COVID-19 bulletin 6: UK government announces monetary financing/QE to fund the immediate cost of fighting coronavirus
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.
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.
We don’t think enough about local government, one of whose jobs it is to mend potholes. When in our own lives our nearside front tyre is shredded, the pothole, Parris believes, represents “a momentary twitching-back of one tiny corner of a great curtain, behind which lie, no, not potholes, but a million anxious human stories, caused in part by cuts in public spending”.
He adds that accidents due to potholes are usually relatively trivial compared with cuts which for others may have meant:
- the loss of social care in dementia,
- no Sure Start centre for a child,
- the closure of a small local hospital
- or the end of a vital local bus service.
Potholes are a parable for others that matter even more. Unfilled potholes put lives at risk and have become a symbol of the damage done to every walk of life by spending cuts.
All the pressures on those who run government, local and central, are to worry about the short-term. it is usually possible to leave issues like road maintenance, decaying school buildings, rotting prisons, social care for the elderly, Britain’s military preparedness or a cash-strapped health service, to tread water for years or even decades. “They’ll get by,” say fiscal hawks, and in the short-term they’re often right.
- Nobody’s likely to invade us;
- the NHS is used to squeezing slightly more out of not enough;
- cutting pre-school provision is hardly the Slaughter of the Innocents;
- the elderly won’t all get dementia at once;
- there’s little public sympathy for prisoners;
- teachers can place a bucket under the hole in the roof
- and road users can dodge potholes.
Parris continues: “But beneath the surface problems build up. The old get older, and more numerous. Potholes start breaking cyclists’ necks. Care homes start going under. The Crown Prosecution Service begins to flounder. We run out of social housing. Prisoners riot. And is there really no link between things like pre-schooling, sports and leisure centres and local outreach work, and the discouragement of knife crime?”
“When New Labour was elected in 1997 we Tories groaned as it tipper-trucked money into the NHS, school building and other public services. Thirteen years later when Labour left office the undersupply was monetary, the red ink all too visible”.
Parris asks: “Must we forever oscillate like this?
One answer: Green & Labour Party leaders would meet these needs and avoid red ink by redirecting the money raised by quantitative easing.
Christine Parkinson has drawn attention to an article in the Guardian, in which MPs Clive Lewis and Caroline Lucas express a profound sense of frustration and dismay about the Conservative victories won by narrow margins in places such as St Ives, Richmond Park and Hastings. They pointed out that if every progressive voter had placed their X tactically, Jeremy Corbyn would now be prime minister with a majority of over 100.
Highlights from their article
The regressive alliance we see forming before our eyes between the Conservatives and the DUP can only be fully countered by a progressive alliance on the opposition benches and if we work together there is nothing progressives can’t achieve. The limits of the old politics are there for everyone to see – the limitlessness of the new we are just starting to explore.
More than 40 electoral alliances, in which people across parties cooperated on tickets including support for proportional representation and the common goal of preventing Conservative candidates winning, were pulled together quickly for the snap election. People from different parties worked together to ‘do politics differently’ and there was a sense that politics has become hopeful and positive again.
We shouldn’t forget the challenges we face:
- markets that are too free,
- a state that can be too remote,
- a democracy that still leaves so many voices unheard
- and change on a scale our people and our planet can’t cope with.
It is going to take a politics that is social, liberal and green to overcome these challenges. No single party or movement has all the answers. We are going to have to learn to cooperate as well as compete to build the society of which we dream. And we are going to have to recognise that the future is not a two-party system but one in which smaller parties grow – both in influence and in their electoral representation.
Colin Hines adds detail: also advocating a progressive alliance of Labour, the Lib Dems, the SNP, Plaid and the Greens he says that they will need to get their ‘policy ducks in a row’ to win it. He continues:“Firstly, these must provide hope, not just for the young, but for every community in the country.
“To do this Jeremy Corbyn must revisit and vigorously shake his people’s QE “money tree”. This could pay for real economic activity on the ground via decentralised infrastructure projects to make the nation’s 30 million buildings energy efficient, ensure a shift to localised renewable energy, and the building of local transport systems.
“Secondly, the divide between young and old must be bridged by policies fostering intergenerational solidarity. Older people with significant saving should be offered “housing bonds”, paying, say, 3% interest to help fund a massive council and affordable homes programme.Tuition fees would be scrapped, but so too must be the threat of having to lose a home to pay for care, or having to scrabble for means-tested benefits such as heating allowances.
“Financed by progressive and fairer wealth and income taxes, and a clampdown on tax dodging, this should have an election-winning appeal to the majority of grandparents, parents and their young relatives”.
In the FT recently, ‘superstar’ economist Adam Posen, US co-chair of the High-Level Japan-US Working Group on Common Economic Challenges, considered that Japanese prime minister Shinzo Abe’s new fiscal stimulus package offers the prospect of a better way forward. Abe aims to increase public spending and lower taxation, giving a positive jolt to economic activity.
Figures presented by the Market Mogul suggest that quantitative easing has been successful in injecting liquidity into the financial sector via central banks, causing ‘an unreasonable euphoria in the financial markets’ but has had, in practice, little or no effect on the real economy due to a lack of buyers and borrowers – a lack of ‘of effective demand’.
Posen reminds us that the first rounds of Abenomics showed the power of spending to increase the availability of public childcare places and cuts to taxes that penalised families’ second earners. This contributed to a substantial rise in women joining the labour force and Posen notes that Mr Abe’s latest stimulus package promises further action on labour market reforms: “The lasting increase in labour supply has enhanced Japan’s long-term fiscal sustainability. We can expect that part of the new package that further promotes participation in the labour force and eases the burden on those caring for family members to have a similarly large pay-off”.
Posen sees another promising aspect of Mr Abe’s package: his proposal to raise the minimum wage and public sector wages for teachers and others. He says that encouraging an upward spiral of wages into prices and back is the best path to nominal GDP growth
Jeremy Corbyn addresses the UK’s ‘broken’ economic model at a leadership election campaign meeting in Dagenham, attended by members of the public, councillors, businesses and the mayor on the 4th of August
An informal shot taken at the meeting
The BBC quoted from his speech which may be heard here: “We need a Labour government that rebuilds and transforms Britain,” Mr Corbyn said, committing to the creation of one million new jobs through investing £500bn in infrastructure, manufacturing and new industries.
He detailed 10 areas which Labour would seek to reform, including promises to create full employment, at least half a million new council homes, a new “National Education Service”, providing universal public childcare, and ending private-sector involvement in the NHS. The money would be raised through an expanding economy and driving down tax evasion.
“A campaign for the entire public to be involved in”
And ended: “This is a preparation for a general election when we can win that general election and produce decency and real opportunity for everyone in our society”.
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.
Vaughan Jones from Dorset writes that he finds the prioritisation of cuts in welfare over the obvious alternative irrational and lacking objectivity:
“As welfare is already tightly controlled, the scope for savings without inflicting harm is severely curtailed. Particular mention is made of the £26,000 annual benefit cap, a sum that most of your readers would struggle to survive on and which any self-respecting banker would consider a derisory bonus. Most of the £26,000 is invariably housing benefit, which goes into the pockets of landlords. It is the nature of welfare benefits that they go straight into the economy.
“Tax avoidance money does not – to anywhere near the same extent. It is well documented that HM Revenue & Customs is a soft touch for multinationals and the über wealthy, while at the same time being heavy handed with small and medium-sized enterprises and ordinary individuals. Tax avoidance by corporations and wealthy individuals is costing the country tens of billions, arguably much more than the £35bn often quoted. At the same time there was reportedly a £38bn taxpayer-funded subsidy last year to Britain’s biggest banks (New Economics Foundation).
“Quantitative easing has boosted asset prices and effectively transferred wealth to the already better off at the expense of the rest of society. Low interest rates have robbed savers but benefited bankers. Farm payments go to millionaire farmers and are not capped like welfare benefits”.
Arun Motianey, Bombay, Princeton, Cambridge educated mathematician and economist, also looks at the elites – a global class – the super-rich in New York having more in common with their counterparts in São Paulo or Mumbai than ever before:
“They work together and they play together. They are the industrialist and investor class with vast reserves of mobile capital. They feed from the same trough, gorging on an outsized portion of the economic surplus.
“Workers in both the developed and emerging world get the leftovers, though the easy availability of credit in the some of the poorer countries has temporarily fostered the illusion among the latter that they are better off. We’ll see how long that lasts.
“But herein lies the opportunity for populists. Unlike the mid and late-19th century, there is no Disraeli or Mazzini around to deftly harness capitalism to nationalism or a Bismarck to buy off the working classes with social benefits. If anything, the opposite is happening. This means the forces of reaction within western societies are greatly weakened. An international working class movement is now ready to be born, if only a leader will be found. And if I am right, this has the potential to strangle the new global capitalism and perhaps a more equitable order will come out of it.”
The Conversation, founded by the following universities: Aberdeen, Birmingham, Bristol, Cardiff, City, Glasgow Caledonian, Liverpool, Open, Salford, Sheffield, Surrey, UCL and Warwick , offers independent expert commentary
The outgoing Bank of England governor Mervyn King has presided over a huge economic crisis. His parting gift is the claim“a recovery is in sight” that the UK might achieve economic growth of even 1% this year. Despite this, the GDP will still be less than the 2007 figure.
“Don’t be in a hurry to pop any champagne corks, because the assumed economic recovery is not what it seems and is unlikely to be sustained. It has been achieved through quantitative easing, printing money as old-fashioned economists used to call it, to the tune of £375 billion. That is equivalent to about £16,000 per household.
Quantitative easing has not been used to restructure the UK economy or start new industries
“This money has been added to national debt – the only thing that citizens seem to own these days – but has not been used to restructure the UK economy or start new industries. Instead, it has been mainly given to the banks and they have used it to bolster their balance sheets and pay high executive salaries. . . Wealth has been sucked upwards with the aid of state policies. Corporation tax rate has been reduced from 52% in 1982 to 21% for 2014. The top marginal rate of income tax has declined from 83%, in 1979, to 45%. Despite the recession, the rich are getting richer. In 2012, the richest 1000 people, representing just 0.003% of the adult population, increased their wealth by £35 billion to £450 billion, enabling them to fund political parties and shape public choices”.
Professor Sikka lists the ways in which the plight of ‘ordinary’ people has been getting worse:
- UK unemployment is rising and the official count now stands at 2.52 million.
- Nearly a million young people aged 16-24 are unemployed, taking the rate to a depressing 21.2%.
- The number of young people on zero hour contracts has doubled from 35,000 in 2008 to 76,000 in 2012. They provide no guarantee of regular work or pay and have become the preferred mode of employment for some 23% of UK employers. Many miss out on rights such as sick pay, pension and paid holidays. Many firms and even charities and public sector organisations are adopting zero hour contracts.
- Thousands have become victims of the payday loans industry which does not shy away from charging interest at the rate of 4000%.
- Some 13.5 million people, including 1.8 million pensioners and 2.5 million children were estimated to be living below the poverty line and with a deep austerity programme these numbers will increase.
- In 1976, wages and salaries paid to employees, expressed as percentage of GDP, stood at 65.1% of GDP. Now it stands at barely 53%.
- The number of people relying on emergency food handouts, simply to survive, has trebled to 350,000.
- People are facing massive hikes in the price of electricity, gas, water, transport and other essentials and simply do not have the financial capacity to take any further hits.
- One survey has suggested that an increase in monthly bills of just £99 will prove to be disastrous for a large number of families.
“Large sections of the UK population are wracked with insecurity. Since the 1980s, the governments have sought to weaken and destroy trade unions and in the absence of countervailing power structures, workers’ pay has been ruthlessly assaulted . . . The plight of ordinary people is made even worse because the above statistics include the rewards lapped up by executives. The rates of corporate profitability are at historically high.
“The above sketch of the social landscape is a million miles away from the rosy picture painted by the Bank of England. Equitable distribution of income and wealth is a key requirement for any sustained economic recovery, but it is not on the agenda of any major political party. Some may be happy to gather the crumbs of economic recovery; but most of us will simply be asking, “what recovery?”
Prem Sikka does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.
The IMF said that austerity theory is based on a faulty monetary system that can and should be changed, but vested interest prefers the status quo . . .
James Bruges 14.3.2013
My bank failed to send statements for three months so, after finals, I visited the manager to ask why. He thought the overdraft might have taken my mind off studies at a critical period. He was a man who understood the needs of his clients and handled money in a way I thought was sensible but must make for a rather boring occupation. I was deeply grateful for his concern.
I can now no longer think about banks without fury. Maybe it’s only the 80 or so directors that should be locked away, but why do their subordinates tolerate these parasites whose driving principle was articulated in the 1987 film, Wall Street: “Greed, for lack of a better word, is good. Greed is right. Greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit”?
Their claim to provide benefit to the nation is clearly a lie if you take into account the recessions and crashes – caused by the banking system – that seriously damage our economy on a regular basis.
And the £375 billion of quantitative easing that, for some inexplicable reason, was money created by the state to benefit banks rather than the productive economy. Also the bailouts and, less widely appreciated, the huge too-big-to-fail subsidies. Fines for their criminal activities, like the Libor scandal, indicate that these banks are also too-big-to-manage and will continue to cause havoc. The biggest scandal and loss to the exchequer, however, is the role the banks continue to play in funnelling money to tax havens.
The five mega-banks are a liability to the country. It would be better if they took their headquarters abroad for another country to bail them out when in trouble (if another country would accept them). It’s only the gullibility of our politicians on both the right and the left that allows their lies to carry any weight.
The pay and bonuses of bankers have sunk the country into obscene levels of inequality. When banks receive money, they invest over 90% in assets like prime property that do nothing for the productive economy. The rich benefit as the value of their assets rises, so 12% of the population now own half the country’s wealth. Might our future resemble Syria? Syria was a peaceful yet divided country under the authoritarian Alawite regime that represented 12% of their country. Then the Arab Spring lit a spark that led to its disintegration.
In Britain, the 12% are exceptionally well housed, have gold-plated pensions, bulging share portfolios, fine art, luxury yachts and shrinking taxes. There is a chasm opening between them and the majority of society who are mostly in debt, suffering reduced welfare and tax benefits, unable to afford a home, increasingly forced to relocate away from their community of friends and travel for hours in order to pick up menial work for the rich. Those in a run-down area lucky enough to own a flat pay eight times as much council tax proportionally as the rich.
A spark will again ignite rioting in the streets — might it escalate to violence on the Syrian scale? We are not immune. Edwardian levels of inequality led to the Great Depression. Austerity measures under chancellor Hindenburg led to Hitler. The drop in household income in Japan between 1929 and 1931 led to a wave of assassinations of government officials and bankers. Social policies after WW2 turned the tables and brought peace, with inequality steadily dropping in Britain until the 1970s. But inequality is now returning to pre-war levels. Be afraid.
How have banks escaped onto a planet of their own? The following little conversation is part of the answer, though it does not explain why society tolerates their pernicious practices.
Imagine a game of Monopoly where John is the bank and Ann wants to buy a house:
Ann The price is £250,000.
John OK. Give me £50,000 as a deposit.
Ann Here you are.
Ann Now lend me £200,000.
Ann Wait a minute, I can see your hand. You don’t have the money!
Ann So how can you give me a loan?
John I’ll show you. I open my computer. I type £200,000. Hey presto. Here’s the money.
Ann You mean you are going to lend me money you don’t have, have never had, which you conjure out of nothing, just figures typed into a computer, and you expect me to treat it as real money?
Ann But …
John Now we come to the part that matters, you start paying me interest on £200,000.
Ann: ! ! !
You may find it hard to believe but that’s how money is created – out of thin air – not for the needs of the country, but for the benefit of banks. It’s so cynical, when I first heard it I could scarcely believe my ears. However, the governor of the Bank of England has confirmed it. Martin Wolf, chief economics commentator of the Financial Times, put it like this in 2010. “The essence of the modern banking system is the creation of money, out of nothing, by private banks’ often foolish lending.”
OK, it’s a bad system, but it’s what we have and to change it would be difficult. Or would it?
I went to a talk given by Michael Kumhof of the International Monetary Fund (IMF). He said the system can and must be changed. Conflict could develop due to 10% in society who are ‘investors’ (those with money to lend at interest) and 90% who are ‘workers’ (who are in debt – many as debt-slaves – to the investors). He outlined three key measures that should be introduced. First, a state body, independent of government, should be charged with increasing or reducing the amount of money in circulation in order to keep inflation at 2%. Second, commercial banking must be separated from investment banking. Third, banks must keep 100% reserves on deposits, which would prevent them from creating money in the way described above. His department’s modelling of the changes indicated that they “would reduce business cycle fluctuations, eliminate bank runs, dramatically reduce both public and private debt, and reduce net inflation to zero.” And, “To summarise, our analysis finds that the government is left with a much lower, in fact negative, net debt burden.” The government would then be able to concentrate on the real issues relating to our future on the planet — global warming, depletion of non-renewable resources and loss of biodiversity –- and banking would become a boring but useful occupation.
Shortly after Kumhof’s talk, I attended a seminar with members from the Bank of England, the London School of Economics, and a number of economics editors and authors. I asked for the panel’s views on the IMF paper, The Chicago Plan Revisited, published three months earlier, and was staggered to be told that none of them had heard of it, let alone read it! What the hell is going on? When the top authority with responsibility for the global economy is saying that the austerity theory sweeping Britain, Europe and the USA is based on a faulty monetary system that can and should be changed, you would expect anyone interested in the national economy to take notice.
There is obviously a conspiracy of silence. The 10% investors intend to retain their privileges at whatever cost to the 90%.
The campaign for monetary reform has set out in detail how the change would take place. A Money Creation Committee would increase or reduce the money supply on a monthly basis to keep inflation at 2%, making sterling the most stable currency in the world. How would it affect you and me? Household debt – yours and mine – stands at a staggering £1,500 billion, equivalent to ten-years’ worth of income tax revenue. It is the nation’s money, which the banks have been allowed to create out of nothing, so it belongs to the nation. Premiums would return to the government, which would use this revenue for welfare, schools and hospitals. Half of it would be distributed as a citizen’s dividend with the requirement that you must first eliminate your remaining debts. Household debt would drop dramatically, austerity measures would no longer be necessary and your mortgage would diminish. Banks would, once again, provide us with a useful service and my fury would evaporate.
The New Economics Foundation has published “Where Does Money Come From?” which is now a university textbook. James Robertson has written “Future Money”. Positive Money has an engaging website with videos and has published “Modernising Money”.
On Wednesday the FT reported that the governor of the Bank of England wanted to inject more money into the economy and that the BoE has so far bought £375bn-worth of ‘gilts’ – gilt-edged securities – mainly held by insurance companies, banks and pension funds.
The Treasury spent many years abruptly dismissing any increase in government issued money as inflationary – sending its juniors to monitor the seminal parliamentary meetings sponsored by MP Austin Mitchell and organised by Sabine McNeill (Forum for Stable Currencies). At one of these the writer sat with a very sceptical young investment banker who afterwards admitted he was won over by a presentation by James Robertson.
QE? Sterling would collapse!
Below can be seen the now-sidelined argument that this would create inflation and sterling would collapse, committed to paper by Anthony Nelson, then Economic Secretary to the Treasury in John Major’s Government, who became Minister of State at the Treasury, Minister for Trade and Industry, before passing through the revolving door to become Vice Chairman of Citigroup.
Earlier this month, the voice of sanity, MP Caroline Lucas, wrote:
This week, the Bank of England is expected to announce a new batch of quantitative easing to the tune of £50bn or more. A new report from the Green New Deal Group and Southampton University economics professor Richard Werner, who coined the term quantitative easing, is calling for such cash to be injected into green investment to support badly needed renewable energy and energy efficiency projects. Rather than handing the money over to the banks, who then sit on it, green QE would put money into the wider economy – creating thousands of new jobs, improving energy security and tackling climate change at the same time.
In other words, as MP Austin Mitchell’s 2008 EDM also advocated, use this money to create real work in the real economy – the unproductive financial institutions can do without it!