by Summary:
I have repeatedly said that I do not support Jeremy Corbyn's "People's QE". But there seems to be considerable confusion about what exactly I oppose. And that is for one simple reason: the deliberate conflation of government investment spending and QE by the architect of this scheme. PQE is composed of two separate and distinct strands: 1. Government spending to finance investment in infrastructure, innovation, R&D and housing 2. Bank of England purchases of government bonds. Despite the insistence of the scheme's creator that one is impossible without the other, these two strands are actually not interdependent. In fact they are unconnected. As the UK is a member of the EU and a signatory of the Lisbon Treaty, it is not possible for Strand 1 to be directly financed with money from the Bank of England. But there is nothing to stop the government issuing "Corbyn bonds" to the UK private sector for Strand 1, either directly itself or via a National Investment Bank. It would therefore be entirely possible for Strand 1 to proceed on its own, and indeed many people - including me - think that it should.
Topics:
Frances Coppola considers the following as important: Corbyn, fiscal policy, inflation, investment, PQE, QE, sovereign debt, UK
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I have repeatedly said that I do not support Jeremy Corbyn's "People's QE". But there seems to be considerable confusion about what exactly I oppose. And that is for one simple reason: the deliberate conflation of government investment spending and QE by the architect of this scheme. PQE is composed of two separate and distinct strands: 1. Government spending to finance investment in infrastructure, innovation, R&D and housing 2. Bank of England purchases of government bonds. Despite the insistence of the scheme's creator that one is impossible without the other, these two strands are actually not interdependent. In fact they are unconnected. As the UK is a member of the EU and a signatory of the Lisbon Treaty, it is not possible for Strand 1 to be directly financed with money from the Bank of England. But there is nothing to stop the government issuing "Corbyn bonds" to the UK private sector for Strand 1, either directly itself or via a National Investment Bank. It would therefore be entirely possible for Strand 1 to proceed on its own, and indeed many people - including me - think that it should.
Topics:
Frances Coppola considers the following as important: Corbyn, fiscal policy, inflation, investment, PQE, QE, sovereign debt, UK
This could be interesting, too:
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I have repeatedly said that I do not support Jeremy Corbyn's "People's QE". But there seems to be considerable confusion about what exactly I oppose. And that is for one simple reason: the deliberate conflation of government investment spending and QE by the architect of this scheme.
PQE is composed of two separate and distinct strands:
1. Government spending to finance investment in infrastructure, innovation, R&D and housing
2. Bank of England purchases of government bonds.
Despite the insistence of the scheme's creator that one is impossible without the other, these two strands are actually not interdependent. In fact they are unconnected. As the UK is a member of the EU and a signatory of the Lisbon Treaty, it is not possible for Strand 1 to be directly financed with money from the Bank of England. But there is nothing to stop the government issuing "Corbyn bonds" to the UK private sector for Strand 1, either directly itself or via a National Investment Bank. It would therefore be entirely possible for Strand 1 to proceed on its own, and indeed many people - including me - think that it should.
So why do we need Strand 2?
Strand 2 appears to be based upon the following assumptions:
- there would be insufficient demand in the UK private sector for the bonds
- the interest rate that would have to be paid to the private sector for the bonds is too high
- the UK economy will soon need a QE programme
None of these assumptions are warranted.
Firstly, very low market rates tell us that there is plenty of demand in the private sector for UK government bonds. I find it hard to believe that say 2bn of 30-year Corbyn bonds at 3% per annum (just above the current yield on 30-year gilts) would not sell.
Secondly, the cost argument is entirely spurious. Interest paid to the UK private sector is simply new money which will be spent into the economy either now or later. We can regard it as tax credits or a basic income. It is not in any normal sense a "cost" for the government: it should properly be regarded as another form of stimulus, akin to "helicopter money". The interest rate is therefore irrelevant. Personally I would offer bonds directly to small UK-resident savers at above-market interest rates.
Finally, it really isn't possible to forecast either the timing or the depth of UK recessions. We do not know what effect, if any, the problems in China will have on the UK economy, but the Bank of England isn't predicting a downturn at the moment. I have argued that an austerity programme of the scale planned by the Conservative government would be likely to cause a recession: but the Chancellor's plans already envisage fiscal easing towards the end of the parliament, so it may be that the UK would be on its way out of any recession by the time of the election. If so, then waiting for the Bank of England to do QE before increasing investment expenditure would be like waiting for Godot.
The truth is that there is no operational justification for Strand 2 at all. The "QE" part of PQE is wholly unnecessary. It is the investment spending that matters.
Strand 2 would, however, mean that the debt incurred as a result of the new investment spending did not appear on the Government's balance sheet. The way this works is this. The Bank of England is wholly owned by the UK Government. Its balance sheet can therefore be consolidated into the Government balance sheet in the same way as a subsidiary is consolidated into a parent company. Indeed the Whole of Government Accounts do consolidate the Bank of England with the rest of government.
When a subsidiary is consolidated with a parent, debt owed by the parent to the subsidiary or vice versa "disappears". After all, you can't owe a debt to yourself. So the Bank of England's holdings of gilts, which are government debt, simply vanish in the consolidation. As the Bank of England currently holds around 30% of gilts in issue, this has the effect of significantly reducing nominal debt on the Government's balance sheet. However, after consolidation the Bank of England's liabilities, which are base money (currency and bank reserves) remain in full on the Government balance sheet. The effect is therefore that government debt has been converted into money. We call this "debt monetisation".
Central banks around the world have monetised debt in this fashion ever since the financial crisis and in some cases (Japan) for far longer with no impact on inflation. It is therefore unlikely that monetisation of Corbyn bonds would cause inflation. What could cause inflation is the investment spending itself. But as Paddy implied in the now infamous "snake oil" post, a determined central bank with an inflation-targeting mandate would simply raise interest rates to counter any inflationary effect of government spending. It would do so even if compelled to buy the investment bonds. Indeed, it would be answerable to Corbyn's Chancellor if it failed to do so.
Of course, inflation is well below target at the moment, so any inflationary effect from investment spending would be welcome. And the inflation target could be raised to say 4%, allowing more room for investment spending without monetary offset. The possibility of inflation is emphatically not a reason for failing to increase government investment spending.
The author of the scheme says that the purpose of Strand 2 is to enable the Government to increase investment spending substantially without it appearing on the Government's books. Personally I regard this as underhand. I am disappointed that anti-austerity politicians and policy makers are too scared to confront the current hysteria around debt and deficits directly, so are resorting to smoke and mirrors to evade it. I would rather have openness, honesty and transparency. But perhaps more importantly, I don't think this will work as a political message.
The principal drivers of the austerity agenda are older voters, who are terrified that high government debt and deficits will mean the loss of their wealth. But they lived through the last serious inflation in the UK. They are equally terrified that inflation will erode their wealth. Any proposal that fails to take inflation seriously is therefore unlikely to be welcomed.
But in order to justify the "QE" element of his scheme, the author has suggested (comments) that the Bank of England's inflation mandate should be ended and its operational independence eliminated:
So let’s get the rest clear. First, I would have thought it obvious if I did not believe in BoE independence that I did not also believe in the primacy of inflation as an economic target, but maybe I am guilty of not having spelt this out sufficiently: I would do so, and soon.
How this is supposed to encourage people to vote for Corbyn I don't know. The principal reason for the Bank of England's inflation target is the fact that an awful lot of people are very scared of inflation, and the principal reason for its operational independence is the fact that an awful lot of people don't trust government to keep inflation under control.
If the views of voters on government debt are too entrenched to be challenged, then surely the views of voters on inflation are too. This scheme tries to assuage popular fears about high government debt by adopting a technique that is popularly associated with high inflation, while removing the principal obstacle to high inflation. I fail to see how this can be a vote winner.
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Image: "Waiting for Godot" at The Albany, courtesy of exeuntmagazine.com