Saturday, August 22, 2015

Simon Wilson — What is QE for the people?


Presents both side on the issue about as well as can be expected in this kind of venue.
In his campaign presentation on the economy a few weeks ago, Corbyn suggested giving the BoE “a new mandate to upgrade our economy to invest in new large-scale housing, energy, transport and digital projects: QE for people instead of banks”. The plan is based on proposals from Corbyn’s main economic adviser, tax campaigner Richard Murphy.…
Murphy suggests that this form of QE is only now being considered because “money has only recently been properly
understood for the first time”. He seems to believe that advances made in the subfield of economics known as “modern monetary theory” (MMT) make people’s QE feasible. (Crudely, adherents of MMT hold that governments with the power to issue their own currencies will always be solvent, and that inflation is caused primarily by resource constraints, rather than monetary growth.)
Here's the contra:
By contrast, most other economists, commentators and politicians – Labour and Conservative – view people’s QE as having obviously dangerous inflationary consequences.
Why is that?
It would fatally compromise the BoE’s standing on global credit markets. As Robert Peston put it in his BBC blog,m“the lore of central banks – which, rightly or wrongly is almost universally accepted by investors – says that central banks should only look at whether there is too much or too little money in the economy… and not at narrowerquestions, such as whether there are enough roads or houses being built in Britain”. 
If markets believe the BoE is no longer exercising judicious restraint in its creation of new money, and is instead the de-facto vehicle for funding politically popular projects, sterling would weaken and inflation rise.
By how much? That’s impossible to say. But even if we are not talking about Weimar Germany, there is little doubt that investors would conclude that the risk of investing in sterling and the UK had grown.
In other words, because "expectations." 

Money Week
What is QE for the people?
Simon Wilson

41 comments:

Peter Pan said...

Because the Gods will be displeased.

Matt Franko said...

"Sterling would weaken and inflation rise."

Only if the UK people agreed to pay increased prices for foreign products brought in after time t=0 not whether some banking accounting balance increased over the corresponding time period...

Random said...

I keep hearing the currency will weaken and we can't have nice things.
The world is a closed system.

Dan Kervick said...

Well, the UK is a pretty small island. They don't have a lot of domestic substitutes for many of the things they currently buy abroad. If the exchange rate changes, that will affect the prices they will actually pay.

But there is no reason at all to think that people's QE, which is just an asset purchasing program, would cause inflation. It's just more QE, and as appears from recent experience QE is not inflationary.

Random said...

Dan that is not true it is more like OMF.

Dan Kervick said...

Which part isn't true?

Random said...

It is additional spending. It is not like QE and carries inflation risk just like all spending. Like Overt Monetary Financing.
People's QE is the brand.

Kristjan said...

Well, It is not QE, just people are confused about QE and they think it is money printing that is why they use the term. Although QE seems to make the rich richer relative to poor through asset prices.

"It would involve setting up a new national investment bank, which would issue debt that the BoE would buy using printed money."

No buying by central bank necessary as long as it provides some kind of support to the liabilities issued by a this investment bank. Since it is a public entity, It is deficit spending functionally.

Should really call It public helicopter drops instead on QE :)

Ralph Musgrave said...

PQE consists of having the state print money and spend it on infrastructure and perhaps one or two other items. The basic flaw in that idea is as follows.

“Print and spend” is a form of stimulus. But in some years little or no stimulus is needed. Ergo if P&S is tied to infrastructure spending, then that spending will grind to a halt or near halt in years when little or no stimulus is needed. Daft.

That point has been explained to Richard Murphy several times, but seems he’s too dim to get it.

In contrast, if P&S money is spent more widely (perhaps even spent on tax cuts) that would be more MMT compliant, and I have no objections to that.

Unknown said...

The fiscal difference between regular QE and this PQE is that regular QE doesnt involve any additional spending. Its just an accounting exercise that changes nothing in total (except future interest income). PQE on the other hand is linked to spending, there would be no scenario where they would do $100 B in PQE and not spend that money on real things.

QE is a monetary policy operation (doesnt change the net worth of the Non-Govt)

PQE is a fiscal policy operation (changes the net worth of the non-Govt)

Unknown said...

Ralph-

Thats a one-sided view of it, if the infrastructure projects are more important than general consumer demand, you always as a last resort raise the VAT a little. But short of that, its rather simple to create a system that is easily scale-able given the business cycle conditions. Neil W has explained it a number of times, its just a pretty easy engineering problem.

Matt Franko said...

Auburn it doesn't matter if they increase the VAT if they pay higher prices then the prices go up....
.
If they have to import cement in response to additional infrastructure projects and yhe foreign sources of cement increase their offers and the UK pays it then the prices go up and then the GBP will go down vs the foreign currency as the financiers of the cement will see their asset increasing in value and they will thus have excess regulatory capital in GBP which they will then try to exchange for another nations currency balances ..... ... rsp

Unknown said...

Matt-

I dont disagree with anything you said, but you are ignoring the impacts on fx\inflation in the other direction from the general decrease in imports that would result from a reduction in aggregate spending due to a tax increase. The currency\inflation movement would be a net of the opposing impacts from our two examples, not the only two of course.

Tom Hickey said...

Bill Mitchell, PQE is sound economics but is not in the QE family

Second, QE does not change the net financial asset position of the non-government sector at all. It is an asset swap. The non-government sector just rearranges is wealth portfolio – more cash, less bonds. No net change.

That is the essence of a – monetary policy operation – which alters the liquidity in the economy. It does it by portfolio swaps and in doing so influences the interest rates and the term structure.

Third, PQE is not QE because it is a fiscal operation – as is any so-called ‘helicopter drop’. Keep the helicopters on their pads and just spend

What does that mean?

PQE (like a helicopter drop) would increase the net financial assets in the non-government sector because it would increase national income (via spending on infrastructure).

That is the hallmark of a fiscal operation.


****

PQE would involve the government instructing the central bank to credit some account so that the National Investment Bank could put in purchase orders for contractors etc

The accounting to support this operation is largely irrelevant – it could be a simple instruction to expand the treasury overdraft, for example. At any rate it is just one government hand putting liquidity into the other and then pushing that liquidity out into the non-government sector. [Emphasis added]

The spending would boost the contractor’s bank deposits (which increases their net financial assets or net worth) and the bank now has more reserves and matching liabilities (the contractor deposits).

That is the hallmark of a fiscal operation.

Tom Hickey said...

"Sterling would weaken and inflation rise."

The UK has international markets and no capital controls. Currencies shift in relative value all the time. If the savers in gilt think that PQE will be inflationary, as many did Qe, then they can profit from it by by shorting sterling or buying assets that are expected to rise owing to inflation, like gold.

They should remember though how well that worked in the case QE. They might ask Bill Gross about that — and the bond vigilantes will they are at it.

Unknown said...

Matt-

Of course if its specifically imported concrete that is driving the fx\inflation changes and you dont want to increase any taxes you could always go the Chinese route and just subsidize the domestic concrete supply side to keep imports\prices in check. There's a reason why concrete prices only went up about 13% between 2011 and 2014 even though China alone used more concrete during that same period than the USA used in the entire 20th century.

http://www.washingtonpost.com/news/wonkblog/wp/2015/03/24/how-china-used-more-cement-in-3-years-than-the-u-s-did-in-the-entire-20th-century/

http://data.bls.gov/timeseries/WPU132?data_tool=XGtable

So if your the CHinese government and you know you're going to be using X gigatons of concrete in your 10 year building plans, you dont want prices to go up too much, and you dont trust leaving it to Mr. Market, you simply cause to come into existence a 350% increase on the production side over that time period. IOW you set the price and let the production quantity float to meet that price, just like any other buffer stock.

https://carboncounter.files.wordpress.com/2014/02/globalcement.jpeg

Ryan Harris said...
This comment has been removed by the author.
Schofield said...

For the record. This is Richard Murphy's August 19th Twitter comment on Bill Mitchell's article:-

"PQE is sound economics but is not in the QE family - http://bilbo.economicoutlook.net/blog/?p=31626 Easily the best comment on PQE yet"

Schofield said...

"At any rate it is just one government hand putting liquidity into the other and then pushing that liquidity out into the non-government sector."

Beautifully put given that money is simply at the end of the day the abstract representation of "human effort" to move natural and human resources about an economy and between economies to create the goods and services collectively desired.

Ignacio said...

Tom the quote from Bill post... I read that and initially I thought it was like that, but there in a specific proposal on how it's going to be done? The devil is in the details, and we won't know for certain it's a fiscal operation until the wording and proposal is clear.

It could be as well a proposal to extend loans to certain sectors of the pvte sector (Crebyn talks about small business, green projects and start ups, etc. so only a small component may be net fiscal injections at all). Dan raised the point in an other thread and we still don't know the correct answer to this issue.

Dan Kervick said...

I think almost all of you need to go and read the actual proposals and position papers that have been developed by Murphy and others. There is a mountain of confusion about what this "People's QE" amounts to.

It is not "print to spend". Murphy has explicitly said that the idea is for the central bank to buy bonds issued by the Green Bank and an infrastructure investment bank.

These institutions are going to be banks. They are not some kind of additional fiscal institutions. Their role will be to make loans to projects that are in line with their mission. They fund themselves by issuing the bonds. The central bank then buys the bonds from whomever purchased them.

The entities getting the loans might in some cases by local governments. But they are loans; the governments have to pay the banks bank.

When the central bank buys bonds from the private sector, that is QE. The program is appropriately named.

Random said...

"Murphy has explicitly said that the idea is for the central bank to buy bonds issued by the Green Bank and an infrastructure investment bank."
Other parts of the govt, not buying things in the private sector.

Dan Kervick said...

Random, the banks - whether they are part of the government or not - are going to be in existence to make loans. But the Green Bank, which already exists, is a public-private partnership. It makes money for private investors.

Ignacio said...

Right Dan, but if the CB is going to buy the bonds (indirectly) of those public banks which will be extending loans to the administration it all ends up within the public sphere.

The govt will be starting projects which will help investment and real output and/or efficiency. the problem will come when the loan has to be paid back, I guess this is the point you raised in the other thread: being banks they are expecting those projects to have a positive RoI, make 'a profit' and pay back the loan this way.

This is presupposing the economy will grow and the tax base will grow with it, or that they will generate in income from that investment. Either way it's just a loan, not a net fiscal injection (so you were right), as the administration is expecting to charge it back from the population. So is a net outflow from private sector to public sector in the end (as with any bank, I guess they will be charging interests, although maybe it will be loans at zero interest rates, in that case it would be neutral), only that is advanced through a loan today.

Pretty disappointing then, as it's just a way to generate some investment today with the hope that the economy will improve and broaden the tax base (for all practical purposes) to pay the loan back.

Tom Hickey said...

Let's imagine that the Department of Transport want to convert its highway lamps to solar. This could be funded by a fiscal appropriation or it could be funded by the Green Bank, or a public National Infrastructure Bank if the Green Bank is not public.

If the Dept of Transport decided on the public bank, then it issues bonds for the purpose, which are bought indirectly by the BOE. The Transport Dept hires private contractors that invoice the department which pays using the borrowed funds now owed to the BOE as the owner of the bond issue.

The loans are issued by government and stay in government after the indirectly purchased by the BOE (only the BOE, the public bank, and the public agency are involved in the lending and borrowing. The bonks can either be rolled over indefinitely, or else just cancelled if that is permitted. Anyway, on the consolidated government books there is no borrowing from nongovernment. So the funds that enter the private sector (contractors) are without a corresponding liability in nongovernment. That is a net financial asset that increases nongovernment net wealth in aggregate.

Dan Kervick said...

Yes, Ignacio, the involvement of the central bank and the public sphere means that credit can be extended at lower rates. That's a good thing. Private investors financing the projects alone would demand high rates of return. But if the central bank commits ahead of time to buying up (some? all?) of the bonds that have been sold to the private investors at some price that is at least minimally profitable to those investors, then the bank will be able to sell as many of them as it wants.

The impact lies in the details. How would the BoE bond purchasing program be structured. How much of this debt would the BoE buy? Would the purchases be conducted via an auction or in some other way? But, frankly, details don't seem to be Mr. Murphy's strong suit.

Tom Hickey said...

There is no substantial difference between the cb buying the bonds directly at the issue or indirectly later in the market. They end up on the cb's balance sheet in any case. If the bonds are liabilities of a public bank, then it's the government lending to and owing government. The liabilities are on the government side and the spending creates assets on the side of nongovernment.

Fore example, the central bank can either lend to the government directly or it can buy the bond issue later. In any case the increase in nongovernment net financial assets in aggregate is the same, since the borrowing and lending is within government — Treasury owes either the overdraft plus interest or else the principle and interest on the bond issue. It's just numbers in the books of different government agencies that cancel when consolidated.

Dan Kervick said...

If the Dept of Transport decided on the public bank, then it issues bonds for the purpose, which are bought indirectly by the BOE. The Transport Dept hires private contractors that invoice the department which pays using the borrowed funds now owed to the BOE as the owner of the bond issue.

Tom, let's just make sure we understand what is going on here. Let's say its the Liverpool Department of Transportation, and the city needs 10 million pounds to carry out the project. The National Infrastructure Bank issues bonds for 10 million and sells them to bond investors (let's say the bonds carry some negligible, merely nominal yield of X pounds). It then lends the $10 million to the city of Liverpool for the purpose of the street light replacement. The city of Liverpool now owes the bond-holders 10 million pounds. The central bank then buys the bonds from the investors via auction for 10 million + Y pounds. The city of Liverpool now owes the central bank 10 million pounds. The initial bond purchasers have made a profit of (Y-X) pounds.

Or the City of Liverpool could issue and sell the bonds directly, without any intermediation from the National Infrastructure Bank, and then the central bank buys the bonds from the bondholders. Ultimately, it's the same thing - only the bureaucratic mechanism differs.

Is this a good program? Sure. Since the central bank is ultimately providing the credit and doesn't have a for-profit mission, the city of Liverpool will presumable get cheaper credit. In the same way, when the Fed bought agency MBS's that reduced mortgage rates. Fine. Indeed, the CB could push the rates down as low as it wants them.

Murphy seems like one of those guys who can't explain simple ideas without a lot of extraneous discussion and without bringing in irrelevant side issues and hobby horses. But the bottom line is that the debt would be interest free:

... But what that then means is that if the debt has, in effect, been acquired costlessly (and it will have been, because the money used to buy it, which, of course, is a sum almost exactly equivalent to the original value of the bond, was created by the BoE out of thin air) then to charge interest on it makes no sense because there was no cost to creation of that money and no debt to be serviced to pay for the cost of acquisition.

http://www.taxresearch.org.uk/Blog/2015/03/12/how-green-infrastructure-quantitative-easing-would-work/

The fact that Murphy emphasizes the "costless" creation of the money by the CB as the justification for the lack of interest suggests that he thinks interest would be appropriate if the CB had costs to recoup. In other worlds, he seems to be assuming the BoE would still be operating with the goal of earning positive annual income, but that it can do that without charging Liverpool much if any interest.

Of course, without significant changes to the current legal structure, the operating profit of the BoE is a political necessity, since operating losses by the bank are borne by Her Majesty's Treasury. So if, for example, the BoE were to subsidize the loans to Liverpool and others by buying up negative interest bonds, the income losses would be made up by a transfer from the Treasury - which I imagine would not go over very well.

Dan Kervick said...

http://www.bankofengland.co.uk/publications/Documents/other/markets/apf/boeapfannualreport1507.pdf

Ralph Musgrave said...

Auburn,

Obviously, as you say, if infrastructure is a priority, and money for that cannot be got from “print and spend” because little or no stimulus is needed, then the money can come from a VAT increase. But that makes a nonsense of the Corbyn / Murphy claim that some FIXED amount should be printed and spent on infrastructure! That’s my point .

Put another way, I agree it’s a “pretty easy engineering problem”. The solution to the problem is to abolish the Corbyn / Murphy “print a fixed amount” idea. Instead, if additional expenditure on infrastructure is justified, then do that and get the money from the usual sources, i.e. tax and/or government borrowing. As to “print and spend”, that’s a form of stimulus which should be implemented when stimulus is needed, and should be spread fairly evenly over every government department so as to avoid big gyrations on the amount spent by anyone department. In addition, some can be “spent” on tax cuts.

Tom Hickey said...

If the spending it done by an entity that has to get the funding to repay the loans, which is the case with city government, then the situation is different from one in which the borrowing in done by the national government with the cb monetizing it directly by lending to government or indirectly by bond purchases in the market.

In that case what PQE does is fund the public bank without a legislative appropriation that goes through Treasury, thereby avoiding the democratic process. But loans the public bank makes outside the national government must be repaid with funds obtained In nongovernment. A city government would generate revenue through taxes, fees and fines to repay the loans (principle and interest) to the public bank owned by the national government. This would increase public infrastructure but the funding injected would be withdraw subsequently leading to no change in net wealth.

NeilW said...

Dan,

The National Investment Bank is going to be wholly owned a publicly owned bank. That makes it precisely the same as our central bank. When any bank owned by the state issues 'loans' to other parts of the state sector that is 'print and spend'.

The very mechanism of any print and spend operation always relays on 'loans'. And there is nothing that says it has to be a permanent loan, an overdraft, to make it 'print and spend'. It works exactly the same with term loans that are simply rolled over all the time. It works exactly the same if you run the 'repayment loop' via local councils as it does with the central one.

It's precisely the same as paying interest on Gilts owned by the Bank of England and getting that money returned as the bank dividend. The net effect is zero.

I just don't understand why you're making a big song and dance about this. There is no material or operational difference at all. It's all smoke and mirrors.

The job of the NIB is to provide the accounting entry cover so that local authorities can spend on authorised investment programmes. It gives them direct capital access whereas at the moment they can only operate on a revenue basis and have to use corporate middlemen (PFI) to gain capital access.


NeilW said...

" But loans the public bank makes outside the national government must be repaid with funds obtained In nongovernment."

They are 'repaid' using further loans obtained for the same purpose in a rolling format. So you get a constant refinancing over time.

It's a simple virtual overdraft where the sole purpose of the exercise is to keep the funds off the Public Sector Borrowing Requirement statistics (PSBR).

There's quite a bit of 'triangulating' going on here so that those with small brains get the wrong end of the stick and think that the 'income' from the investments is going to pay back the loan. That's not going to happen any more than it does with the current PFI arrangements. The majority of a local authority's income comes from the block grant from central government.



NeilW said...

"That point has been explained to Richard Murphy several times, but seems he’s too dim to get it."

The dim bit is missing the trick in PQE. The infrastructure projects are fragmented and they don't chase the wage at the margins. The individual projects are not time sensitive and they can happily sit on the shelf awaiting somebody to bid for them at the price offered.

And of course space can be made fairly easily in the planning system as well: "no you can't build that hotel, until these houses/roads are finished"

This constant obsession with being 'full' is the mistake. The economy is not 'full'. There are 23 million people across the EU looking for employment. That's a million miles away from 'full'.

NeilW said...

"But that makes a nonsense of the Corbyn / Murphy claim that some FIXED amount should be printed and spent on infrastructure!"

It's not really fixed, more capped. Which is unfortunate since that means it's not going to be very effective in a downturn. Although I suspect the cap amount is there largely for initial political purposes and it would be extended to whatever is required at the time of a slump.

Matt Franko said...

" city of Liverpool for the purpose of the street light replacement."

Maybe the project will include a personal "EZ Pass" and when you are out in the evening and walk under the new lights, the system will sense your presence and debit your EZ Pass for a few GBPs so they can "get their money back..."

Ignacio said...

"The very mechanism of any print and spend operation always relays on 'loans'. And there is nothing that says it has to be a permanent loan, an overdraft, to make it 'print and spend'. It works exactly the same with term loans that are simply rolled over all the time. It works exactly the same if you run the 'repayment loop' via local councils as it does with the central one."

I think the only problem is political/idealogical (as always), in the sense that the 'debt doomsday' crowd will be saying: "but our children won't be able to pay back" (moron alert: national debt is never paid back; but they don't understand this). Again, is the implementation details which are important, because if there are expectations built within the program that it all will have to be 'paid back' within a (relatively) short term (let's say 2y to 5y), it's just an upfront loan with the intention to kickstart the economy, but that ultimately will have to be 'paid back' (charging for services or through taxes).

Will it help? Sure it will, but this does not help redefining the frame and in the long run (removing austerity politics) and in the end increasing fiscal injections into the economy which is what is needed to solve the 'demand' part of the problem (the investment would help with the 'supply' side of the problem, which is also quite real even if ignored sometimes by MMT economists).

Ignacio said...

Oh I forgot to say, ofc you can always do what Japan and China do: ignore the debt doomsday crow and rig the game so all those public loans are indefinitely rolled over regardless of the total national debt increasing.

Dan Kervick said...

In both the US and the UK system, central bank income losses are ultimately borne by the treasury. If the central bank gets into a pattern where it is loaning money to various entities to finance both current spending and repayment of its previous loans - whether those entities are inside the government sector or in the private sector - it is going to experience annual income statement losses from those programs. These losses are deducted from the amounts that the central bank remits to the treasury, and so are ultimately financed by the treasury.

It doesn't matter very much whether the national infrastructure bank is in the private sector or the public sector. The point is that this bank be operating like a bank: it will be issuing loans to both private development concerns, public-private development partnerships and local government agencies, and those loans will have to be repaid by those loan recipients.

The idea that this is all just window dressing for a printing scheme whereby the infrastructure banks and central bank will be lending the loan recipients the money they need to carry out all of the infrastructure spending plus to repay previous rounds of loans, and thus will be booking huge annual income statement losses is fantastical. That is not how Murphy has presented the system. He has presented it as an extension of the QE program to a new class of bonds that are issued to finance infrastructure investment. And the asset purchasing facility in the BoE that carries out QE is indemnified by the UK treasury against losses.

NeilW said...

"it is going to experience annual income statement losses from those programs"

No it isn't. I don't understand where you're getting this from.

Where the hell is the 'income loss' on money lent for nothing that is simply refinanced when required - assuming there is any refinancing at all and it isn't just an overdraft.

The money spent moves into the banking system. The cash deposit ratio system funds the bank of england on the relevant fraction of the extended liabilities.

Do I really have to draw up the T accounts?

"The point is that this bank be operating like a bank: it will be issuing loans to both private development concerns, public-private development partnerships and local government agencies, and those loans will have to be repaid by those loan recipients."

Sigh.

You repay loans by refinancing loans - with the same bank.

I've know Richard a long time, he's a chartered accountant, we've talked about this and I know what the design of this system is and why its like that.

It's just classic accounting smoke and mirrors to make one thing look like another.

If there are any private sector loans, and I don't know that there will be, then that is just standard banking. They will have to repay and pay interest. It may be that the public sector has to do the same thing, in which case the dividend from that will be recycled back via the Treasury into the public sector block grant to complete the circuit.

Honestly Dan when you get the wrong end of the stick, you just won't let go.

Dan Kervick said...

"No it isn't. I don't understand where you're getting this from."

Neil, when the central bank loans money, that is an expense on its income statement. When somebody pays it back, that is revenue. If the BoE lends some local government 10 million pounds for some project, and then in each succeeding year lends it exactly the amount needed to service the previous year's loan, then it remains 10 million in the hole perpetually. That loss is made up by reduced remittances to the treasury - or even a transfer from the treasury when there are no profits to be remitted.

If, as you say, the "lending" dimension of this program is just smoke an mirrors to make helicopter money look like something else, then we can analyze it in helicopter money terms: Start with a central bank that has zero net profits each year. Now suppose that bank simply starts helicopetering money into the economy while everything else stays the same (no loans, no asset purchases - just helicopter money given away). That helicoptered money is an expense. If the bank had zero profits previously, and then helicopters 50 billion pounds into the economy the next year without picking up any new sources of revenue, it will experience a 50 billion pound loss.

Now we can certainly imagine how the system could be engineered so that that loss doesn't matter. Central banks don't really need income; they don't really need positive equity. These are accounting conventions established to preserve the central bank "independence" prized by neoliberals. We could set up central banks in such a way that they simply absorb all of these losses into their own accounting, and can dig as deep a fictional "hole" as they want to carry out monetary expansion.

But in the systems and institutional-legal frameworks that your country and my country have actually created, the ones that actually exist now, it does make a difference, because central bank losses are currently made good by the treasury. Here, for example, is the BoE explaining the QE facility:

The Company is fully indemnified by the HM Treasury: that is, any financial losses as a result of the asset purchases are borne by HM Treasury, and any gains are owed to HM Treasury.

The people who set up the current system put treasuries on the hook for central bank losses to prevent precisely the sort of thing you are talking about: using the issuing powers of the central bank to directly finance government, and leaving the government of the hook for taxing and borrowing to finance its operations.

If Corbyn and Murphy want to change this stuff, then great. They should clarify what changes to the Bank of England Act they are planning to legislate. Otherwise, they should stop pretending that there is some QE-style workaround for helicopter money.