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COVID-19 bulletin 6: UK government announces monetary financing/QE to fund the immediate cost of fighting coronavirus

Source: https://www.ft.com/content/dc233540-798e-11ea-9840-1b8019d9a987

Eight hours after Andrew Bailey wrote his article, however, an FT editorial announced that the UK has become the first country to embrace the monetary financing of government to fund the immediate cost of fighting coronavirus.

The Bank of England (below) is to finance the state’s spending needs on a temporary basis to prop up the UK’s economies in the face of coronavirus – expanding the size of its own bank account at the central bank, known as the “Ways and Means Facility” – central government’s overdraft facility at the Bank of England – which normally stands at just £370m. This will rise to an effectively unlimited amount, In 2008, a similar move saw the facility rise briefly to £20bn.

Precedents

The FT editorial board reminded readers that in times of emergency, particularly war, central banks have often handed freshly printed banknotes to governments. The fight against any resultant inflation was postponed until after any crisis.

Fear of inflation

They dispelled the objections made for many years by stating that the quantitative easing of the past decade, despite predictions, has not lifted inflation above the main central banks’ 2% target.

There is no clear distinction between quantitative easing and monetary financing, the board insists: they see it as a matter of presentation: whether asset purchases are deemed temporary or permanent.

The board thinks that opinion article this week by Andrew Bailey, the Bank of England governor, may have been intended to convince international investors that there is little reason to fear keeping funds in sterling.

The scale of today’s downturn means that even the most direct monetary financing, such as “helicopter money” or handing cash to the public should remain an option.

Quantitative easing programmes may be here for the long term. The debate should be over keeping the process under control via independent central banks.

 

 

 

 

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‘Green Infrastructural QE’ for ‘jobs in every constituency’: a vote winning commitment

Colin Hines, Convenor of the Green New Deal Group, addresses the Financial Times:

Your editorial was correct to call on the European Central Bank to look at QE, but wrong to say that QE shouldn’t address inequality (‘Farewell to the Fed’s QE3, a monetary job well done’ Financial Times November 1st/2nd).

Opinion is now coalescing around the realisation that rising inequality and the fall in real incomes is threatening future growth through its adverse effect on effective demand within countries.

In terms of the UK, its leading export markets like those of the rest of the Eurozone, are also experiencing slowdowns in effective demand. This points to the need for countries of the EU to concentrate more on their domestic economy, but in a way that benefits all corners of nations as well as the environment. This suggests the need for a new round of QE, which would tackle these problems head on this time.

In the UK this could contribute to funding a carefully-costed, nationwide programme of energy efficiency in the nation’s 28 million homes and 2 million commercial and public buildings. Also crucial, such a QE programme would help to overcome the present annual shortfall of 240,000 new, affordable, sustainably sited, energy-efficient homes.

The previous QE purchased government bonds, and ‘green infrastructural QE’ could buy bonds from a suitably enhanced Green Investment Bank to invest in such a programme.

This is technically feasible since earlier this year your paper reported the Governor of the Bank of England as saying that if the government requested it, the next round of QE could be used to buy assets other than government debt (‘Mark Carney boosts green investment hopes’ Financial Times, March 18th, 2014).

This ‘jobs in every constituency’ approach would create employment, business and investment opportunities in every city, town, village and hamlet in the country, providing a vote winning commitment for all political parties in the run up to the election.