of capitalism.
    A world of declining surplus production which in the 20th century was wasted via depreciation of consumer goods or lost directly on the battlefield.
    Now we will neither have surplus production to waste or control of the commons.
    We are entering perhaps the most dangerous phase of capitalism where it's demonic dynamics will become obvious to all.

  5. Where is the England of Old?
    The England between the death of the Roman slave culture - its replacement by a cooperative culture and its brutal killing on the alter of capitalistism by the Tudors and the people behind them?
    I would suggest it's long dead.
    It's become populated by people who manage world capital flows and the baldricks who serve them as they come and go.
    Narrow minded financial managers who the price of everything and the value of nothing.

  6. Why is inflation seen as the primary target? High time Taylor rule thinking is chucked in the trash along with Monetarism. Why not target full employment first and foremost? This is quite possible with stable inflation (prices - our measures of 'inflation' are so coarse grained). As the inflation hawks constantly gripe about it, why not push wages and inflation follows (rather than vice versa). Then, as you may agree, fiscal policy is more effective at raising demand, fiscal policy is equally effective at controlling inflation via targeted taxation. As opposed to the massively blunt tool of bank rate rises. Why are we talking about raising the inflation target when we can't even hit the existing one? That should tell you how ineffective the monetary tools are.
    If we want to get rid of the smoke and mirrors of PQE, we should equally rid ourselves of the smoke and mirrors of the belief that only the BoE can steer the economy with it's bank rate and inflation target. The only effective route is to get coordinated action between Treasury and BoE, which means less 'independence' (and the driving seat should always be at the democratically elected body)


  7. martin kragh rysslands historiaJag har med förväntan öppnat Martin Kraghs bok med den blygsamma titeln ”Rysslands historia”, för all del med ”från Alexander II till Putin” i mindre skrift. Det positiva med boken är att det på svenska nu finns en sammanhängande redogörelse för denna epok utifrån de ekonomiska betingelserna. Bra diagram och bildmaterial. Och kanske kan den bidra till att illusionerna avtar att bolsjevikernas styre på något vis var av godo. 

  8. Frances,

    I think you are probably right about how voters would respond. Although PQE as a counter-cyclical tool under control of BoE (where bond purchases are earmarked for public investment to create a tighter link between monetary and fiscal policy) might be regarded as credible by inflation averse voters (and is something I tentatively think might be a good idea, in a very second best sort of way).

    If Richard had actually thought about my argument, which solely concerned the nature of current monetary policy regime, instead of embarking on an irrelevant flight of fancy (nothing I wrote assumed anything was in equilibrium, whatever that means) he might have responded with: yes I agree, an inflation-targeting central bank cannot commit to a sustained and permanent increase in flow of base money into the economy, so PQE will mean stripping the BoE of that mandate (as your quote from him here suggests). Then he'd need to argue how PQE could be judiciously managed to stop inflation running away whilst still having a material impact on government expenditure without corresponding increase in borrowing, but at least he'd then be getting to the point. (as I have already pointed out, increasing inflation target would not make space for PQE, because increasing inflation target increases implied rate of seigniorage anyway - PQE cannot do what its proponents claim, whatever the inflation target is)

    I hadn't noticed him saying that bonds purchased by PQE would be cancelled by BoE. That would imply that if BoE tightens policy, and starts shrinking its balance sheet, the quantity of bonds it has available to sell to pull base money out of economy is smaller than quantity of base money, and if you keep that up in long run (govt keeps doing PQE, BoE keeps tightening) it would run out of bonds to sell.

    as an aside, that I know I really ought not bother with, my post was about PQE not Richard Murphy and I described PQE as snake oil because it is a miracle cure that will not do what it promises to (a sustained and material increase in govt spending without borrowing or inflation). Another policy I might call snake oil is the idea of expansionary fiscal contraction. If I'd written that article, would people be complaining I'd libelled or offended those who believe in that? People who routinely question the motivation and integrity (and intelligence) of others who disagree with them (neoliberals, mainstream economists, whoever) should have thicker skins.


  9. Frances,

    Any government should really provide the investment spending it wants and the country needs at the most advantageous price possible without increasing inflation. That is the job of the government. PQE is just the tool for that.

    You suggest increasing government debt for investment spending. That, to be frank, is a non-starter. You will not convince voters of the intracacies that government debt is different from household debt, because the Conservatives and their supporters in the media will make sure that extra debt and bigger deficits will be seen as irresponsible and will conflate gov. debt and household debt on purpose. It happened last time Riachrd Murphy was on Radio 4. The man from the CBI came on afterwards and said gov. debt and household debt is the same, of course. That was the first thing he said. He said that on purpose for that very same reason, to confuse the listener, even though he will know that that is nonsense. It will then seem a "political" issue. No sophisticated argument will be listened to, the people will believe that it is best that "the UK does not end up like Greece" and will vote for the party which avoids that, which promises the lowest deficit. That is about all they are interested in, as far as economics of debt are concerned, if you are lucky, and that will be that. In reality they will think "too much debt is bad, no matter what economists tell me." It just sounds intuitively right, and voters will believe that. So anybody wanting to to increase investment through increasing deficits and debt is going to lose an election. Period. If you want to invest, and we all do, you have to think of something else.

    Now, PQE is not underhand. It will say, look we are going to invest and it will not cost you, the people, anything, because we will not have to pay the money back, and there will (effectively) be no interest to pay. That will be responsible because it will be honest and open, and not the trickery and sleight of hand we have seen in the past to keep things off the government's balance sheet. (PFI/ contingent liabilities) It will also cost a lot less than the current financing model, which is in the main letting corporates provide the funds to the government, which will always pay more in interest than the government. Obviously, compared to the even more wasteful PFI financing schemes, which have for years provided the finance for government schemes (and ridiculous profits for the City) it is a welcome change, as financiers will now have to look for other profit generating oportunities. So for a change, the government will provide value for money.

    If you believe that construction companies are "bunged", please provide evidence for that, as otherwise this is a complete nonsense. Construction companies will need to be paid for their work, as any government contractor will be, as otherwise their will be no roads, hospitals, railway lines, bridges, etc.

    ( to be continued)

  10. (continuation)

    Now, as far as inflation is concerned, let us say that a future Labour government will provide additional investment funding through PQE. That is £50bn a year, about the current amount spend per year, will be financed by gilts. Plus another 20%, ie 10bn for additional work identified as needed by the nation by a new Labour government, which the Conservative government was too stingy to finance, will be paid for by PQE.

    Now that is 10bn extra in a 1,800bn a year economy. What do you think the impact for inflation will be from that additional 10bn investment spending financed through PQE?

    I suggest it will be absolutely zilch, nothing, nada. It will be too small to make any impact whatsoever. Whoever suggested that that tiddly little amount in the scheme of things would make a decisive difference to inflation, and would get the BoE to increase interest rates in compensation really does not know their economics, and really should start selling snake-oil. Other factors capacity utilisation, unemployment rate, productivity, future tax rates, etc will be much more decisive for the Monetary Policy Committee to decide the future course of interest rates. (I know Paddy is your mate, but I think he is seriously wrong on this in detail, although Richard Murphy generously gave him a 2.1 for getting the theory right)

    However, back to the real world. The UK will now have 10bn of addtitional assets (that is about new 40 hospitals!) which will increase the country's productivity/health for essentially nothing. There is no taxes to be raised to pay for it, as there will not be any interest or repayments to be made. There is no PFI repayments of about 30bn over the next 30 years to be made. Neither will the deficit have increased, as Labour will just have used PQE.

    So the nation, the people, are better off, their quantitative means have been eased through less future taxes, a real People's Quantitative Easing. Will everybody win from this? No, of course, the financial sector loses out. But that is about it.

    So all in all, that message "a lot cheaper than PFI, does not increase deficits, taxes or inflation" will be much easier to sell than "increase the deficit, it will be alright, really". Politically extra deficits and debt is just a non-starter. That is the reality.

    1. I admire your enthusiasm for PQE, but I think you are very wrong about inflation. It is not a matter of whether inflation would be increased by PQE, it is the fact that people think it would.

      It is no easier to convince people that "money printing" won't lead to inflation than it is to convince people that investment spending is necessary. I would argue in fact that it is considerably more difficult. If you can't win elections by challenging the debt & deficit hysteria, you've got no chance whatsoever of winning elections by promoting policies that are widely perceived as inflationary.

    2. Matt

      fine, small things have small effects, if you want to say PQE will increase UK govt spending by less than a rounding error, it is hardly worth mentioning in election manifestos.

      but if you think small increase in govt spending and a small increase in inflationary pressure, small change in inflationary expectations, why do you not also just suppose an equally small response in terms of monetary policy, rather than helping yourself to the assumption of none?

      ignore conventional QE for now (not ignoring it means we just have to wait a long time until worked it way out) the size of BoE balance sheet is just under 400bn. So you think we could start adding 10bn per year to that over and above whatever path would have been in perpetuity do you, with BoE doing nothing to interfere?


    3. Frances,

      Yes inflation expectations could be higher, that is not a bad thing, if there is, as at the moment a threat of deflation.

      But, clearly, inflation cannot be influenced by an additional 10bn spending in a country where 1,800bn of goods and services are consumed/invested each year. Even the most economic illiterate person will not believe that.

      There is no doubt that people will try to claim that PQE= Zimbabwe. As the Daily Mail/Jeremy Warner have already done so. Now it is true that elderly people will get their information from them, might be influenced. But that is not the ones Labour will ever win over, anyway. They are not in the swing voter bracket.

      Anybody else will believe that if 375bn "quantitative easing for the 1%" did not cause inflation, then 10bn per year "quantitative easing for the people" will not cause inflation either. That should be the mantra hammered home by Labour, outside the blue-rinsed Daily Mail reader-ship.

      (I know it is not exactly the same, but Labour should use the same conflating/confusing trick about this, as the Conservatives do with the deficit issue!)


      I do not thing that anybody is suggesting that a proposal which is not even fully thought out, to be introduced at the earliest in 5 years time, if Labour wins, will run into perpetuity.

      It might have an effect on inflation even, if labour markets are tight. But only then. But if the labour market is tight it will be because of other booming economic activity, PQE will only be a marginal and very tiny factor, among many others, for the BoE to decide if it should tighten monetary policy through whichever means possible.

      But the point is this, what is glibly dismissed as a rounding error (10bn PQE compared to GDP of £1,800) is in fact almost exactly what was spent on the NHS by Labour when going through its hospital rebuilding programme (£11.8bn, which built or rebuilt about 100 hospitals).

      So 50bn of PQE over the five year term of a Labour government, say, is hardly a rounding error, if expressed in number of hospitals built.

      Now, if Labour last time around had spent this 11.8bn money through PQE rather than the expensive PFI, we would all be substantially better off. By about 2bn a year, or about 2% of the NHS budget. (Even if we had borrowed the money, it would have cost us less than 1bn a year.)


      That enormous financial benefit alone should make PQE a valid and preferred form of finance to pay for government investment projects.

      So the point is if we want good value financial investment for the government without having to increase the deficit unnecessarily PQE is a valid thing to consider. Also, the lower the cost of financing, the lower the reurn on investment needed before a investment will be worthwhile adn contributing to increasing the wealth of the nation.

      PQE will not have a decisive impact on inflation, and there should no need for the BoE to neutralise it straight away. The Bank of England should, as the government, wait and see what the impact of the policy is. It would do that anyway, I am sure, and not automatically neutralise it.

      As any new policy, it will have to be implemented before the real effect will be known.

    4. Matt,

      The fact that Zimbabwe has already been mentioned in relation to PQE should put you on your guard. The swing voter bracket is terrified of inflation too. We are treading a very fine line between "OMG Greece" and "OMG Weimar".

      This is not about reality, or sense, or economics. It's about the Daily Mail and the Sun.

    5. Matt,

      agreed, 10bn not immaterial in terms of what it can buy. It's also about 10% of current fiscal deficit, I do not share your confidence immaterial in inflation terms either. By how much do you think govt would need to raise spending before it starts to have a noticeable impact on inflation? You think Osbourne could announce new path for deficit 10% above current forecast path, and a new investment programme equal to hospitals under Labour to which you refer, and the BoE would pay no heed?

      perpetuity sounds extreme, but "spending without borrowing" means *permanent* monetary expansion, and if PQE is not merely a counter-cyclical tool but a way of regularly having more spending without more borrowing, then its impact on BoE balance sheet is going to add up, and if "spending without borrowing" true that implies cumulative impact not reversed by BoE otherwise it's debt financed. .

      Basic point is that PQE, as sold, requires a long run change in rate of seigniorage, under current MP regime that is pinned down by inflation target. Which part of that are you disagreeing with?

      If you want to argue that processes which actually determine inflation are mysterious and erratic, and there might be able to get away with an extra 10bn here or there, nobody any the wiser, OK but that moves in mysterious ways argument cuts both ways, could be inflation expectations lose anchor, inflation response is larger than you imagine. Otherwise I'd say small change in agg nominal demand has small change to inflation and small MP response, and I would not be promising 10bn a year of free hospitals on basis of your confidence that number is too small to have any impact other than on hospitals being built.

      I say free, because the only sense money financed spending has any cost, is via inflation.

      are people here, I wonder, aware that in most developing countries the advice tends to be to go for a higher seigniorage + inflation mix because they have large hard to tax informal sectors and inflation is a tax on cash economy? You don't come across people there saying oh don't worry money financed govt expenditure has no impact on inflation - you get high inflation. I am not talking Zimbabwe, just low double digit.


    6. @Paddy:

      "You think Osbourne could announce new path for deficit 10% above current forecast path, and a new investment programme equal to hospitals under Labour to which you refer, and the BoE would pay no heed? "

      The way the BoE would pay heed is to shrug their collective shoulders and say "We will see". The deficit cannot be forecast that far in advance with any certainty, anything could happen to bring this forecast out of kilter, and frequently does.

      The BoE will say that extra 10bn spending from the deficit might provoke inflationary pressures, but might not. Capacity utilisation/unemployment will be determining factors. Same with PQE.

      Now let us pretend it is early 2020 and the economy runs at full whack, 3.5% unemployment, wages going up by 4%-5%. Balanced gov. budget. 2.5% inflation.

      In that case a major PQE would certainly be inflationary. And could and would perhaps be rightly counterbalanced by rising interest rates. It would be a political choice to go ahead with it. (Eg. there might still be a huge need for social housing)

      (But, although, to be fair, under these conditions nobody would vote Labour anyway. )

      But in the current situation it would make sense to have a PQE programme in reserve.

      My point really is, there is no automatic BoE cancelling required of a PQE program. It will always depend on the circumstances. And the difficulty is really to assess whether 50bn over five years it is really a rounding error, or is indeed

      The point you make with developing economies which have large cash economies, that is not the UK. We have 3% cash and almost everybody pays taxes through VAT, national insurance, and income tax. So we always could just hike VAT by a point or two to put brakes on economy. Not really difficult. So other options are available to put brakes on economy if needs arise.

      But cash raises a good point. Let us pretend instead of something new and never tried before (PQE) we will use the old fashioned method, printing money, literally. To benefit from the seigniorage the good old fashioned way.

      Even if the UK, instead of PQE literally printed cash and paid for new hospitals by 50bn of new crisp notes in suitcases, that would only double the cash component of the money supply from 3% to 6% over a period of 5 years. (At the moment there is about 50bn of cash in the money supply)

      The money supply would over 5 years go up by 3%! Where is the risk of inflation in that? I think you will agree, that is too small to have any impact on inflation by itself.

      You probably have seen the Billy Blog on this, I just read it, all more eloquent and to the point.


    7. If you're talking about having PQE in reserve and imaging you disagree with me, then you evidently haven't read what I have written very carefully. Generous 2:2 for you. I was quite explicitly not talking about PQE as counter cyclical tool. I am talking about idea PQE could be used regularly to have (material) spending without borrowing as its proponents describe, whether BoE thinks stimulus warranted or not. When forecast inflation path below target obviously BoE won't be tightening to offset. Obviously no automatic offset. Some truth to your BoE would wait and see answer, but MPC does look at forecast inflation paths and its decisions are forward looking, would take money financed fiscal plans into account.

      Yes I read Billy. Not impressed by daft I won't link to this attitude, attributing all manner of crap to me that I do not think nor argued, failing to grasp what i was arguing.

      Point of mentioning developing countries merely to say plenty of examples of seigniorage financed govt spending and higher inflation. Nowhere do I say inflation caused by base money expansion, I say base money expansion would be undone as BoE tightens.

    8. Actually I got that wrong. Been long day. Its not just about whether BoE tightens. It's about interaction of policy rate, what banks are doing, demand for reserves. Rather complicated now because of interest on reserves, but looking forward a year or so, say 10bn PQE, policy rate is 1pct, banks don't want that 10bn try to get rid, would push rates down, BoE sells gilts to maintain its rate. So even if you think no immediate sign of inflation hence no BoE tightening, still hope that f permanent monetary expansion can be undone under current regime. For PQE to deliver as promised, regime has to go.


    9. @Paddy
      "If you're talking about having PQE in reserve and imaging you disagree with me, then you evidently haven't read what I have written very carefully. Generous 2:2 for you."

      LOL, well, I fully admit that was my fault making myself not clear. I said Labour should have PQE in reserve, I think I meant when/if they get into power. It is more than likely PQE could be introduced without worrying too much about inflation, as it is highly unlikely that a full employment, high wage growth inflation scenario would prevent PQE from being introduced in 2020.

      So PQE is contingent on a number of factors such as Corbyn winnning leadership and election in 2020. So a lot of ifs.

      What the exact policy will be regarding PQE will need to be determined in advance, such which projects should be financed from it, but it could for example say, if unemployment is less than x% let us do 10 million in year 1, 15bn in year 2, 20bn in year 3, as long as inflation rate less than y%.

      Slightly different scenarios could be worked out.

      What the response of the monetary policy committee (MPC), which sets interest rates on behalf of the BoE will be to these hypothetical scenarios, I do not think we know at all, and to be fair, I do not think the MPC will know either yet, as they never had to think about it.

      So probably a prudent policy would be to ask them in advance, what they would do under a number of circumstances in certain scenarios. That would give Labour then a hint what might actually happen if the PQE policy is pursued, and if and how the BoE would actually tighten, if at all. And we would know under which circumstances tightening is likely to happen

      I think generally a new policy as PQE will have to be well thought out in advance, to make it viable and attractive to sell to the public. To rely on Bill Mitchell (who might , I agree, misunderstood what you said), say, who says "no risk to inflation" would not be prudent enough, if the MPC comes to a different conclusion and undoes PQE benefits through potential interest rate rises.

      The debate about these new, unorthodox instruments such as PQE, (or helicopter money, or issuing money to repay debt (Steve Keen's idea), or say higher inflation rates of 4%, or even higher deficit financing) will need to be had. I think it is very valuable that academics engage in the discussion, so that the policies can be argued out and gremlins found. Because ultimately, the public needs to be persuaded, and that can only be done if all bases have been covered in advance.

    10. Hello.

      You don't need full employment before you get inflation.

      I am all for discussing new ideas, but claims have been made for PQE that should not have been made (not in bad faith, just hasty and wrong).

      In retrospect I might have saved myself a lot of bother if I'd put less emphasis on inflation (although I do think PQE would be inflationary) and just focused on question of what determines size of BoE balance sheet under current regime and explained how BoE cannot force reserves to permanently increase by 10bn (or whatever) per year, at least not whilst it is still inflation targeting.


    11. Seems to me that the argument that PQE wouldn't be inflationary because inflation is currently low is embedding the equivalent error that banks made in the selection of inputs to their flawed risk models in the 'great moderation' which led to the excesses that caused the global financial crisis.

  11. Because employment adds to costs/ also.
    Full employment means more inputs as a result of commuter traffic etc etc.
    But any increase in costs/ leads to further mass bankruptcy..
    We have seen a breakdown in world trade between 2007-9 which means in reality consumer roboten could not afford what the machine was selling producing
    In 2014 there was a partially botched attempt to reduce the size of the euro scarcity engine via threat of war and Sanctions on Russia
    Certainly inputs decreased dramatically But at what Cost?
    The workers of the west are not peasants with their land and real labour.
    Workers in the west simply go around in circles today.
    This attempt simply reduced the size of the circle.
    We may indeed be seeing the end of the capitalist ranch system of production much like how the Roman slave system failed but I am afraid the capitalists have the idea of dragging us all down with them....
    Something must click in your head when capitalists such as Larry Summers and Bill Mitchell agree on inflation targeting.
    The answer is simple - both are supercapitalists, liberal materialists.
    Oiling the machine becomes more import then the people.
    People become like just another input.

  12. I don't think strand 2 of PQE is based on the three assumptions you mention at all. It's what you allude to lower down. A way of reintroducing active fiscal policy without increasing government debt. Your suggestion is to use conventional borrowing to achieve the same aims, but it seems to me this faces the same - if not greater - political opposition than does PQE. It's a question of strategy I guess. PQE is not QE at all. It's OMG (or OMFG as Stephanie Kelton calls it). OMFG is the usual response you receive when you suggest it as a possibility!

    1. No, Prof, it isn't OMFG. It really is QE. Bill Mitchell is wrong about this. The government would issue bonds to the private sector who would then sell them to the Bank of England. It has to be done this way because of Article 123 of the Lisbon Treaty which prohibits OMFG.

      Richard Murphy suggested that the private sector bit could be gamed by rigging the price and selling only to specific actors who would be required to sell them on to the BoE, but that is not going to wash with the European Commission. They see through dodges like that. It would be illegal.

      You, too, buy into the "no-one will agree to increasing government debt" mantra. It is false. There is substantial support for higher government debt to fund a large investment programme.

    2. I don't think no-one will agree to increasing debt. There is substantial support in the academic world, and the Labour Party could and should have drawn on this support much more during the last parliament. It could do again. It would still be a tough sell to the public in the face of Tory Party and media opposition though. As a supporter of MMT though, I prefer OMF to issuing debt. You are right that PQE is an attempt to circumvent EU law, but may not achieve that. EU and Eurozone rules have already been stretched to breaking point over the last 7 years (and longer), so it need not be an insurmountable barrier.

    3. I think we have to assume that EU rules ARE an insurmountable barrier, precisely because they are stretched to breaking point elsewhere. The European Commission dare not allow the UK to be seen to step out of line - it would give carte blanche to others to follow suit. Impossible laws are always more strictly enforced than reasonable ones, especially when the survival of the institutions that create and police the laws is at stake.

      I don't know if you are aware that the EC has been pressurising the UK government over the deficit? European Council in May censured the UK for failing to meet fiscal targets under the Excessive Deficit procedure, saying it wasn't making enough effort and that reforms had tailed off in the last two years. That is at least partly where the excessively tight fiscal plans come from. Osborne is fobbing off the EC.

    4. Presumably then, your proposal to issue more debt is also a no-goer as doing so may increase the deficit? Even if you argue the extra borrowing is for investment and the current budget is in balance or even surplus, the EC would still see through a dodge like that wouldn't they?

    5. The UK has a lot more wiggle room on debt and deficit than it has on monetary financing of government. It is not a Euro member and famously refused to sign the fiscal compact. Consequently the "excessive deficit procedure" has no force in the UK, as indeed the original 2010 "excessive deficit procedure" document from the EC acknowledged. All the UK has ever done has said it will "endeavour" to keep within Maastricht limits.

  13. Why is not the debt self liquidating?
    How much claims on wealth is required to sustain the system.
    Are we working towards a infinite amount of debt on a finite system.
    This is the use of money designed for the purposes of non consumption.
    A fantastic world scheme of exploitation if I may say so.

    In the past people saved goods during the autumn season
    Now economic insecurity forces them to save in all seasons and all years of their life.

  14. Why is not the debt self liquidating?
    How much claims on wealth is required to sustain the system.
    Are we working towards a infinite amount of debt on a finite system.
    This is the use of money designed for the purposes of non consumption.
    A fantastic world scheme of exploitation if I may say so.

    In the past people saved goods during the autumn season
    Now economic insecurity forces them to save in all seasons and all years of their life.

  15. Strand 1 would have been possible prior to becoming tied to an EU policy designed to circumscribe governments’ freedom of action with regard to their direction of their national economies, making it subordinate to the international banking cartels that operate within its jurisdiction. Must nations be forever milked because banks are allowed by governments to create new State currency in order to lend it back to the government and charge it interest for the privilege of borrowing its own State’s money? In WW1 the government successfully limited its indebtedness to the private sector by directly paying for its purchases with money it created out of nothing (‘Bradbury’ pounds) and continued using this device in diminishing amounts until the late 1920’s. The comments attributed to a one-time director of the BoE, Sir Josiah Stamp, have more pertinence today than when he uttered them ; “........if you wish to remain the slaves of bankers and pay the cost of your own slavery, let them continue to create money”. Sir Mervyn King echoed Josiah Stamp’s observation in a speech delivered in 2010, “Of all the many ways of organising banking the worst is the one we have today”. Not the left, right or middle of the political spectrum appear to have embraced the need for re-jigging the financial system – to much of a hot potato. More regulation isn’t going to make much of an impact on a discredited and discreditable system and since Jeremy Corbin’s economic gurus suggestions are to add to the present system not remodel it we can conclude they are as much part of the consensus as their erstwhile opponents.

  16. Question please Frances: You say that 'the cost argument is entirely spurious. Interest paid to the UK private sector is simply new money which will be spent into the economy either now or later.'. But a substantial proportion (30%?) of gilt holders are non-UK so is this not a leakage? Or are you proposing that Corbyn bonds be sold exclusively to UK private investors? Thanks...

  17. Francis - I listened to your savings question on Bills site.
    The theme of the talk was decades old monetary misconceptions
    May I suggest you perhaps suffer from a centuries old puritanical belief on savings which is indeed quite rational for a individual living inside hothouse scarcity conditions but is entirely wrong when looked on in a holistic manner.
    You seem to suggest it's quite natural to save / defer spending to the extent we see today.
    This was of course never the case in a peasant economy (autumn storage Only)

    The puritanical era was a direct result of the introduction of the ranch style capitalistic farm of the enclosure era.
    Production per acre crashed causing physical shortages forcing people to save continously.
    This is the forever autumn economy we know today as the capitalist economy.
    It was quite rational to save as you could not afford to consume the product.

    The extreme savings /debt of today points to the breakdown of the real production distribution and consumption chain.

    The true costs of production is consumption ( not the consumption of capital goods currently used to access Consumption)
    This level of savings is certainly not "natural"

    1. The desire to save/hoard/acquire assets is completely natural. It's a worldwide phenomenon.

      In my view government has a responsibility to accommodate the reasonable desire of its citizens to save. It can do so by recycling those savings back into investment in productive activity while protecting citizens from potential losses. Government can eat losses better than any private sector agent, which is why deposits in banks always end up being guaranteed by government. This is completely compatible with Bill's view. We only differ over the specific mechanism by which government enables its citizens to save.

      I do not have any "puritanical" belief in the virtue of saving. Indeed I have pointed out many times that extreme saving is dysfunctional.

    2. Ha -
      it is a worldwide phenomenon because waste (production not designed for real consumption) is a worldwide scourge.

      Waste and Saving go hand in hand. ( SEE Below)
      Listen Francis modernism as we understand it has failed.
      You need a crash course in common sense.
      Reread Dante or something.
      If lazy like me watch the film L'inferno (1911) with a modern score.
      It's perhaps the best silent film ever made.
      Good luck with propagating those disastrous British memes of yours and Bills of which the labour theory of value is perhaps the most catastrophic for industrial humanity.
      I will sign off a while as even I am at loss for words given the overwhelming evidence in favour of the social credit people and their almost complete absence from public discourse of which Oliver Heydorn is perhaps the best.

      I really can't believe it takes a rank amateur like this Dork to challenge and rip at
      this dirty fabric of course wool they call capitalism.
      Get Heydorn inside a debate room with Bill and yourself and I may take yee guys seriously if yee somehow manage to win the rational argument.....

    3. Ps
      I watched a basic income debate from last year between yourself, Liam Halligan & the basic income guy........Guy Standing.

      Why does this guy have a monopoly on the basic income debate?
      Social creditors reject the basic income memes totally
      A national credit office supplying a dividend operates in a system where credit banks do not exist.
      It's possible that a basic income rather then national dividend would be a dramatic failure possibly blamed for increasing inflation as credit banks release their poison again destroying the national capital base.

  18. In reply to anonymous on Francis false accusation post regarding the time value of money.
    He asks if I will lend him 10,000 tokens as his descendents will pay my kin back in 1,000 years.
    I say sure why not.
    Go and enjoy yourself baby.
    If I could give you free credit I would gladly do it.
    I like to see other people happy and stuff.
    However I ain't in control of money as I just use it.
    At the moment most people are forced to save /defer consumption which more then hints at the breakdown of the production distribution consumption chain.

    You don't have to believe in God to understand the Christian message but it helps...... my god is the ghost of Christmas present.
    The function of money tokens is to facilitate real consumption.
    Using scarce money to obtain a yield so as to obtain yet more scarce money is only rational for the individual under current circumstances but it's diverts most of the world's present consumption from the very act of human consumption.

    The solution is to not make money scarce.
    To not engage in inflation but to give each a dividend (not a basic IncomE) based on the capacity of the economy to produce a industrial surplus so this income is therefore not guaranteed.

    Money is free, the industrial surplus belongs to everybody

  19. Ps
    Tax is used to sustain centralization which is a hallmark of finance capitalism, it does not give money it's value as a utility.

    The physical surplus produced gives money it's utility value and nothing else.
    The real physical surplus available for consumption is declining, money is being increasingly used to defer consumption in a understandable act of desperation amongst conduit people.
    Hoarding is a symptom of system breakdown rather then the cause.
    But in doing so money loses its utility function.
    Eventually you get a breakdown of commerce, a schism between production and consumption.

    1. http://www.inspiredbydante.com/Inferno/Entries/2010/3/28_Canto_VII_-_Circle_IV__.html

  20. And when they met and clashed against each other
    they turned to push the other way, one side
    screaming, “Why hoard?,” the other side, “Why waste?.”

  21. This comment has been removed by the author.

  22. I apologise for thinking that you were a relatively thin-skinned blogger, Frances, before I came across Richard Murphy!

    Having tried to discuss his PQE thinking with him on his blog (eg here: http://www.taxresearch.org.uk/Blog/2015/08/25/the-bank-of-englands-already-been-authorised-to-do-peoples-quantitative-easing/comment-page-1/#comment-733137 ), I suspect that the reason why Murphy involved the BoE in his PQE scheme is that he somehow thought that the National Investment Bank debt could be cancelled such that the scheme would be cost-free (abstracting from Paddy’s excellent point about an independent BoE offsetting NIB bond purchases by gilt sales).

    Before I was cut off Richard Murphy’s blog myself, I got him to the point that he accepted that, under his plan, PQE would be funded by BoE reserves that presently pay interest at the BoE repo rate, but his response was simply that this rate could be set to zero, while maintaining that PQE would not be inflationary.

    The problem is, however, that, assuming that economic confidence returns, perhaps even due to PQE itself, non-interest-bearing reserves would become the classic “hot potato”, and could be expected to bid up prices. And, given that the stock of reserves spent on buying NIB bonds would be of the order of hundreds of billions of pounds compared with a present stock of non-interest-bearing base money of about £70bn, the price level would have to rise several fold before a new equilibrium is reached with the stock of non-interest-bearing base money being willingly held.

    Assuming that the BoE does not sell the NIB bonds back into the market to reabsorb the reserves created when they are purchased, the BoE could “cool” the reserves by paying a rising BoE repo rate on them as interest rates generally rose, as would be expected as economic confidence grows. In that case, however, PQE would become, ex post, a floating rate funded investment scheme, and such a maturity mismatch would seem especially unwise at a time when long-term interest rates are so low (as you say, Frances, better to be straightforward and just leave the NIB bonds in the market).

    In conclusion, Murphy is stuck between PQE being either just another debt-funded public expenditure programme or a potential source of very high inflation. I can only surmise that Murphy over-reached his limited understanding of central banking, arrogantly dismissing quiet early warnings ( http://www.taxresearch.org.uk/Blog/2015/08/05/putting-the-record-straight-on-peoples-qe/ ), and being now increasingly embarrassingly dismantled by his critics, is lashing out at them and trying to deter further questioning.

  23. "The principal reason for the Bank of England's inflation target is the fact that an awful lot of people are very scared of inflation, and the principal reason for its operational independence is the fact that an awful lot of people don't trust government to keep inflation under control."
    That's the idea isn't it. The problem is monetary policy has mixed effects. Raising rates may well increase inflation.
    But of course that's not true is it - the voters love inflation, only if it is the right type. They love house price inflation. They want the government to protect their private property "rights."
    It is to transfer income from people with less property to people with more property; it is a massive government instigates income redistribution system, for upwards income redistribution.
    Many generations in their 20s/30s are being led to financial destiture.
    But that's precisely the plan: at some point anglo-american culture government went through a bit of arithmetic and found that to fund retirements a substantial chunk of GDP had to shift from younger to older residents to pay the level of pensions that older voters would demand, and older voters are a huge voting block, and if funded with taxes that huge shift would mostly be paid by higher income and wealth voters.

    1. (Continued)
      Anglo-american culture governments decided that they would not raise official taxes to do that, they would rig markets to the same effect, and the main way would be to raise house prices instead to create the same shift of GDP, or larger, as someone pointed out:

      «guaranteed property price inflation was the best way to fund ones eventual retirement»

      This rigging of the market to transfer a large chunk of income from younger residents to older voters (note the "residents" vs. "voters") was accompanied by vastly increased immigration and offshoring to push or at least hold down wages, in particular in public services like the NHS, which are also costs to retirees and high income and wealth taxpayers.

      Asset price bubbles and immigration and offshoring have many advantages apart from obscuring the government instigated redistribution of a lot of income from workers to retirees:

      * Extremely popular with older and female voters who tend to vote more often and swing vote more often than younger or male or Northern who tend to be locked into Labour voting and thus electorally irrelevant.

      * The capital gains can be realized by remortgaging, a vital tool, as it generates huge profits for the financial sector and holds up property prices.

      * By providing massive property based income for many people it drives them to seek lower wage increases, to not worry about pensions as in «made it even easier for the ruling elites to dismantle final salary pension schemes for everyone than them themselves», and to make most voters be indifferent to or hate trade unions.

      Rent have gone up a lot too, and many middle aged or retired property speculators in the South East own several properties that generate enough income to live like a lady of the manor without having to downshift.

      To get an idea of the size of the latter point, in a recent committee discussion with the BoE governor it came out that 40% (FORTY PERCENT) of all mortgages are interest-only.

      As to the first point, remortgaging has given property owners a way to cash in (by borrowing) capital gains amounting to over 100% of GDP growth during both the Thatcher and Blair eras.

    2. (Continued)
      Inflation and "price stability" is a political issue.
      "First, in general terms. “Wealth” represents nothing more or less than bundles of social and legal claims derived from events in the past. You have money in a bank account, you have deeds to a property, you have shares in a firm, you have a secure job that yields a perpetuity. If you are “wealthy”, you hold a set of claims that confers unusual ability to command the purchase of goods and services, to enjoy high social status and secure that for your children, and to insure your lifestyle against uncertainties. All of that is a signal which emanates from the past into the present. If you are wealthy, today you need to do very little to secure your meat and pleasures. You need only allow an echo from history to be heard, and perhaps to fade just a little bit.

      Unexpected inflation is noise in the signal by which past events command present capacity. Depending on the events that provoke or accompany the inflation, any given rich person, even the wealthy “in aggregate”, may not be harmed. In a oil crisis gains to oil men might more then offset losses to other wealthy claimants, leaving “the rich” better off. So, yay inflation?! No. The rich as a class never have and never will support “inflation” generically, although they routinely support means of limiting supply of goods on whose production they have disproportionate claims. (Doctors and lawyers assiduously support the licensing of their professions and other means of restricting supply and competition.) “Inflation” in a Keynesian or monetarist context means doing things that unsettle the value of past claims and that enhance the value of claims on new and future goods and services. Almost by definition, the status of the past’s “winners” — the wealthy — is made uncertain by this. That is not to say that all or even most will lose: if the economy booms, some of the past’s winners will win again in the present, and be made even better off than before, perhaps even in relative terms. But they will have to play again. It will become insufficient to merely rest upon their laurels. Holding claims on “safe” money or debt will be insufficient.


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