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.


4 responses to “What is People’s Quantitative Easing?

  1. reallyniceguy2014

    Reblogged this on My WordPress blog.

  2. Hi Peter,

    Informative as always, I always enjoy your blog.

    Is it a reasonable interpretation of PQE to suggest that it is just a new name for Deficit Spending on Infrastructure projects (with some en passant job creation), and in many ways perhaps simply a rebranding exercise?

    Not that I’m suggesting there’s anything wrong with that – a discussion of how the economy actually functions instead of the usual neoliberal dogma about deficits and surpluses can only be a good thing.

    But is there more to it that I’m missing?

    • Hi ret56fe,

      Thanks for your comments.

      Yes PQE is another from of deficit spending which may or may not be used for infrastructure projects.

      Normally, when money is moving fairly quickly in the economy, there’s no need for either conventional QE or People’s QE. If the govt needs money it sells bonds and these are bought by banks and other financial institutions and interest is paid out on those bonds. They are sold off at auction so the lower the price the more interest those bonds carry. For example if a ten year £100 bond sells for £70 we can calculate a yearly interest figure of 3.6% This is known as borrowing but it’s just swapping one kind of “printed” govt IOU for another form of “printed” govt IOU. For “printed” read “created by computer or printed”.

      But there are times when Govt doesn’t want to pay any interest. It may be trying to force down long term interest rates so doesn’t want to issue bonds to the market. More bonds means lower prices for those bonds which means higher interest rates. Instead, it can then just instruct the central bank ie the BoE to create £100 in cash and swap that cash for a govt bond.

      This is frowned upon as “printing money” of course. But I always make the point that all money is printed, so the discussion should be about HOW MUCH is printed rather than IF it should be printed.

      • I see the distinction now: PQE would not result in bonds being held by the banking sector (and therefore earning them interest), but directly by the central bank, which is not going to pay interest to itself. I think that wouldn’t be allowed under the bifurcated Treasury / Reserve arrangements that they have in the US, correct?

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