Noah Tucker
People’s quantitative easing would see created wealth poured into social housing and infrastructure rather than the coffers of the super-rich, writes NOAH TUCKER
In the closing moments of Thursday’s Sky News debate, the “impassioned” attack by Yvette Cooper on Jeremy Corbyn’s proposal for people’s quantitative easing (PQE) pleased the pundits. But it was Corbyn’s calm rebuttal, in which he called for investment instead of austerity, that won enthusiastic applause and overwhelming positive instant poll ratings.
The audience was right to trust Corbyn rather than Cooper. Her tirade against PQE was replete with fallacies.
Her fundamental assertion against PQE was that the money raised would need to be paid back — and many times over — as implied by her soundbite that PQE is “PFI on steroids.”
But as Richard Murphy, the architect of the policy, points out: “That contradicts the facts. Not a penny of QE money the whole world over, including the £375 billion created by the Bank of England since 2009, has been repaid — nor is there any prospect that it will be.”
I asked Murphy to clarify and he explained: “All money in an economy, as is now accepted, is created by lending. Therefore, when loans are repaid the result is that money is cancelled. Banks in the UK economy traditionally made most money by ever-expanding their loan books. The result was the 2008 crash. QE has, in effect, created the new money which the economy has needed since 2008, as bank lending declined.
“There is nothing magical about QE. The Bank of England lends money to one of its own subsidiaries to create new money, which is used to buy back the government’s own bonds (known as gilts). That has effectively cancelled much of the national debt, and means that all the tales of uncontrollable deficits have been complete nonsense.”
Notably, these gilts bought by the Bank of England are not purchased directly from the Treasury. They are bought second or third-hand in the financial markets, from private-sector institutions which have already purchased the bonds, thus — due to supply and demand — increasing the overall prices of financial assets. The result is obvious: QE has made very rich people, who are the ultimate owners of most financial assets, very much richer.
PQE, in contrast, would not involve purchases in the financial markets but instead would fund construction of social housing, infrastructure and other useful investments.
Nevertheless, the principle by which the money is created would be identical. There are transfers between parts of the state, but there is no outside source from which the money has been borrowed: the state does not owe it to anybody and there is nobody to pay it back to because the state’s own bank (the Bank of England) has made the money for the government’s own use and to its instruction.
Had Cooper not been declaiming in soundbites, she might have said that QE money could eventually be “uncreated” — leaving the state £375bn worse off in current terms. Thus the Bank of England would sell its gilts, and then delete, from its balance sheets, the many billions thus received.
But a decision to do this would be entirely voluntary on the part of the government. And it could only really happen if the state was running a surplus, or something near it, or the right conditions for the sale would not exist. Given that no useful purpose (for any section of society) would be served by such a sale, and the negative consequences that would ensue, the likelihood of this ever happening, as emphasised by Murphy, “is remote in the extreme. No government of any persuasion is ever going to pursue such a policy.”
Berating Corbyn for offering “false promises,” Cooper claimed in Thursday’s debate that “quantitative easing has stopped because the economy is now growing. If you simply keep printing money when an economy is growing it simply increases inflation.”
But QE has not stopped. Since 2012, Britain’s QE programme has been maintained at £375bn, but it remains an active programme. The Bank of England makes a profit from the interest paid on the gilts and so far has earned £50bn, which is remitted back to the government. And each year a proportion of the bonds held by the Bank of England come to maturity, resulting in payouts of around £26bn annually (on average) being received by the bank. Currently, this sum is then injected straight into the financial markets to buy more gilts, keeping the total held by the bank at the overall level of £375bn.
The significance of this for PQE is that expansion of QE above its current level, (although that might be considered desirable) would not be necessary for a considerable sum to be released for public investment. Without any money having to be printed, initial funds of up to £26bn (on average) could be diverted each year from gilt purchases and instead be made available to the National Investment Bank. To put that figure into perspective, to build 100,000 new council homes per year would cost an estimated £14bn annually (without taking into account the reduced housing benefit expenditure).
But could the current QE programme be modestly expanded, thus producing further cash for public investment without causing run away inflation? The $6.5 trillion worth of QE money produced globally has mainly been created alongside economic growth (or per-capita growth in the case of Japan), and without resulting in excessive inflation. Current growth predictions worldwide are having to be reduced following the slowdown in China.
In Britain, the government’s target rate of inflation is 2 per cent on the Consumer Price Index (CPI). Yet despite our trumpeted GDP growth — encompassing asset bubbles, rising consumer debt and falling manufacturing output — CPI inflation is currently at 0.1 per cent per annum. There is plenty of scope for a moderate rise in the level of QE without causing raging inflation.
Coincidentally, on the same day as the Sky News debate, Mario Draghi of the European Central Bank announced that the it will consider a further enlargement of its QE programme. This is above its present expansion which is at the rate of €60bn per month, and is increasing the limit on QE bond purchases from 25 per cent to 33 per cent of the national debt for countries in the eurozone.
This will of course not apply to Britain, because our government decides how much QE takes place here. But for comparison, if Britain were to observe an upper limit for QE of 33 per cent of the national debt, that would allow the “printing” of up to £140bn — vastly more than proponents of PQE are suggesting.
Responding to Cooper, Corbyn asked what her proposal was how to fund the public investments which are so needed. Is it PFI? That was of course the previous New Labour solution which has left public authorities with debts of £220bn and rising. For those who accept the narrative of austerity there is no answer to that question — certainly the private sector and the “free” market offer no solutions.
As Murphy points out, the starting point is to look at what is needed to build the country in a way that benefits the people, addresses social problems and supports growth — building social housing, infrastructure and technical innovation. This will have to be driven by the public sector. The money for it can be derived, depending on the economic situation at the time, from a mix including fairer taxation, issuing bonds and PQE.
The importance of Corbyn is not just that he is discussing what means may be used to achieve it, but that he is pointing to what it is that we must achieve.
