What is People’s Quantitative Easing?

PQE,  sometimes known as Overt Monetary Financing, is the process of creating new money, issued by the central bank in exchange for government bonds. This is then directly spent into the economy to stimulate economic activity. Whereas conventional Quantitative Easing is primarily to provide liquidity to banks and other financial institutions – Some might say it is to give them money which can create asset price bubbles, and other price distortions! – PQE is much simpler and free of many complications.  PQE  can be part of powerful fiscal policy to remedy the  problems of recession and depression.

Mention PQE, however, a term coined I believe by Richard Murphy, and it won’t be long before Zimbabwe and the Weimar Republic will be used as examples of why it’s not a good idea! That’s OTT, but nevertheless the objection of possible inflation needs to be addressed.

PQE could possibly cause inflation. All government spending, as with all spending, deficit or otherwise, carries an inflationary potential .

Deficit spending is necessary to keep the economy functioning when users of the currency wish to save some of it. Those who doubt that might just like to consider the very simple economy of a baby sitting circle. If everyone in the circle readily spent a token and received a night’s baby sitting in equal measure to their willingness to do a night’s baby sitting to receive a token, there’d be no problem at all. But, say, for whatever reason, some of the sitters decided to accumulate tokens. Fairly quickly there would be a shortage and the system would cease to function. There would be a demand, from those without tokens, that the baby sitting council should issue extra ones. Those with a stockpile of tokens would object, saying the “printing” of new tokens would devalue their existing tokens.

If the hoarders lent the tokens back to the council they could be pacified with some reward. Just as lenders of pounds to the government are pacified with a reward of extra pounds. But if the hoarders of the tokens saved them in a piggy bank and refused to lend them back, all the council could do would be to create new tokens and inject them into the system. This would be the equivalent of PQE.

Is one method more or less inflationary than the other? There’s not much in it. Arguably PQE would be less inflationary because there are no extra rewards needed. If the issuing of new tokens, by either method, was just enough to restart the system, not too much and not too little, then neither method would be inflationary.

So who are the hoarders in the real economy? The central banks of the big exporters are the biggest. The big exporters don’t want to spend all they earn by selling goods and services into the British economy. So they buy Government bonds and so effectively lend back their surplus tokens, or ££. The wealthy are the other main ‘culprits’. They tend to accumulate more ££ than they need.

But what if not everyone recycled their extra tokens back through the banking system? Suppose they kept hoards of cash in safes or bank deposit boxes? The government can’t borrow those back. All it can do is create some new tokens. PQE in other words.

The government can’t know just how fast money is moving or if lots of it is being stored this way. What it can expect is the combination of low interest rates and low inflation will make it more attractive for many users of currency who may be engaging in illegal, or borderline, transactions and so wish to hide their finances, will  to store their cash this way.  However, Government can easily monitor inflation. If it is engaging in PQE and inflation starts to be a problem it needs to back off. Alternatively if it’s not a problem it can do a bit more. The government needs to be careful, but shouldn’t be so scared of the idea that it doesn’t even try it out.

Corbynomics or Leslienomics?

The leadership debate in the British Labour Party seems finally to have swung around to a discussion on economic theory. The Labour Shadow chancellor Chris Leslie has recently weighed into the discussion with a claim that:

Jeremy Corbyn’s anti-austerity agenda will harm the poor

Really? What planet is Chris Leslie living on? Back on Earth the empirical evidence from around the place is that harm to the poor occurs from the application  of austerity economics rather than sensible economics.

The Labour right’s economic mumbo jumbo means that they are forcing Labour Party members who may not be of the left themselves to ally themselves with the  left. Many may not want to leave NATO, or want to nationalise all the leading industrial companies, or want to live in a society which is over-controlled by government. The do, though, want sensible macro-economic polices and they, albeit in slightly imperfect form,  aren’t on offer from anyone except the left.

The Labour Right needs to get a grip.

They could start by looking at the nature of deficit spending by government. This is one way of getting more money into the economy. Generally to reflate it. Taxation is one way of removing money. This has a deflationary effect. But, they aren’t the only ways. There is export inward spending by overseas customers which is reflationary. And, spending on imports by home consumers which removes money from the economy and so is deflationary. Then there is saving which is deflationary and de-saving, or private  borrowing, which is reflationary. Too much deflation leads to recession. Too much reflation leads to inflation.

We have to consider all money flows. Germany, being a net exporter, has inward money flows from trade and so a balanced or even a surplus budget is required over the trade cycle. The UK is a net importer so requires a deficit -on average over the trade cycle.

So, if the Labour Right wish to reduce the government’s budget deficit, they need to understand what they are doing and understand the nature of those money flows. They need to understand the need to move trade into balance too -probably with the help of a significant £ devaluation. Otherwise they will just end up incompetently crashing the economy and having 20% plus unemployment.

German euros and Greek euros. Are they really the same?

Just like the US dollar, the euro is a single currency which is shared by 19 countries of the European Union.

That’s the official fiction. If the powers-that-be in the EU had really wanted it that way they could have had it that way. They would have needed only one central bank. There would have been one design for each of the various banknotes and one design for each type of coin.

Instead there are multiple country based designs for both notes and coins.  Notes carry a serial number including a country code. There is one national central bank (NCB) per country plus we have the European Central Bank (ECB) .  Whereas most currencies can be considered to be a two layer structure, the euro has a three layer structure. It can be best understood as a collection of tightly pegged but slightly different euros. The Bank of Greece (their central bank) can still print and create euros which they normally do with the approval of the ECB. That approval has been recently withdrawn. So what happens if they create euros without the ECB’s approval? The ECB can only refuse to guarantee them on a par with other euros so instantly the Greek euro would float.

All Greek banks whether domestically owned, or foreign owned, rely on the BoG for their liquidity. So the closure of the Greek banks, including all foreign owned ones, has nothing to do with their financial viability, but everything to do with the inability of the BoG to provide the euros they need to function.

If the euro were a truly single currency the ECB would not be able to isolate Greek banks and their account holders in the way they have. The banks could open tomorrow if the BoG started to create euros again. And indeed they should, preferably with the support of the ECB. The ECB has a duty to all Greek euro holders just as the US Fed has an obligation to all holders of US$. It would be inconceivable that any political dispute between the Federal government and , say , the city of Chicago would result in the residents of that city being denied full access to their bank accounts.

If the BoG issued euros without ECB approval then we’d have a new currency. The Greek euro. Just what would be the status of all previously issued euros, both digitally and physically created would depend on the willingness of the ECB to guarantee them. It would be legally messy but it is a quick solution to get that new currency.

In the EZ, bank depositors, except of course in Greece at the time of writing,  can costlessly shift euro deposits from one bank to another anywhere in the zone. Any depositor of an Irish bank, say,  can move their money to a German bank. This requires the Central Bank of Ireland  to obtain reserves that get credited to the Bundesbank, the central bank of Germany. If deposits tend to flow from the poorer nations,  to Germany in particular, their central banks go ever more deeply into debt to the ECB to obtain reserves that accumulate in the account of the Bundesbank.

As recent events in Greece show, it makes no sense at all for anyone to hold any amount of money in the peripheral banks. The sensible thing is to shift it to a German bank for safe keeping. This is not doing the Germans any favours. It is simply the best way of forcing those most in favour of the euro to accept full liability for euros held by all Europeans. So logically nearly all  euros should end up being German euros anyway!

Is this yet another fundamental flaw in the architecture of the eurozone? The ECB has to guarantee the liabilities of the peripheral NCBs to hold the system together but what if  any country defaults? They will be rid of their National debt at a stroke and can then start afresh with a new currency. The ECB ends up with the bill, which means the rest of the eurozone. Ultimately if everyone else defaults it is Germany, or the last country left in the system, which has to pick up the tab for everyone else.

The Germans should be extremely worried at the prospect of Greece defaulting to be followed by whoever may be next, then whoever is next after that. At the first sign of any repetition of the Greek experience,  savers in the less safe regions of the EZ will, if they are sensible, shift the bulk of their savings out of their local bank and into German euros. They should make plans for doing that now, while there is still  time.

Germany vs Greece. The end game?

It looks like it’s crunch time. Either there will be some last minute cobbled together agreement to prolong the agony, or Greece will be forced to leave the Eurozone. Most neo-liberals take the simplistic view that Greece borrowed the money and has an obligation to repay come what may.

When bankers issue loans they have to be sensible and only issue loans to creditworthy customers. If the customer cannot repay the days when they were placed in a debtors prison are long gone. In any case we should not look at macroeconomic problems in microeconomic  terms. Germany has a net annual surplus of over €200 billion which, by definition, it is not re-spending. Another few billion euros, extracted under duress from Greece, would make no difference whatever to the living standard of German workers – many of whom are not at all well paid.

It would make much more difference if Germany moved to abolish its trade surplus. That would certainly increase living standards in Germany and also allow Greece and others to trade their way out of their debt problem.

Germany has been foolish in several ways. Foolish to lend the money, but also foolish in not understanding the basics of macroeconomics. Prof. Yanis Varoufakis reports that he’s done his best to explain some basic theory to their supposed brightest and best but the more he tries the more upset they become!

Simply, they don’t understand that there are consequences to running an annual surplus of over €200 billion. Where do the Germans think those euros come from? They cannot print them themselves like they could with the DM. They cannot come from the UK or USA. They pay for German exports in £ and $.

They have to come from other euro using countries which means they don’t have enough euros left to run their economies properly. It’s not just Greece. Albeit to a slightly lesser extent it’s Italy, Spain, France etc too.

Alternatively, they have to be created by the ECB or by the Bundesbank  with ECB approval. So if the ECB can do that for Germany, why not for Greece?

The British left needs to discuss more than the UK’s membership of the EU.

As the EU debate swings into life in the UK we’ve so far heard the most from the business sector who have been most pro in their advocacy of the UK’s continued membership. It is perhaps quite natural that big business would like the EU to remain as it is. Those on the traditional left would say that’s because they want to have a large pool of unemployed workers to keep wages down and maintain worker discipline!

Are they correct in saying that? As things are at the moment it is hard to say they aren’t. It is hard for big business to argue that they only want the EU for its expanded, but much depressed, market.

The modern supposedly progressive left has been seduced by the powers-that-be in the EU into thinking the EU to be a socially progressive organisation too. Recent events in Greece, for example, are shaking that view. That needs  to be shaken  some more. A first step would be to get them to actually discuss the problem. We might well think the election of Syriza in Greece, with its band of ex-Maoists, ex- Trotskyites, ex-Communists would be a topic of interest for them. Not so. They are shell-shocked into silence at the moment. The main Labour websites have nothing at all to say on that.

Anyone believing in a united Europe, as many of our EU advocates clearly do, should feel as passionately about unemployed young people in Spain or poverty in Greece as they do about it in the UK. The progressive left  say they like everything about the current level of EU integration, and like the EU as it is. If they ever remember to make a critical comment, it is not because they wish to change anything or intend to vote against any of its measures.

If the UK today had ultra high levels of youth unemployment as the south of the EU currently suffers,  the progressives would never let anyone hear the end of it. Rightly so. There would be marches  from the most depressed areas to London to demand some action.

If the UK had Greek levels of unemployment, and a Greek cost of living crisis which has depressed average real incomes by almost a quarter since 2007, again we would not hear the end of it, as the ‘progressives’ would rightly think it completely unacceptable. If the unemployment in Greece or Spain had been brought about by a right wing military coup, again there would be uproar. So why is it that these people who believe in pan European solidarity have nothing to say about the scandal of poverty and joblessness in large areas of Euroland? Why are they not insisting on new policies for the EU?

Now’s a good time to be saying something about that in connection with the EU referendum. The British left needs to discuss more than the UK’s membership of the EU. It needs to discuss the EU itself too.

How to win and lose elections. (2)

There’s been a lot of navel gazing in British Labour circles recently about what went wrong last week and what needs to be done to prevent a re-occurrence next time. Presumably in about five years time. The arguments are pretty much along the same lines as the last time that Labour suffered an unexpected election defeat. Naturally, those on the right want to move more to the right. Those on the left want to move more to the left. Those in the middle think a new personality might do the trick.

Who’s right? Let’s just stand back and look at the numbers. According to my calculations the Tories received about 24% support from the electorate in the 7th May 2015 UK elections. Labour about 20% support. That’s including those who didn’t vote. So to win government, next time, Labour need to get at least another 5%. If they are positive, and were prepared to really go for it, they could aim for another 10%. If they achieved that they’d be back big-time.

So what’s the best way to do that? Let’s leave the politics out of it as much as possible and just think in pragmatic terms. Do they try to persuade nearly half, or a quarter if we allow for the same reduction in the Tory vote, of those who voted Tory this time to switch sides? I could be wrong, but I don’t think that’s ever going to work. I know a good few Tories and I can’t think of a single one who would ever vote Labour, even if the Labour Party were offering the most Tory of policies and had a picture of Maggie Thatcher on the front cover of their next manifesto. Of course, if the party did that they would jeopardise their own core vote. That’s never a good idea.

I’d say the same would be true in the USA too. Both the Democrats and Republicans would expect only limited success if either moved towards the other politically. Probably it wouldn’t be enough to make a real difference. It could well be counterproductive and would naturally give more justification to those who were disillusioned with the lack of political choices that were on offer. They’d choose to do other things, rather than becoming involved in the election and would be less likely to make the effort to vote. This argument probably wouldn’t apply to Australia which has compulsory voting – the Aussies are quite unusual in that respect.

Alternatively, Labour could aim for the 56% who didn’t vote for either them or the Tories. This, again, would include those who didn’t vote at all. Labour wouldn’t persuade them all, that’s for sure. But, they’d just need to sway 1 in every 5 and they’d be home and dry.

This is an implied conclusion which, I have to acknowledge, will be more appealing to the left than the right. But, I’d argue it’s the reality too. The left would argue that by being true to their historic principles, and offering a message of hope rather than despair to working people they would have a better chance of winning. They’d argue the need to have a distinctive message which wouldn’t allow anyone on the doorstep to say “but you’re all the same”.

I’d add that the party, as a whole, needs to make a start on the explanation of how the economy really works which is not at all how most people think it works. Once more people have that understanding it will become apparent what the real choices are from both a left and a right perspective.

Muddled Thinking Watch #7: Chuka Umunna on Labour’s pre-GFC Deficit

Chuka makes some valid points in his recent Guradian article:

http://www.theguardian.com/commentisfree/2015/may/09/labours-first-step-to-regaining-power-is-to-recognise-the-mistakes-we-made

For example he acknowledges that:

” First, we spoke to our core voters but not to aspirational, middle-class ones. We talked about the bottom and top of society, about the minimum wage and zero-hour contracts, about mansions and non-doms. But we had too little to say to the majority of people in the middle.”

Partially right. “The majority of people” are in the middle. So, in a democracy, to win elections, you have to not only speak to, but also win support from,  “the majority of people”. There’s no getting away from that.

Whether Labour spoke to its core voters is a matter of opinion. I’d argue they may have spoken to them, but they didn’t listen, which is slightly different.

He also makes some invalid points. He says:

“Of course, the last Labour government should not have been running (an albeit small and historically unremarkable) deficit before the financial crash. “

The last Labour government certainly made more than a few mistakes. George Brown famously  made the ludicrous claim that he’d abolished “boom and bust”.  The period  of the Labour government  (13 years) consisted of mainly years of boom, which enabled it to achieve electoral success,  except the last 2 years were years of bust, or trying to recover from the 2008 bust, which brought about its downfall.

But did they make a mistake about the government’s deficit? The boom was caused by too much credit being created by the private sector. I don’t believe there is any dispute on that point. That credit inflated asset prices, firstly shares in the dotcom boom and then property prices in the years up to 2008.  With the benefit of hindsight what should they have done to prevent that credit bubble? They, or their so-called “independent” Bank of England,  should have increased interest rates.  If there’s too little saving and too much borrowing then interest rates should rise. Is there any dispute on that point? That would have stopped the credit bubble. No problem.

But if they’d done that there would have been a problem of the £ appreciating in value. Exports would have become uncompetitive. That, and the reduction in domestic borrowing, and therefore, spending, would have led to less economic activity. Business failures and unemployment would have risen.

So what else would the Labour Government have had to do to compensate? Run a tighter fiscal policy, with a lower deficit, or a looser fiscal policy with a higher deficit?

If you think you know the answer, please email it, with an extremely simple to understand explanation,  to:

chuka4streatham {at} gmail(.)com

PS  I’ll ask Chuka if he can provide a small cash prize for the best answer. :-)