Friday, September 25, 2015

Bill Mitchell — lightweight garbage from The Economist


Bill initially smacks down The Economist as a propaganda rag, but the rest of the article is an excellent primer on PQE and the difference between QE and the misnamed  PQE. QE is a monetary operation and PQE is a fiscal operation.
The differences are (see PQE is sound economics but is not in the QE family:
1. QE does not change the net financial asset position of the non-government sector at all – that is, the net wealth remains unchanged. 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.
2. PQE (or OMF) means the central bank, as one part of the consolidated government sector, the other being the Treasury, would use the currency-issuing capacity of the government to facilitate the purchase of real goods and services to build productive infrastructure.
The NIB [National Investment Bank] is just a fancy title for a government agency and would be engaged in public spending – that is, in a fiscal operation. It would be spending out of some account the Bank of England created on its behalf and filled with numbers, presumably with many zeros after the first few digits.
PQE is not QE because it is a fiscal operation, which means it would increase the net financial assets in the non-government sector because it would increase national income (via spending on infrastructure).
PQE as envisaged is a fiscal operation, not a monetary operation, whereas QE as practiced by the Bank of England, the Federal Reserve Bank of America, the Bank of Japan etc are not fiscal operations.
Bill Mitchell – billy blog
lightweight garbage from The EconomistBill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

6 comments:

Ralph Musgrave said...

Given that PQE increases the private sector's stock of base money, strikes me that PQE is actually part monetary and part fiscal.

If increasing the private sector's stock of money is not monetary policy, what is?

Dan Kervick said...

Bill says "the NIB is just a fancy title for a government agency and would be engaged in public spending – that is, in a fiscal operation. It would be spending out of some account the Bank of England created on its behalf and filled with numbers, presumably with many zeros after the first few digits."

But, it is not. The NIB that has been proposed will be a bank, not a fiscal agency. It is to be modeled on the Nordic Investment Bank. It will make low-interest loans to worthwhile projects, not grants or purchases. That lending will be financed in the first instance by sales of bonds to the private sector, followed by central bank purchases of some quantity of those bonds. That’s classic QE. Basically Corbyn is proposing a Fannie Mae for infrastructure lending, together with a QE program for purchasing a new kind of agency debt.

It’s a good idea. It will keep infrastructure financing rates for identified projects very low; it will reduce the level of rent-taking it the infrastructure financing system; and it will help fight recessions by rendering infrastructure financing somewhat impervious to pro-cyclical fluctuations. How well it does these jobs depends on precisely how the central bank bond purchasing component is structured.

Corbyn should stick to clear proposals, and not let his agenda get mixed up with Richard Murphy's convoluted and confused blogospheric ramblings. He also needs to sweat the details about exactly what legislative directives are going to be issued to the central bank. If they aren't careful, the banksters and their lawyers will water it all down as the legislation flows through parliament, and the end result will make little real difference to the way the BoE does its business.

Neil Wilson said...

"That’s classic QE."

The operations are the same.

The spending and the 'funding' are asynchronous operations that are simply not related to each other. Where the 'split the zero' event occurs is utterly irrelevant.

If the Banks and the punters end up with Bank Reserves rather than 'bonds' of any type, then it is just a spending on the government overdraft however it is dressed up.

The key differentiator in all of this is where the profit from the investment banks go. If it goes back to central government then it completes a circuit that makes the whole thing the equivalent of an overdraft at the CB.


Anonymous said...

Tom -

A Friedman smackdown that may be worth a promotion, he gets some stuff wrong but plants a good left hook on NAIRU and "rational expectations".

Anonymous said...

Scene one, take two...

http://naija247news.com/2015/09/why-the-fed-buried-monetarism-by-anatole-kaletsky/

Matt Franko said...

Dan looks like they're going your way:

http://www.theguardian.com/politics/2015/sep/25/john-mcdonnell-labour-will-match-osborne-and-live-within-our-means?CMP=share_btn_tw