An article appeared on the BBC News website today:
Despite being an article about the tragedy of youth unemployment, it has spurred me to share my thoughts on quantitative easing.
It is only recently that I have looked closely at QE as a strategy for warming up the economy. QE is an effective and important tool to get more money into the economy – ideally giving people more “spare cash” to spend – and more importantly calming their instinct to hoard their cash in the face of impending doom.
(For an exceptional explanation of how QE works, see Joan and Richard Sweeney’s article “Monetary Theory and the Great Capitol Hill Baby-sitting Co-op Controversy” – analysed in a very user friendly way by Paul Krugman from page 106 in the “Four Percent Follies” article in his collection “The Accidental Theorist”.)
However, QE is based on the assumption that money injected into the economy by buying up companies’ assets will then “trickle down” into the rest of the economy. Trickle down economics is at best optimistic. And in the case of the UK, the assets that have been bought up by the Bank of England are all… wait for it… investment portfolios. And the only companies that the Bank buys assets from are… wait for it… the banks and financial institutions.
Even if you are not a bank basher, it seems an unusual policy to solve the financial crisis by buying risk from companies that have a non-existent reputation for a socially progressive distribution of profit and that are under such intense public scrutiny that hoarding profit as security, rather than spending it, is almost a certainty.
There are, of course, some conditions attached to the money that is exchanged for these assets. (I’d be grateful to anyone who could provide information on this.)
But the most important requirement of QE is that the “trickle down effect” is significant. So the money must go into the hands of those who will spend it.
One solution would be to buy assets from companies that have a good reputation for distributing profits amongst stakeholders. Maybe the cooperative groups? Or John Lewis / Waitrose with their unique profit sharing model? Or why not help out small businesses by injecting assets into companies where the staff are also the owners? But most critically the Bank of England should avoid buying assets from companies who will distribute the money into the hands of people who don’t need to spend it.
BUT, the counter argument is that the amounts of money that are involved are so large that they can only realistically be injected into the economy by buying up assets with massive value – and investment portfolios are simple, non-physical assets – and so superficially at least, a very practical way to do this.
One might attach stricter conditions to the money that is used to buy up assets.
OR… could we inject the money into the economy in another way – one that would have a better trickle down effect?
We could be talking about tax breaks but we’re not.
This other method not only has better trickle down consequences, but also real benefits, not just money.
I am talking about old fashioned Keynesian fiscal stimuli: putting money into people and projects.
“Shock horror” scream the monetarists! “NO!” cry the free-marketarians.
In my view, QE is the same as Keynesian fiscal stimulus – but with no focus.
Unless it comes with strict conditions or is only used to buy assets from companies with a good track record of distributing wealth, QE may just end up putting more money into the hands of those who already have enough.
So, I say put money into home-building, education and work experience and let the educators, the builders, the carers and mentors distribute the money – God knows many of them can ill afford to hoard it. And we must remember the multiple benefits that the money can create for those young people in the BBC article who are being left – not just with no money – but with no chance to enjoy the social, mental and physical benefits of work.
I was pleased to see Mariana Mazzucato touch on this during her Newsnight interview last week. I don’t know a great deal about her work, but you can read more here.
Write to your MP and discuss this with him.
For more about QE, you can visit the Bank of England website: http://www.bankofengland.co.uk/monetarypolicy/Pages/qe/default.aspx
5th November 2014, Paul Krugman celebrates IMF’s audit in which they say they got it wrong over embracing fiscal austerity in a near zero interest rate economy. More here.
On 16th October 2014, Martin Wolf wrote a piece in the UK’s Financial Times saying, “after years of being ‘penny-wise, pound-foolish’, …the UK has the second-worst infrastructure in the Group of Seven leading high-income countries, ahead only of Italy.” He recommends that we target “a current budget balance, while borrowing for infrastructure investment”.
On 22nd October 2014, there were two interesting articles in the UK’s Financial Times. The first was about the momentum of suspicion that QE has been a driver of inequality. The article claims that the Bank of England itself says that QE has boosted asset prices and household financial wealth “heavily skewed with the top 5% of households holding 40 per cent of these assets”. The second article was by Martin Wolf concluding that Germany’s lack of growth despite low unemployment and high productivity could only be solved by “unconventional monetary policy or expansionary fiscal policy”. He goes on to say that long term borrowing for Germany from the European Central Bank will result in a real terms interest rate of zero. So expansionary fiscal policy is the obvious choice.