My Green New Deal colleague, Colin Hines, is in the Guardian this morning rehearsing some familiar themes. He co-authored the first green quantitative easing publication:
Sorry Brenda from Bristol, but another election looms, and this time a progressive alliance of Labour, the Lib Dems, the SNP, Plaid and the Greens need to get their policy ducks in a row to win it.
Firstly, these must provide hope, not just for the young, but for every community in the country. To do this Jeremy Corbyn must revisit and vigorously shake his people's QE “money tree”. This could pay for real economic activity on the ground via decentralised infrastructure projects to make the nation's 30 million buildings energy efficient, ensure a shift to localised renewable energy, and the building of local transport systems.
Secondly, the divide between young and old must be bridged by policies fostering intergenerational solidarity. Older people with significant saving should be offered “housing bonds”, paying, say, 3% interest to help fund a massive council and affordable homes programme. Tuition fees would be scrapped, but so too must be the threat of having to lose a home to pay for care, or having to scrabble for means-tested benefits such as heating allowances. Financed by progressive and fairer wealth and income taxes, and a clampdown on tax dodging, this should have an election-winning appeal to the majority of grandparents, parents and their young relatives.
Colin Hines
East Twickenham, Middlesex
Let's have a Green New Deal, in other words.
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Agree. Only as discussed yesterday talk of money trees is politically loaded. I would refer to the Green New Deal as invest and reap.
Dear Richard,
Thanks for the reference to your People’s QE paper.
I didn’t see it covered in the paper, but I presume the scale of P-QE is limited by the extent one can put ‘slack’ back to work in the economy — or until inflation starts to pick up.
With CPI today at 2.9% and unemployment at 30y lows, is there much slack at all, and if not would you accept the targetting of higher inflation rate, say 5%+, at least to get going on the projects.
(I would expect that cancelling PFI debts through P-QE would have smaller inflation effects than green infrastructure spending, so monetary effects depend on the final investment choices…?)
Tom
I agree that limit is the slack in the economy
I agree with Danny Blanchflower that this is vastly bigger than the ONS record – there is considerable underemployment
I would relax the inflation target. 2% is too low
I can see almost no inflation impact of PFI cancelling – what am I missing?
I am all for Green QE. However, we need to make sure that we don’t simply suck in exports with the result that much of the stimulus is felt outside of the UK (70% of offshore wind farm content is manufactured outside of the UK). The French put various conditions in their offshore wind tender processes that appear to favour French manufactures and (so far at least)do not seem to violate EU law. We need to make sure we copy their example.
And after Brexit we too can do that
Blanchflower is right of course. There is massive slack. We now live in an era of permanent excess capacity (some of which is avoidable). The immediate evidence of that is in unemployment, underemployment and sub-target inflation.
It may be that the main thing saving us from deflation is corporate oligoply pricing which is a very real worry for stimulus plans. We do not want to see rising incomes and demand being captured as supernormal profits by oligopolies operating in the retail sector and elsewhere.
A serious and effective competition policy is pre-requisite for any major long-term stimulus program.
BTW Australia’s central bank, the RBA, has a target band of 2-3% inflation, has had for a very long time and it hasn’t done their nation any harm
P.S. With regard to the immediate evidence of excess capacity I forgot to mention those rock-bottom, historically low interest rates.
With capacity it is probably not the potential that is at issue (there’s plenty of that) it is the time that it takes to realise it.
That I accept
I am really glad to see your commitment to using the money tree to achieve a transition to green energy.
The UK tends to overlook this question, but we should not forget the need to simultaneously make a transition in agriculture and food supply chain. Chemical and fossil fuel inputs won’t be available forever to sustain the current approach.
There are plenty of examples of economically viable Permaculture based farms that provide models for us to follow. The money tree should also be used to ensure that we achieve sustained investment in farm conversion, in training of existing and new workers, and in an organisational impetus at national/regional/local levels.
I agree with that need….
If the land, labour, energy and materials are available to carry out a “massive council and affordable homes program” (which would be desirable, of course), then why does money need to be raised by 3% Bonds issued to wealthy pensioners, rather than simply spent into existence by Government?
Correct me if I’m wrong, but I would imagine that a “massive” program would take many years, and more than one term of Government to accomplish; to build say 500,000 homes within two or three years would (I think?) be way beyond the capacity of the real economy, so wouldn’t public spending (directly or via PQE) on such an ambitious program (albeit needed) be inflationary?
This is what really worries me about the duration of austerity and any consequent policies to ameliorate it: with all the direct capital spending, either directly or via the ‘smoke and mirrors’ of PQE, to do the job properly (without incurring inflation as the limits of the real economy are reached) will take years, if not decades – by which time any Labour Government that initiated such policies may well have been voted out, and austerity would return anew.
I know Tony Benn said that the class struggle is a constant battle that must be fought by each generation, but the lower we decline, the more impossible the task becomes to rebuild – even to catch up where we left off, never mind about improving on the past.
Has anyone calculated the what potential numbers are for a “massive” housebuilding program, that could be realistically achieved, without leading to labour and material shortages (> inflation), within the terms of a single parliament?
500,000is possible – dammit, we did it in the 50s
And it need not be inflationary if we reskill or are willing to use new technologies (houses can now be printed)
Richard, I was wondering where Mr. Shigemitsu’s inflation concerns could be addressed by that fact that there is a huge amount of private debt, given:
“PEOPLE IN THE UK OWED £1.529 TRILLION AT THE END OF MARCH 2017. THIS IS UP FROM £1.484 TRILLION AT THE END OF MARCH 2016 — AN EXTRA £886.84 PER UK ADULT.”
Wouldn’t the spending mean people would start paying off those debts -i.e. money will be extinguished as the spending takes place?
I am not sure I am following this….
Printed homes – or more accurately the parts for them – are still very expensive, Richard. In reality we could do this with a mix of traditionally built and prefabricated homes (which are nothing like their wartime equivalents). There are a couple of UK companies offering designs. Danwood are one – and their designs have the added bonus of being self build if people feel suitably up to the job (www.dan-wood.co.uk). And then there are a number of German companies active in this market, all of whom will build in the UK and all of whom have outstanding reputations for the standard of their work (e.g. WeberHaus). But a combination of British memories of prefabs, snottiness at anything that isn’t built out of bricks (encouraged by UK house builders such as Bovis, etc) and ignorance that such houses exist, have kept this form of house building off the UK populations’ radar for years (though I note that even the Daily Mail did a feature on self build prefabs).
I agree with all that
But I think the times they are a changin’
Sorry, I meant that:
With private debt at all-time highs wouldn’t extra Government spending be soaked up into people paying down debts and extinguishing money thereby making inflation even less likely?
I doubt it
I think it might drive up prices too fast
But your idea is interesting
Don’t get me wrong, I think it would be wonderful if it could be achieved.
I’m just aware that although the limits to public spending are, contrary to received opinion, not financial, there are still real world limits, and I’m curious as to what the capacity for a massive public house building program would be, within the potentially single term of a Labour Government.
If it’s 500K, so much the better, and if inflation hits 5%, then it’s not the end of the world, but I was simply wondering: has anyone made those calculations?
The reason I’m enquiring is, btw, not to pick holes in your case, but so I can defend this argument elsewhere, but with some kind of (borrowed!) authority.
We did then in 2008
They would need redoing
But I think the figures are within deliverable limits
Simon,
This rapid paying down of debt (or deflationary de-leveraging) that you fear is something that normally occurs in times of acute crisis when the presence of deflation increases the real value of debts.
In the absence of crisis, in a time of rising incomes, effective stimulus and growth, people tend to be be more relaxed about their debts. Especially so given that inflation (albeit mild) decreases real interest rates and the real value of debts.
Is Article 126 of the Treaty on the Functioning of the European Union an impediment to Peoples QE? I presume not as it does not appear to have prevented QE.
However I will admit to be puzzled by the apparent inclusion of £400+B of QE being included in the Govt debt when debt is defined thus:
“Debt represents the amount of money the public sector owes to UK private sector organisations and overseas institutions”
Source: https://www.ons.gov.uk/economy/governmentpublicsectorandtaxes/publicspending/bulletins/ukgovernmentdebtanddeficitforeurostatmaast/octtodec2016
If you look at the whole of government accounts it is not part of national debt any more
The ONS, IFS, et al, all misrepresent the truth by saying it is
It has been cancelled
Can you supply a link to “the whole government accounts” please?
I thought the ONS could be relied upon to at least be consistent with the Govt!
So is Article 126 a reporting requirement and recommendation only, given that we are outside of the Euro? That it puts no constraints upon our ability to create money?
Any chance of running a weekend hackathon like event so that we private soldiers can aspire to greater understanding and perhaps promotion?
I google whole of government accounts uk when I need them
QE just gets round EU law
I am afraid weekends or for my sons as yet
In a year or two they won’t want to know me at weekends
Maybe then
No, QE debt is definately still in the government accounts and on the balance sheet of the BoE.
QE debt has not and is not cancelled.
Wrong: it reduces the national debt
Bank reserves are there
But they are no QE debt
Again, get your facts right
It is impossible for the government to owe itself money which is why the debt has to be shown as cancelled
It seems you have a loot of learning to do
More nonsense observations will be deleted
All good stuff but I have concerns about:
‘Older people with significant saving should be offered “housing bonds”, paying, say, 3% interest to help fund a massive council and affordable homes programme.’
I’d prefer a rentier free approach to the building of social housing otherwise you are using the housing market as a piggy bank again. All that needs to happen in reality is that the Government credits the necessary bank accounts and the houses get built. Housing Association have already been under enough pressure why get them to cough up 3% when it is not necessary? For those bonds to cough up the 3% they would have to be ‘wrung’ through the financialisation process with fees and charges spinning around the system and backed up by the usual securitization and ‘instruments of financial destruction’. Another earner for the ‘free lunch’ brigade. Also the 30% will probably partly drawn from future sell-off of the houses which then defeats the object.
Or are there genuine non-rentier safeguards amid all of this?
3% is very easy to earn in housing
The government has expected 8% from the state sector
And that is absurd
I`d be happy to get 3% on my NS&I savings.
Most woukd be!
Ok so more QE and yes I agree this is better way to use it rather than how it has been used where the effect is to inflate asset prices.
But, like the existing QE, it has to be repaid, right?
And if it does have to be repaid, it will be future generations that repay it.
But I suppose we are bequithing them a great road, rail and energy system?
It is not repaid
QE is money creation
And it is never repaid
None has ever been
And it never will be
Why talk nonsense?
Is PQE essentially the same as a fiscal stimulus where the deficit is balanced by bond sales?
In this case I guess the bonds roll over rather than every get repaid as complete repayment would destroy all money.
It is fiscal stimulus
And the bands are bought back onto the government balance sheet
After Brexit the bond sale in the middle will not be needed
Then it is just invetsment funding using government created money
Which it is effectively now
And the money is made in perpetuity. Whether it is available for use depends on commercial bank reserve requirements
The National Debt (Gilts) are just savings deposited with the Treasury; if the Gov ever decides to “pay them off”, it will simply swap those ‘Treasury deposit accounts’ for (lower-paying) Reserve accounts at the BoE, which it can create at a keystroke.
“Paying off the debt” would simply be an asset swap; a deposit at the a treasury for a deposit at the BoE.
Given the choice, the holders of those reserve accounts would immediately buy more Gilts with them, if they could!
Why earn 0.25% when you can earn 2%?
(And because cash holdings would be way in excess of the Deposit Guarantee, not risk losing any of it in a possible bank failure.)
This a very interesting thread.
Prof. Richard Murphy says that “it is fiscal stimulus”. I recall Prof. Bill Mitchell saying that PQE is not QE, it is “Overt Monetary Financing”.
Both are correct and Mitchell reconciles any confusion by explaining that PQE (OMF) is a “fiscal operation” where the distinction between monetary policy and fiscal policy is determined by their respective purposes (and outcomes).
Contemporary monetary policy targets interest rates and seeks to influence the economy indirectly by that means. PQE would directly “increase national income (via spending on infrastructure)”
http://bilbo.economicoutlook.net/blog/?p=31626
For those of us that are used to the old definitions something like PQE may seem to blur the distinction between monetary and fiscal with the way that it involves money creation and the central bank. The confusion is ultimately semantic. It is fiscal policy by virtue of what it does (or would do).
Meanwhile, I notice that Mr Shigemitsu raises an interesting question: “why does money need to be raised by 3% Bonds issued to wealthy pensioners, rather than simply spent into existence by Government?”
The answer to that question might be worthy of its own post at some stage, Richard?
Maybe!
I di not accept there is a monetary / fiscal distinction
I do not think it helpful and it has in reality been harmful
There are economic goals and tools
Letting who can use what differ has undermined achievement
‘it will be future generations that repay it.’
This is another neo-liberal myth used to hold populations hostage to private debt slavery and is utter bollocks -if the logic were true we should have got poorer and poorer since 1694 and just be about hitting the mesolithic period by now.
Nice one, Simon.
Not according to Kamal Ahmed, he of the BBC
In his article http://www.bbc.co.uk/news/business-40262751
“Yes, Theresa May can argue that government debts are still rising and that those debts will have to be paid off by future generations.”
Aaaaahhhhhhhhh
Time for a cup of tea and a jaffa cake!
I agree
31 comments to moderate though
Aaaaaahhhh indeed.
The question is how to move your counter argument forward.
I would suggest that you write a draft conference voting paper with a short pre-amble. Send it to all the political parties and ask them to discuss it with a view to becoming party policy.
There must be policy whallahs from all the parties who read your blog. They could take it forward. Kamala Ahmed’s of the world will otherwise continue to spout this nonsense.
I like this idea
I think we are just struggling to understand Richard
I am certainly not trying to doubt you or ridicule you
I simply do not understand how money can be created out of thin air.
I am a simple man. I had trouble understanding double entry bookeeping. I stuck with it and eventually mastered it
I am hoping to do the same with this
I’ve ordeded Ann Petifers new book plus an old Richard Lipsey textbook to see if these clarify matters fir me as well as your own joy of tax
Go to your computer and presume you are a bank
Write Dr Gareth Loan account £10,000
And then write Cr Gareth current account £10,000
And you have just made £10,000 of money
Job done
Double entry is all that is required
And Lipsey will not help
Although he is a hard right winger of the Austrian School I found Murray Rothbard’s “The Mystery of Banking” to be a very good introduction to how money is created out of thin air. One caveat, you do have to wade through a lot of gratutious right wing nonsense, but the fundamental technical content of how the fractional reserve banking system works is very good.
The UK does not practice Fractional Reserve Banking.
There is no reserve requirement in the UK.
Correct
Gareth,
There is nothing new in this “money from thin air” concept.
Recharge, this may interest you as well.
The influential Swedish economist, Knut Wicksell identified ex-nihilo money creation in 1906:
“The banks in their lending business are not only not limited by their own capital; they are not, at least not immediately, limited by any capital whatever; by concentrating in their hands almost all payments, they themselves create the money required,”
“The sum borrowed today in order to buy commodities is placed by the seller of the goods on his account at the same bank or some other bank, and can be lent the very next day to some other person with the same effect.”
“in our days demand and supply of money have become about the same thing, the demand to a large extent creating its own supply.”
Knut Wicksell: ‘The Influence of the Rate of Interest on Prices’ 1906
http://www.econlib.org/library/Essays/wcksInt1.html
It was comforting to see that the BoE finally recognised this in 2014:
http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf
Progress is not always rapid.
But this is not the money out of thin air argument
This assumes a deposit or capital is needed and neither is true
“But this is not the money out of thin air argument. This assumes a deposit or capital is needed and neither is true”.
No Richard,
If you read the quotes carefully (or the historic article that is linked) you will see that Wicksell identified the fact that money is created ‘out of thin air’ (ex-nihilo) by private bank lending and that the banks need not have capital or reserves to do that.
The asset that is their loan is then balanced by a deposit (their liability)that deposit is made by the person who received the loaned money. This is like the double-entry that you described to Gareth.
When Wicksell wrote this article telling us that the: “demand and supply of money have become about the same thing, the demand to a large extent creating its own supply”, he identified the concept of Endogenous Money decades before the Post-Keynesians made it cult-fashionable and 100 years before the BoE fairly acknowledged it.
OK
I only read what you noted and that showed a deposit today could be a loan tomorrow….
Interesting to note Churchill’s comments about fiscal policy during WW1 and then after (on Bill Mitchell’s blog today)
‘A requisition, for instance, for a half-million houses would not have seemed more difficult to comply with than those we were already in process of executing for 100,000 airplanes, or 20,000 guns, or 2,000,000 tons of projectiles. But a new set of conditions began to rule from 11 o’clock onwards. The money cost, which had never been considered by us to be a factor capable of limiting the supply of the armies, asserted a claim to priority from the moment the fighting stopped.’
Wow Churchill got it! ( He must have got what the Bradbury Pound implied) – tell that to the Tories and Johnson who fancies himself as a Churchill.
Churchill went back to the gold standard……
Indeed…it’s weird how he ditched his former insights and coped with the cognitive dissonance afterwards..although we are seeing that being a Tory and cognitive dissonance are familiar bedfellows.
Must get around to reading a decent biography of Churchill some day. I remember reading, that after he returned Britain to the Gold standard and deflation worsened he merely said ‘I just did what my advisers told me.’
Churchill was surprisingly good on Land Tax and the evils of rentier landlordism, too:
http://www.landvaluetax.org/current-affairs-comment/winston-churchill-said-it-all-better-then-we-can.html
Yes but the person taking the £10000 money, has a £10000 debt, it owes the bank £10000.
Your discussion of QE implies that it does not need to be repaid
If it does need to be repaid, being a debt, then at some point in time it will have to be repaid.
A government does this with a bank it owns
You are an accountant
So the consolidation journal
I despair
We (you!) are going to have to keep hammering away at this one Richard.
Don’t despair
I can see, using your consolidation analogy, that whilst the two sides of the transaction remain within state areas that they net down to zero – they cancel each ither out.
As with an inter company loan which disappears on consolidation.
But as soon as the money is spent, say on a new road, with the money given to the private sector company doing the work, the debt side of the transaction remains on the states balance sheet, and is added to the national debt.
To me the term money tree implies free money but because of the above this is not true.
When the new road is built, national debt is increased.
Hence Labour’s manifesto is not without cost, there being no free money tree as proven above. With all the goodies promised, and used as very effective bribes to gullable voters (eg students), these would all add to national debt which at some point would need to be repaid.
I think you are being deliberately obtuse
There is also an asset: do the double entry
Are you saying investing is a bad thing? Especially when the required rate of return is so low?
Yes i appreciate that the other side is an asset, but this of coyrse will be depreciated or amortised or written off – in all cases the asset will have a value of less than cost.
The other side of the double entry will be the debt, the liability which will be added to national debt and at some point need to be repaid.
As i said i am concerned that a “money tree” infers free money, which is not the case and is mis leading
With all the concern about inter generational inequality, i wonder when people voting for Labours money tree realsie that the cost will add to national debt and need to be repaid by future generations.
If we repay the national debt there is no money left in our economy
The national debt is our money
How do you think the economy will function without money?
Might you also suggest when the national debt has ever been paid off?
“The other side of the double entry will be the debt, the liability which will be added to national debt and at some point need to be repaid”
Why??
If the Gov ever “paid back the debt”, all it would be doing would be to transfer the Gilt-holders’ assets from a deposit account at the Treasury, to reserve accounts at the BoE. (Which it does every single day as a matter of course, and at no ‘cost’ to itself, as it spends money created at the drop of a mouse into the economy, or rolls over expired Gilts).
But you have to ask yourself, why on earth would the holders of Gilts want to be paid back their Gilt holdings in cash?
What would they do with it, except clamour to buy more Gilts?
🙂
A large amount of cash is exceptionally risky
Hence repo
Which requires…..gilts
Cash is less risky than Gilts – hence the repo market looking for cash against lending Gilts.
You can create as much free money as you want by printing it – but it does not create any value.
Wrong
Gilts are less risky than cash
Hence the repo market
Cash is an unsecured loan to a bank
Gilts are an asset you can take title to independent of the bank
Hence repo
Get your facts right
Greetings
If I am following. Government creates and spends as much as needed? Then to tax if inflation rising? Can tax rate change every week or month if inflation begin to rise? Should tax be on income or goods/services?
If tax is to take money from economy to reduce inflation, is same achieved if people, say, encouraged to take money abroad?
Thanks you.
Of course the tax rate does not need to change every week
And taking money abroad is not the same as tax
Although quite what you mean by taking money abroad is not clear
Saving does behave like tax in some ways
You can’t ‘take Sterling abroad’.
If you want to import goods, send remittances, or go on holiday then you need to exchange sterling for foreign currency first.
This occurs on a one in, one out basis; ie you swap your pounds for someone else’s yuan or Euros, that someone else being someone who needs Sterling in exchange for their currency.
And te only place that that Sterling can be spent is in the UK.
“And te only place that that Sterling can be spent is in the UK.”
Sterling can be spent anywhere that accepts it. I expect everyone has been in a shop or bar abroad where “£s and $s are welcome”.
I’m not sure what question Hrist is asking above but of course sterling can be taken abroad. There are no exchange controls. I expect there are millions and millions of UK £s in foreign banks around the world and lots in circulation in places like Zimbabwe and Venezuela where £s and $s are preferred to the local stuff.
Maybe his point is what happens if someone has (say) £5m in his bank account, goes abroad and takes it out in a foreign currency to spend abroad. Is that not anti-inflationary in the UK? Almost suggesting that stashing your cash in a tax haven is as good for keeping inflation down as taxing it?
I mean, if the government can print as much cash as they like they won’t miss it, they’ll just print some more and if it is off-shore it can’t cause inflation in the UK. Everyone’s happy.
Of course the pound can be taken abroad
And notionally it can be saved abroad
But it ultimately only has value in the UK: it is not like the US dollar in its acceptability
Sop pragmatically the answer was fair
Now I’m confused. If I can take pounds out of the UK and spend them as we all seem to accept then those pounds could be circulating outside the UK. So how can we tax them? And if we can’t tax them doesn’t that make them inflationary?
Elsewhere we’ve agreed that old people need political education so we have to be armed with simple messages which they can understand. We can’t expect them to read “Jay of tax” so what do we say to people who raise these queries?
Can you help?
The proportion of the total is small
And in return some dollars and euros are spent here
Peripheries like these do not upset the grand schemes of things
Did you see that Ralph Musgrave has posted a facile comment in the ‘Bits and bobs’ column of his blog? “Richard Murphy says the UK can “shake the magic money tree”, i.e. print money and spend it like there’s no tomorrow when inflation is already at 2%. Delusional.” (http://ralphanomics.blogspot.co.uk/2017/06/dimon-claims-lower-capital-ratios.html) Probably not worth wasting your time to comment. Just wondering if you’ve had spats with him in the past.
This is the person in question
http://www.thenorthernecho.co.uk/oldsections/elections/general_election_2010/constituencies/204.durham__city_of/candidates/209._ralph_musgrave/
Says it all – haha! 🙂