Queasy Come; Queasy Go

I want to think again about quantitative easing - the government's new favourite policy that enables it to make money by decree. This is necessary because the favoured method of money creation in this late form of financialised capitalism is by banks lending it and then accepting each other's debts. Once they realised their mutual debts would never be paid this source of cash dried up, and so the government stepped in to spend money directly into the economy. In essence, this is exactly the sort of money system that green (and other) critics of debt-based money have been calling for.

So what's the problem? That is easy to answer: the money that is being created is not being spent on the real economy, but rather injected into the financial upper circuits of the global economy, where it does nothing of real value (it would be far better if the policy worked as illustrated in the cartoon). As Colin Hines argued back in the spring, this money should be being spent on building the infrastructure for a low-carbon economy.

In fact it is being used to buy two sorts of debt. Most is being spent on government debt, which means that the government's debt management agency can afford to sell more government bonds without having to offer impossibly high rates of interest on them - the more UK national debt there is out there the more expensive it becomes to create more. Some is also being used to buy junk corporate debt, thus 'helping the banks to rebuild their balance sheets', otherwise known as 'new lamps for old'.

The pushing of all this new money into the financial system was proposed on the basis that it would miraculously find its way into the real economy. There is no evidence or even convincing argument as to why that might happen. In this form of capitalism, the reverse process is dominant - with money being sucked out of the real economy into financial operations where more money can be made more rapidly.

The policy has two real consequences - both iniquitous. As more cash floods into financial organisations, they use it to buy assets of various sorts, so QE causes a new asset bubble. This value can then be used by the wealthy members of society who own assets to purchase other assets, such as more property or land, hence exacerbating the inequality that already haunts our economy.

Secondly, the policy extends the gap between the money supply and the real economy. The money that has been created is a claim on future goods, and hence this policy is creating a pressure for more economic growth, with the consequent exploitation of more energy and resources. Hence QE to support the finance sector is an environmental disaster in the making.

As it is being used currently, quantitative easing is magnifying the worst consequences of the financialised economic system we are suffering under. The one glimmer of light is that it has proved beyond question that money can be created in this way, but when it is, it should be used to invest in positive outcomes for society, rather than to support the unequal distribution of resources. Tweet

Time to Account for the Asset Bubble

Opinions may vary as to whether the economics profession was asleep on the job, following Nelson's lead in watching the financial markets with only their blind eye, or engaged in some form of self-reinforcing mass delusion. My money is on the latter. For political reasons, the methods used in neoclassical economics are designed to abstract from reality rather than respond to it. This allows injustice and inefficiency to prevail while careers are made proving mathematically the superiority of capitalism.

But are the accountants doing any better? A paper you can find here (if you are suffering sleep deprivation and are seeking a rapid route to a few zzzzs) concludes that the techniques of following the flow of money through the economy that accountants use identified the problem. Meanwhile the 'equilibrium' models so beloved of neoclassical economists concealed the ballooning asset bubble.

But the accountants are not immune to criticism. Far from the Arthur Pooty stereotype who longed to become a lion-tamer in the Monty Python TV series, today accountants bestride the globe, creating value merely be defining it into existence. When is a liability an asset? It is within an accountant's power to turn one into another and effect a total dislocation of real economic value from accounting value.

You can find a nice summary of the paper on Steve Keen's blog. As one commentator there notes, 'I can’t help but feel capitalism needs this ignorance to function, if people knew the game no one would play.'

*Thanks to Paul Nollen for sending this paper. Tweet