Quantitative Easing for the Poor?

Creating money was once looked on as a dangerous game, destabilising the economy and potentially leading to rampant inflation. But this traditional wisdom was swept aside and now the financial junkies are protesting the advertised end of the policy in the US and creating market falls on the basis of those expectations. In the UK context, researchers at the Bank of England investigated the distributional effect of their QE policy, i.e. who were the winners and who were the losers. Their conclusion was that most of the benefits accursed to the wealthiest 5% while some of this living on pensions were losing out quite substantially.



On the radical side of economics we have been trying to argue for direct credit creation for social benefit. At the beginning of this month the New Economics Foundation issued a report formalising this demand. Strategic quantitative easing makes the case that new money should be directly created by government to fund the transition towards a sustainable economy, particularly paying for green infrastructure and the rapid policy of home insulation that will reduce carbon emissions and prevent deaths through cold this coming winter.

Now it seems that the US government has found a way of making credit creation work for the poor. I had not realised until I watched Faisal Islam's extraordinary report on the Rhode Island gold card the sheer extent of the federal food stamps programme. US commentators have noted that the food stamps programme is the modern equivalent of the Depression era soup kitchens. It seems sadly symbolic of our individualist and technocratic age that rather than sharing a bowl of soup, in no matter what dreary conditions, today's dispossessed are issued with a deceitful imitation of the gold credit card of the wealthy.  Nationally, the number is approach 50 million and as Islam's report showed, it is now remarkably easy to use your preloaded card to do your shopping.

Now I know that the money to pay for this programme, a huge $75bn., is not directly created, but since the quantitative easing programme buys back treasury bonds, thereby reducing the debt, it effectively creates the scope for this massive federal programme for the poor. It also makes clear that questions about how money is made and who has the right to decide how it is spent has been removed from democratic control through the increasing use of technical language for what is really simple. Governments can make money directly and it is a political choice that in the UK that money is sent to financial institutions rather than to help the poor.
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Adair Turner Makes Play for Job as Governor

At last a crack appears in the establishment position over the national debt. Following the statement from the Office for Budget Responsibility that the country is bankrupt, last night Adair Turner, former head of the employers' organisation and now boss of the financial regulator the FSA, came out arguing the case for the Bank to take the necessary steps to eliminate the national debt. He has effectively conceded one of the key planks of the arguments of those who seek monetary reform: if you have maintained the control of your currency, as we did by resisting the push to join the Euro, then you can print as much money as you need to eliminate your unpayable debts. The limit on this is faith in your currency and your national economy.

This is, of course, a deeply political point. It continues the theme of earlier posts that the decision to accept our level of indebtedness is political rather than economic. Turner's proposal is relatively limited. He appears to be arguing about the government debt that was bought from companies through the quantitative easing programme, and that the Bank is cautiously holding onto rather than cancelling. In my article 'Who owes whom?' I quantify this as around 25% of our national debt. It is important to note that Turner is suggesting this as a means of reviving the economy and stimulating growth. He is not conceding the monetary reformers central demand: that the creation of money should be exercised by the state in the public interest rather than by the banks for private profit.

This is clearly a move by Turner to establish himself as the radical and creative candidate to succeed Mervyn King as Governor of the Bank of England. Perhaps King would like to follow this policy but lacks Turner's political nous. The contest within capitalism is now clearly between those who are using the debt crisis to bear down on the power of working people and shift the balance of ownership towards the wealthy, and those who would seek a more workable form of social contract. To those of us who consider that capitalism is inherently an unjust and unsustainable form of organisation this is still something of a sideshow.  We also need to keep our focus on how the massive financial readjustments themselves transfer value between rich and poor - whose assets will be protected? Those of the banks or those of the pensioners?
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Ineffective Government Breeds Ineffective Demand

The launch of the Bristol Pound on 19 September was the subject of international media attention, and rightly so.  The decision by a whole city to reject the pound sterling and take charge of its monetary affairs is an exciting and unique one.  However, the most important aspect of the Bristol Pound went widely unreported: the local council is prepared to accept it for payment of local taxes.  Once a political authority underwrites a local currency in this way it can become a viable alternative, and the Bristol Pound is the first currency that has been accepted in this way in the UK.

This week I published a report with the Green House thinktank called Local Liquidity where I discuss the implications of this change.  I frame the post-2008 financial crisis in terms of the failure of effective demand. Quantitative Easing has not only increased inequality, as indicated recently by the Bank of England, but has also created only ineffective demand.  If local authorities were to back their local currencies this could enable them to generate effective demand to replace the financial energy they have removed through successive years of spending cuts. A more immediate and effective alternative, of course, would be for the government to spend the QE money on building green infrastructure, but that is beyond the control of local communities.

The report includes an authoritative account of the different types of local money that are in circulation across the world from Germany's hugely successful Chiemgauer to the currency issued by Banco Palmas in Brazil and Rotterdam's Nu-Spaarpas.  It explains how the design and democratic control of local money can help to reverse the tendency of central bank money to favour elites and starve small businesses.

From a green perspective, the building of s sustainable society requires a transition towards a system of self-reliant local economies, where the majority of our needs are met from genuinely local production. Green economists see the lengthy supply chains of the global economy as wasteful of energy, as well as leaving us vulnerable in the face of rising fuel prices and more unpredictable weather resulting from climate change. Rather than increasing growth for the sake of it, local currencies can shift economic activity out of the globalised economy and into the local economies on which we will all come to rely.

The rapidly growing body of evidence about local currencies indicates that their popularity is counter-cyclical, that is to say that they flourish in times of liquidity crisis, when there is not enough conventional money to support necessary economic activity, and shrink again when the capitalist crisis passes and the economy revives. This is true of the non-circulating currencies such as LETS and time-banks but particularly notable in the case of the scrip currencies that supported local economies in the US Midwest during the Great Depression and more recently during Japan’s lost decade. In a globalised economy local authorities often feel powerless to act to support the economies which support their citizenry, but they are not. Local authorities across the world have the power to support local currencies and enable them to underpin struggling local economies of both production and distribution.

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Renew Calls for Citizens' Audit

For a while now I have been blogging about the importance of a Citizens' Audit. The role of such an audit would be to settle the issue of how we acquired the debts that have left us so vulnerable that the Director of the government's Office for Budget Responsibility has apparently recent claimed that 'Britain is Bust'. At least as important, however, is to question how is the financial crisis and recession redistributing wealth?

The Bank of England  has recently addressed this question in a report on the distributional consequences of their policy of quantitative easing. This policy is often referred to as 'printing money', but in fact it is anything but. Printed money would have to be spent on real output, and hence would inevitably provide some stimulus to the real economy. QE, by contrast, has consisted of the creating of credit in the government's account at the Bank of England, with which it has bought government gilts, or IOUs.

This has fed money into the financial economy and resulted in a boost for financial institutions and traded stocks. As the bank concludes: 'By pushing up a range of asset prices, asset purchases have boosted the value of households’ financial wealth held outside pension funds'. This is illustrated in the figure, where you can see clearly the fall in the value of stocks as a result of the credit crunch in 2008, which is reversed as the policy of quantitative easing starts to take effect from March 2009 onwards.

Had we not bought our own debt presumably we would look even more bust than Robert Chote thinks we do already. Hence the QE policy has reduced the cost of national borrowing, keeping the rates of interest charged by our foreign creditors low. The Bank has also kept its own base rate at a historic low of 0.5%, reducing the earnings of those who live from savings, especially the elderly.

What has most incensed the citizens of the UK is that the financiers who caused the financial crisis that has bankrupted the country as still profiting, whereas those who work or have saved are losing the value of their assets and their incomes. The Bank concedes this accepting that 'holdings are heavily skewed with the top 5% of households holding 40% of these assets', i.e. the assets that have increased in value as a result of QE.

These matters are the result of political and policy decisions and yet these decisions are not the subject of political debate. Instead of buying gilts, money could be created by government and used to fund green infrastructure, insulating the homes of the pensioners whose income is now so reduced that they cannot afford to pay their fuel bills, perhaps. The calls for a Citizens' Audit are precisely to enable us to have the information necessary to make these decisions as we should do in a democracy - together and in service of the interests of the majority rather than the wealthy minority.
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Green Queasing Gathers Support

Last year Colin Hines and Richard Murphy of Finance for a Future called for money to be into businesses helping us make the transition to a sustainable economy, a call which has been by Green MP Caroline Lucas and repeatedly on this blog. If we are to create money it needs to generate truly effective demand, not just disappear into banking black holes.

A recent post to Power Switch, the UK's peak oil discussion forum details how such a scheme might work. Meantime, more rhetorical support was offered by Tim Jackson during his presentation to the Schumacher centenary festivities in Bristol earlier in the month.

Meanwhile a useful piece of research commissioned by WWF indicates another important direction that manufactured money should be directed: towards transforming our energy grid towards sustainability. The report's encouraging conclusion is that:

'This report makes it clear that decarbonising the UK power sector by 2030 in an environmentally sustainable way that avoids reliance on risky nuclear technology and high levels of unabated gas is achievable without compromising the security of the UK’s electricity system.'
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How Much Money Has the Fed Printed?

As we suffer under the cosh of the Tories' austerity, many are casting envious eyes across the Atlantic and asking whether our government could, like the US government, create money to help our economy out of the many and mutually reinforcing problems we are now facing. The answer seems to be 'no' and 'yes'.

The scale of US government money creation is staggering: according to an article published in the Post-Autistic Economics Review it amounted to $2 trillion dollars in 2009-10, with another £1 trillion coming this year. This represents approximately twice the economic value of the total annual activity in the UK over those three years. This money is being given to US financial institutions in the hope that they will lend it and thus stimulate economic activity. But as in the UK, the bankers are keeping that money to themselves, holding it as capital or paying it out in bonuses. The public is seeing no benefit from this massive money creation.

Meanwhile, internationally, the creation of dollars on such a vast scale is destabilising the whole financial system, leading to the understandable raising of currency barriers by the BRIC economies, particularly China, and the creation of a new grouping that is rejecting the continued role of the dollar as the major trading and exchange currency. China has now negotiated currency-swap agreements with Russia, India, Turkey and Nigeria. As Hudson explains:

'These problems are topped by the international repercussions that Mr. Dudley [Chairman of the New York Federal Reserve] referred to as the “limits to balance-of-payments expansion.” Cheap electronic U.S. “keyboard credit” is going abroad as banks try to earn their way out of debt by financing arbitrage gambles, glutting currency markets while depreciating the U.S. dollar. So the upshot of the Fed trying save the banks from negative equity is to flood the global economy with a glut of U.S. dollar credit, destabilizing the global financial system.'

So, to answer my initial question: could the UK follow a similar policy of quantitative easing? On the scale of the US money binge, the answer must be no, since the pound does not have the same international credibility. In addition, the policy is diplomatically unacceptable, since it is clearly unilateralist and destabilising. However, the actions of the US government do prove two things: austerity is a choice not an inevitable; and governments can and do produce money and spend it dirctly into the economy.

A policy of creating money targeting at specific sectors to stimulate the creation of jobs in pro-green areas of the economy could be exactly what we need in the UK just now. Such a programme was detailed in the Green Quantitative Easing report from Richard Murphy and Colin Hines. This would smooth our path to a lower-carbon, lower-growth future and is a strategic and forward-sighted policy to contrast with the ideological short-termism of the coalition.
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Easing Eurozone pressures

Richard Douthwaite, of the Dublin-based think-tank FEASTA, has produced a useful paper offering solutions to the Eurozone crisis from an Irish perspective. The solution, which he terms 'deficit easing', is similar to that proposed by the more radical proponents of the Green New Deal, i.e. that money is created by governments to be invested in the transition to a low-carbon economy. This will support economies otherwise facing depression, while making our basic support systems resilient to climate-related weather shocks.

Since, as shown in the graphic, all the countries of the Eurozone are in debt, and therefore engaging in austerity measures, any policy designed to grow or trade our way out of the economic decline cannot be effective. The second graphic shows how all the debt, both public and private, is interconnected. So a collective solution is the only hope of success.

Richard's paper has the clarity and conviction that would be expected from one of the world's leading alternative economists. I would be inclined to add two small additional points. The first is the political point made by Robert Peston, who fished around in a lengthy and probably extremely tedious report from the Bank of England to find the nugget of data: in 2009 public support for the banking sector amounted to £100bn. This is more than half the so-called 'structural deficit' and indicates the cost to all of us of not finding a structural solution to the banking crisis.

Second, Richard's paper surprisingly makes no references to the link between financial expansion and resource exploitation. He has argued this elsewhere and would I'm sure be in agreement but it is important that all radical economists keep this planetary perspective in mind - and continue to draw attention to it - when proposing our monetary solutions.
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Who do we owe the national debt to?

On this day when we finally hear the details about the cuts that we have been bullied and battered with for the past six months, it might be helpful to have a bit of a recap about what the alternatives are for dealing with the huge debt that we are left with after the banking bailout.

Many commentators have pointed out that there are two sides to the public balance-sheet and that the focus on cutting the spending side, rather than raising more revenue through increased taxes, especially on the corporate sector which has done so well from our largesse, is an entirely political decision. Another approach which is available even within the existing capitalist structure could involve managing the economy into a smaller and more equal form, thus achieving the sorts of social side-benefits that are identified in The Spirit Level.

But on this morning, of all mornings, let us look beyong the political rhetoric and think about the hard finance of the situation. That takes us to the question many outside the media bubble are asking: who do we owe this money to? And in a world where nearly every government is facing a similar problem of massive debt, could we not all come to some agreement to forgive each other and start again? In following up on the accuracy of a statement by George Osborne that the interest we are paying on the debt is going to foreign governments, my friend and colleague Barbara Panvel has done the bit of research necessary to answer the question about who the money is actually owed to, and the answer raises a whole series of new questions.

The figures, from the website of the government Debt Management Office, indicate that much of the money we are paying on our national debt borrowings is not going to foreign governments, as George Osborne gave as a justification for the need to urgently cut the size of the debt, but rather to our own good selves in various guises. So the cuts programme is really an example of robbing Peter to pay Paul. The data shown in the graphic indicate that only 29 per cent of the gilts currently in circulation are held by overseas investors, with slightly more (30%) being held by UK insurance companies and pension funds. The figures also indicate that nearly a quarter of our own national debt currently belongs to the Bank of England, which I assume is the result of the quantitative easing policy.

So who would lose out if we acknowledged that repayment of a debt on this scale is inconsistent with living in a civilised society, and began a policy of negotiating with creditors that they would not see the whole of their lending repaid? For those who have investments in pension funds, they will see their pensions reduced while their services are protected, so it will be a trade-off, but one that is fairer because those with larger savings will lose more, in contrast to the spending cuts that hit the poorest hardest. The overseas and other financial institutions would also lose out but this could be seen as compensation for the massive investment bubble they benefited from, and gained from, and which caused the banking and credit crisis that landed us all in this mess.

So there are a range of alternatives, with different degrees of challenge to the existing economic system, that are available to the UK government. To suggest that destroying the remaining vestiges of solidarity in our society is the only option is the big lie for our times. Tweet

More on Money

As the bank results roll in, and the bonuses roll out, it is good to have a reminder of where this money came from. This letter to the FT from an economics professor at Strathclyde makes the point that the money queased into the economy might have achieved its aim if it had been spent directly into the real economy, rather than sent via the banks, who merely absorbed it into their profits. He does not make the additional point that it could have funded the Green New Deal type proposals we desperately need to build our low-carbon infrastructure. Tweet

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

A Tale of Two Sectors

I am posting from distant Brno, which is a civilised country where you can travel miles on a tram for fifty pence and people still stop work to lunch together while resting and talking. So the gloom that surrounded the latest ´growth figures´ for the UK economy seemed less important than usual.

What are these guys measuring? You begin to think that they have been convinced by their own fantasy. The reason economists did not predict the continuation of the Recession may be that they genuinely believe that what is happening in the City has some relevance to the British economy. The confusion between counting artifically inflated monetary values and accounting for real economic activity seems to have impaired the ability of the statisticians to assess what is really happening.

The capacity of the private sector to "create wealth" has always been related to its ability to find various methods for creating money. The latest is to lean on the government to use money that has been queased into existence from nowhere to buy various bits of corporate debt, thus flooding the stock market with cash. Presumably this is some desperate stratagem to prevent the yachted classes from quitting the country.

According to the economistic mythology, those of us who work in the public sector do not create wealth. Education and health are not wealth, they are mere by-products and as nothing compared to a healthy balance-sheet. It may be this sort of prejudice that is stopping the government from using the money it is creating to invest in the future of our country by building up the public sector. This would be the normal policy in a time of Recession when private sector incomes are squeezed and public sector incomes make up what they lost during the boom times. This is illustrated in the graphic taken from an IFS paper by Richard Disney that looked at the public-private sector wage gap in the 1990s.

But this Recession is rewriting the rulebook. Private-sector managers are insisting that their bonuses continue, and these growing returns are being funded at the public expense. On the one hand we are being forced to forego the public investment we need to build a low-carbon infrastructure and improve health and education; on the other, we will be required to pay more in taxes to repay the debt incurred to keep the structure of inequality.

Perhaps most serious of all, the private-sector managers who have been injected wholesale into the public sector have brought their old ways with them. So they are responding to the recession by forcing cutbacks before they become necessary. This may partly explain the appalling recent figures, although most of these cuts are yet to bite. So we can expect to managerialised into an even deeper and longer recession ones the plans laid in the public sector this autumn come to fruition in the new year. Tweet

True Blue Never Fails

At last the Tories have come out of their policy closet and given some detail on what they actually plan to do after the next election. And we see that they are the same old party. Their response to a recession is to cut public spending and pick on the vulnerable. Cuts in the health budget and tax breaks for business: business as usual for the true blues.

The slogan for the first day of 'business' was peculiarly misplaced: getting Britain working. It is hard to see how forcing the sick and disabled from one form of social security benefit to another is going to create the millions of jobs that our economy is short of, according to the conventional economic paradigm, based as it is on wage slavery. Any attempt to resort to the traditional pasttime of threatening the marginal with starvation is more likely to get Britain robbing.

Why is it that those on the right are so desperate to force others into unpleasant, poorly paid jobs, that generate little of value and a great deal of carbon dioxide emissions? Could it be that they detest their own jobs and feel others should suffer alike? Light greens are much more likely to offer to share some of their work through reducing work hours, or their income through a citizens' income scheme. Darker greens would argue for freeing access to resources - especially land - so that people can provide for their own needs outside the market system.

And what of the Tories' promise to be the 'new green'? This fake and shallow veneer has rapidly peeled away. 'The environment' will barely feature at this week's conference as the planet's fair-weather friends revert to type and blow on the dog-whistle of oppressive Victorian policies that works so well within their electoral niche.

As Colin Hines argued back in the spring, within the conventional paradigm the obvious answer to the two-sided crisis of environment and economy is to send the quantitative easing money in the direction of real green jobs, with real green consequences: retrofitting Britains' tragically leaky housing stock would be a good place to start.

It's hard to know whether the reason this will not happen is that Boy George can't work out the economics - or whether he just can't resist his in-built propensity to beat up on the working people of this country. Or perhaps I should say the people who would be working if the money that might have enabled this had not all been spent on those who live from rents rather than wages. Tweet

Money system of last resort

In a system that relies on debt to create money, as capitalist money systems do, there is always a temptation for individual banks to take imprudent risks and be unable to repay their creditors. Because greed tempts bankers to destabilise their own business, and a run on the bank leading to bank collapse would undermine faith in the whole system, capitalist economies have a 'lender of last resort'.

The lender of last resort in the UK economy is the Bank of England. When banks hit sticky times they turn to the Old Lady for a shot in the arm, and she must oblige. This is exactly what happened last year, when banks had massively over-borrowed, they were loaned vast sums by the Bank.

You may be left asking where this money came from: who were the creditors? The answer is that, because there was no one left to lend money, the government itself acted as what we might think of as the 'borrower of last resort'.* When all else fails, a government can decide to create money by political fiat - the quantitative easing policy. And who do they borrow money from? The answer, I'm afraid, is you and me - and we are now being asked to pay this back through spending cuts, higher taxes and more work.

Leaving aside the question of whether the UK is really capable of paying back this level of debt without unacceptable suffering and civil unrest, let us consider for a while longer the concept of a borrower of last resort. When demand in the economy is so low that we are in a self-reinforcing downward spiral, as we are now, a capitalist economy requires the government to step in and borrow, just as it would expect the central bank to step in and lend to banks. So rather than cuts and austerity in the public sector we need to see borrowing and investment.

So far I have only considered the last resort in a financial sense, but what about the ecological crisis we are facing: the ultimate situation of last resort. Surely it is time for the government to act as borrower of last resort and produce a massive spending package to create the infrastructure and home renovation projects we need to achieve the carbon reduction targets that are now enshrined in law? Mad as it may seem, if you insist on creating money as debt, that is the only way that we are ever going to be able to buy ourselves a future.

*Thanks to Richard Douthwaite for this useful thought - and so many others. Tweet

Mr. Bean to Explain Quantitative Easing Policy

This is one of those moments - like when Tom Lehrer gave up satire to commemorate the award of the Nobel Peace Prize to Henry Kissinger - when you feel that all comedians should retire because the whole universe has been created by an almighty stand-up comedian. Not so much intelligent designer as cosmic joker.

Yes, the deputy-director of the bank of England is really called Mr. Bean and he really is undertaking a national tour to convince us of the seriousness of the policy of Quantitative Easing. The BBC managed to post an online story about this with every sign of a straight face:

'Mr Bean is in Leeds on the first leg of a tour of the UK, attempting to explain what the Bank calls its "conventional unconventional" measure to counter the recession. Armed with a box of explanatory pamphlets, optimistically entitled Quantitative Easing Explained, he is on a single-handed mission to the world of gilt yields, money velocity and commercial paper to the people.'

Excuse me - I am loving this so much I can't type straight for fits of hysterical laughing.

It is good enough that the bank have admitted that money was always created from thin air, that the whole time they have been creating money as debt - at huge cost to citizens and the planet - it was completely unncessary. That has given me great satisfaction. But that they leave the task of explaining this policy in the hands of Mr Bean is just a delight too far.

Indications are that the public are unconvinced - questioning why the money is not reaching the small businesses it was apparently created for. The explanation is simple: the vast majority of the thin-air money has been used to buy up national and corporate debt and not sent to small businesses that are strapped for ready cash.

According to the BBC, 'Mr Bean hopes to work out if the bank's policy of pumping billions into the economy is beginning to ease the severity of the recession.' It's just as well they only have Mr. Bean on the case. Anybody with a slightly straighter picture of reality would quickly grasp that this was never the intention. Bankers and corporations have seen their share of the cash; businesspeople and taxpayers will just be paying the tab. Tweet

One Day All Money Will be Created this Way

In an earlier post I questioned what might be the limitation on the policy agreement between the Bank of England and the UK Debt Management Agency that one can create money from thin air which is then used to buy UK national debt. For a while I have been calling for a transparent process to reduce the the level of this debt from the unpayable quantities announced in the Budget. I now realise that there is a very murky version of such a policy already in operation.

So what prevents the UK government from eliminating the whole of our national debt in this way, by creating money from thin air, or what Mary Mellor calls 'fresh air money'? The traditional response would have been 'Inflation' - because 'once the economy picks up again' there will be too much money in the system. The created money is buying debt that was generated to pay the debts of the banks. So the fact that the Bank of England is countenancing this suggests that nobody expects the 'assets' that we have bought from those banks to ever be worth anything. They are not a future inflation risk because they are as worthless as we always expected - debt and definitely not assets.

Such a policy of creating money to repay our own debt cannot possibly make the UK less solvent, since it is removing the quantity of debt and thus improving out balance-sheet. So why is Standard & Poors threating to downgrade our credit-worthiness as a nation from three stars to two? Leaving aside the question of how much weight we should attach to the views of these agencies that were quite happy with the banks' utterly worthless assets, why should they be making this announcement now?

It seems that there is a struggle going on at the heart of capitalism and this is a shot across the bows of governments that are reneging on the deal they made with corporate investors and the sovereign wealth funds controlled by national governments - the two groups who buy UK national debt.

How does it affect the corporate bond-holders if much of our national debt is simply eliminated by sleight-of-hand? One would have thought that it would have increased their ability to extract work from the labourers of Britain to pay the interest on their gilts, since they are now competing with fewer holders of gilts for their share of this value.

As for national governments holding sterling as reserves, they may become uneasy (queasy?) about the value of these assets, since the QE buy-back policy suggests an inability to support the levels of debt that have been taken on by the UK government. But again, the reality is that as the level of debt is managed down, the ability of UK plc to make good on what remains is increased.

The real issue is a political one. Money is being created from thin air to enable banks that extracted huge amounts of value during the asset bubble to carry on functioning - to maintain themselves as ongoing concerns that can thus continue to hold these 'assets'. What must really frighten the board of Global Capital Inc. is the thought that we, the revolting peasants of these islands, might demand that money is created in a similar way to pay for schools, hospitals and the others services that are so under-financed.

So the downgrading of national debt is a shot across the bows of a government that has increased investment in the public sector in recent years - the lastest move by the privateers to establish their power over our national economic life following a time when the government was forced to introduce a de facto socialist regime. It reinforces that massive transfer of value to the rich that the bank bailout represents, and reinforces the rules of the capitalist game that those who earn must work for their living, while those who own need not. Creating money directly is a head-on challenge to these rules and this is why it must be undermined. Tweet

Gilty Secrets of the Treasury

For those whose interest in what the hell the government is up to with our monetary policy continues, I offer the Debt and Reserves (as if!) Management Report 2009/10 from the government's Debt Management Agency. I bet that looked like a cushy number when the tender went out.

There are some great data and graphics indicating the horrendous debt situation we are in. The report also informs us that the some of the auctions of government debt have had ‘largeer than average tails’ as a result of ‘volatile gilt market conditions’. A helpful note informs us that ‘the tail is the yield at the lowest accepted price less the yield at the average accepted price’, in other words the debt is getting harder to shift. This is confirmed by the admission that there was an ‘uncovered’ auction on 25th March, i.e. some of the debt remained unsold. (This is illustrated in the second reproduced graphic.)

Here is how the report describes the introduction of quantitative easing:

On 19 January 2009, the Government established the Asset Purchase Facility (APF) to enable the Bank of England to ease credit conditions in corporate debt markets by making purchases of private sector assets. On 5 March 2009, the Monetary Policy Committee of the Bank of England (MPC) announced its decision to use the APF for monetary policy purposes by purchasing £75 billion of assets (the majority of which would be gilts) in the following three months financed by the provision of central bank reserves. The asset purchases are designed to influence the quantity of broad money as a supplement to setting the level of the Base Rate.

In February Mervyn King got the wind up about the buying back of our own debt and wrote to the Chancellor to require that ‘It should not alter its issuance strategy as a result of the transactions undertaken through the Asset Purchase Facility for monetary policy purposes.’ The Chancellor maintained that the objectives of monetary policy had remained the same, and that these remained ‘to minimise, over the long-term, the costs of meeting the Government’s financing needs, taking into account risk, whilst ensuring that debt management policy is consistent with the aims of monetary policy’.

I'm afraid I can only bear so much of this deliberately obfuscatory prose. It does nothing to change my view that we need to have an up-front and just negotiation about how the debt is removed from the economy, together with a revision to the money-creation system that makes a similar bust impossible in future.

Yesterday, the Treasury Select Committee criticised the Treasury for focusing the money created through the QE policy on managing the monetary aspect of the problem, rather than supporting the real economy, which was the justification for the policy and the reason the Bank of England agreed to it. So far of the money created £2.8bn. has been spent on corporate debts, compared with £51bn. used to buy up government debt. Tweet

Would you buy a used economy . . .?

I am faintly tempted to make some sort of connection between the budget and the scrappage scheme, which might get as far as a joke if it weren't such a desperately serious business. The blogosphere is full of confident experts selling their opinions but I feel fairly comfortable letting on that I don't really know what it feels like when your economy goes bust. Perhaps we should be looking across the Irish Sea to get a few hints.

As usual the main budget stories have been apolitical and have avoided the most important issue, but tucked away inside the Guardian we find an article that tells us what the financial markets made of it. They weren't impressed. The result was an increase in the cost of insuring UK debt, which is now considered riskier than that of Spain and almost twice as risky as that of Unilever or France.

On the one hand you might be tempted to laugh this off, given that the risk is measured in terms of the very credit-default swaps that got the global economy into this mess and by the people who considered Lehman Brothers in good health the weekend before it went bust. On the other, as in all matters of economic confidence, it is a self-fulfilling prophecy, since as our IOUs become riskier they become more expensive to sell. So we have to work harder to pay off the debt that was taken on in our name, and a default is more likely.

Meanwhile, reading between the news, we find that the 'quantitative easing' programme, where the government invents money and uses it to buy the national debt, is expanding to twice the originally planned level. So it is only the sleight-of-hand process of removing some of the unwanted debt that is keeping the price as high as it is. The interesting question for puzzled economy-watchers is how long this bizarre stealing from Peter to pay Paul can carry on? And who will take the decision to call a halt to the game? Answers on a postcard, or in a comment. Tweet

Who Pays the Piper?

The public debate has moved seamlessly from outrage at the handing of vast sums of debt-based money to reckless financial institutions to wise words about the need to tighten our belts, pay more taxes and cut the public sector.

Even from a conventional economics perspective reducing government spending into the real economy in a Depression is a disaster. It is the normal pattern in recessionary times for the public sector to increase relative to the private sector; the fact that the government has already sent unimaginable sums in the direction of bankrupt banks does not alter this fact. The bailout was referred to as 'Keynsian' but in reality was nothing of the sort. Keynesian policies involve investment in public goods, not private losses.

Let's just consider again the size of the sums involved. The cost of the bailouts plus potential liabilities is around £617bn. This is the same amount of money as the whole of public spending last year. There is absolutely no way it can be recouped from tax increases or spending cuts. The arguments for them are rhetorical and political rather than prudent.

If we add together the size of the public debt and the cost of the bailouts we arrive at a figure of £1,527bn. The British GDP is only £1,473bn. RBS’s liabilities are £1,800bn. so if we add that to the public debt it rises to £3,327bn. which is more than double the size of our GDP. The only way out of this mess is to negotiate our way out of these debts on an international basis. Attempting to pay them back will lead to a decade of Depression and several lifetimes of wage slavery.

What can we do about these misguided and unjust policies? For those who can get there, demonstrations in London around the time of the G20 should be fun and should help to vent some frustration. More important is to refuse to go down the road of the inevitability of public spending cuts: challenge every person who argues the case to you. There simply is no reason why an asset bubble and a transfer of value to the rich should mean that the rest of us have to suffer a savage cut in the standard of our public services. Tweet

Something for Nothing

Yesterday was QE day: the day that the government and the Bank of England proved the justice of the argument for which monetary reformers have been pilloried for decades. It is possible simply to create money as credit when the economy needs it. There is no need to create it as debt whether public (enforcing citizens to work to pay it back) or private (ensuring an automatic transfer of economic value to the banks and the rich who profit from them).

I spent the day in Merthyr Tydfil - the day that was also the 25th anniversary of the Miners' Strike. That strike, and the economic devastation that followed the politically motivated closure of the South Wales coalfield, led to massive levels of indebtedness and I was attending a conference of good people who run credit unions trying to help the victims of Thatcherite capitalism manage their paltry incomes with the help of credit unions.

The £75 billion that was generated yesterday could have been used to wipe out all the debts in the South Wales Valleys - some sort of political amnesty for the local people's refusal to sign up to free-market capitalism. Instead it was used to buy up worthless assets that have been generated by a corrupt financial system.

When the asset bubble was being inflated, the banksters and their mates could price an asset at whatever they could persuade somebody to pay for it. So long as they could sell it on, it was possible to then translate this artificial value into real value, by buying land or gold, for example. Once the bubble bursts these assets have no value and those left holding them are bound to lose out massively. The government is using its ability to produce money to prevent this from happening.

Rich people's debt is repaid by government; poor people's debt remains with them, forcing them into lives of grinding despair. Sending the money to banks is a hopeless strategy in terms of reviving the economy, since it will be sucked into the black-debt hole that has swallowed up all the rest of our money thrown at the problem.

But ideologically it is crucially important that this money isn't given to citizens or spent on the health service. If it were the capitalist mantra that you cannot have something for nothing would be seen to be false. Of course this mantra has only ever applied to poor people and working people. If you are a member of the Bullingdon Club working out smart ways to conceal the fact that you live from something for nothing is your congenital life strategy. Tweet