PQE is sound economics but is not in the QE family

The conservative forces including those ‘Tories’ that are within the British Labour Party (aka New Labourites) continue to gather their forces to counter the growing threat posed by Jeremy Corbyn to their secure world as neo-liberal, Tory-lite hopefuls. They are part of a phalanx of critics, including mainstream economists who seek to diminish his credibility. At the extreme end of this bunch are the evil ones who have accused Corbyn of being antisemitic and a friend to Islamic terrorists. I am reliably informed that the same tactics have been deployed against Bernie Sanders in the US. It tells us that desperation has replaced any sense of decency or reason. It also tells us that the Tory-lites are finally seeing the evidence that their day in the sun has gone and they are being cast into irrelevance. Not before time, I should add. But all is not clear on the Corbyn front either. Today, I want to discuss what appears to be a major economic policy proposal – the so-called People’s Quantitative Easing (or PQE). There are elements of a good idea in this proposal but the QE reference and the resulting language is all wrong, in that it betrays as lack of understanding of the difference between a monetary

policy operation and a fiscal policy intervention. The concept should be re-framed so that a consistent narrative can be provided and that a good policy proposal gains the wings it needs. PQE is a wealth generating policy which is in contradistinction to QE which just shuffles wealth portfolios.

By way of background, please read the blogs:

1. Functional finance and modern monetary theory

2. Keep the helicopters on their pads and just spend

3. Government budgets bear no relation to household budgets

4. The consolidated government – treasury and central bank

5. Quantitative easing 101

6. Why history matters

7. Building bank reserves will not expand credit

8. Building bank reserves is not inflationary

9. The complacent students sit and listen to some of that.

Jeremy Corbyn’s proposal is outlined in his PQE plan in his manifesto – The Economy in 2020.

In a discussion about “rebalancing” the British economy to drive innovation in hi-tech industries with the requisite infrastructure, the ‘Plan” proposes PQE:

One option would be for the Bank of England to be given a new mandate to upgrade our economy to invest in new large scale housing, energy, transport and digital projects:

Quantitative easing for people instead of banks.

The funds would establish a “‘National Investment Bank’ to invest in the new infrastructure we need and in the hi-tech and innovative industries of the future.”

PQE as enunciated is thus quite simple in conception.

The idea that the central bank, which is one part of the consolidated government sector, the other being the Treasury, would use the currency-issuing capacity of the government to facilitate the purchase of real goods and services to build productive infrastructure is sound.

I dealt with the otherwise named Overt Monetary Financing option for governments at length in my current book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale (published May 2015).

This blog also considers the policy option – OMF – paranoia for many but a solution for all

See also ECB should start funding government infrastructure and cash handouts

However, the proposal has been attacked by all and sundry as being “bad economics”, as compromising the so-called “independence of the central bank”, as putting elected officials in charge of monetary policy, as being the path to hyperinflation or for others deflation, and more.

Such a simple idea has invoked an hysterical backlash and it is more than just a dislike/fear of a Jeremy Corbyn victory in the British Labour leadership contest that is driving the negative reaction.

The concept of Overt Monetary Financing is a taboo in mainstream economics. Please read the blogs cited above to learn more.

But if we cut through all the sophistry disguised as ‘economic theory’, which seeks to demonstrate that such a policy would be inflationary at least, the real reason the policy option is taboo is because:

1. It cuts out the private sector bond traders from their dose of corporate welfare which unlike other forms of welfare like sickness and unemployment benefits etc has made the recipients rich in the extreme.

Welfare provision at the bottom of the income and wealth distribution is so partial that those on unemployment benefits in Australia, for example, are not only deprived of a chance at a job by deliberate government policy (failing to increase the fiscal deficit sufficiently), but are then forced to live below the poverty line while jumping through a ‘hoop’ of pernicious compliance obligations.

2. It takes away the ‘debt monkey’ that is used to clobber governments that seek to run larger fiscal deficits.

The language is important. The conservatives (including most economists) know that the public doesn’t understand these concepts but have a visceral response that ‘too much debt’ is bad and that the government will force them to pay for it in the form of higher taxes etc.

That message is continually rammed homeand thus metaphors like the ‘debt mountain’ and ‘debt explosion’ etc are all readily deployed at the political level to discipline government spending (unless, of course, it is benefiting the well-to-do or bailing out banksters).

These conservatives know that if the government just spent (as it can any time it likes given it issues the currency) and didn’t match that spending with any debt issuance or tax revenue increase, then it would be harder to mount a case against the fiscal intervention.

People would soon see the benefits in the form of better schools, hospitals, public transport, green energy innovations, more jobs, more diverse cultural events etc and there would be no ‘negative’ association.

So the conservatives prevent that sort of realisation from occurring by mounting these spurious claims about inflation, and compromising central bank independence etc to try to stop governments from using real resources to improve the well-being of the people.

Conclusion: PQE is an excellent strategy for the British government to introduce. It exploits the currency-issuing capacity of the government directly and uses it to increase the potential of the economy to improve well-being.

But, the policy proposal should never have been called PQE because it is not similar at all to Quantitative Easing and the false analogy only opens the proposal to further, unwarranted criticism.

So the language is all wrong because the underlying economics is not fully articulated.

None of the commentators I have read in the mainstream media understand the point I am about to make.

Larry Elliot’s article in the UK Guardian (August 14, 2015) – Is Jeremy Corbyn’s policy of ‘quantitative easing for people’ feasible? – thinks that PQE is not necessarily “bad economics” but because the Bank of England’s monetary policy committee “is toying with the idea of tightening policy by raising interest rates rather than adding to the amount of stimulus” it would seem not to be a policy for the current period.

Elliot thinks that Quantitative Easing (QE) was a way of giving banks more money to loan out.

He also think that in the “current circumstances”, more QE should be avoided because it would be inflationary in the current economic circumstances and would have “risks – including giving the impression that the government is indifferent to inflation”.

All claims are false.

Then there was the article in the Financial Times by its economics editor Chris Giles (August 13, 2015) – People’s quantitative easing – no magic.

He wanted to disabuse his readers of the idea that PQE would work. He uses the loaded metaphor – “a magic solution” – to discredit the concept through language abuse.

He seeks to compare PQE to QE. What do we learn? Answer: not a lot.

1. Who decides when “to instigate QE – the creation of additional central bank money”. He concludes that “Between 2009-12, that was clearly the role of the BoE’s Monetary Policy Committee, although it required Treasury authorisation”. Note the intrinsic link between the central bank and treasury, which Giles does not tease out.

Whether he understands the import of that link is one thing, but if he did he wouldn’t want to tease it out because it would totally undermine his next point.

2. He wrote “People’s QE is definitively different: the government would order the central bank to print money and determine the quantity of QE.”

The conclusion:

“In both ordinary and people’s QE, the BoE “prints money”. This is shorthand for saying it creates electronic money – a liability on its balance sheet – which can then be used. There is no difference between the two.

First, the term “printing money” is not just “shorthand”. It is loaded language, which is not descriptive of the actual process that underpins government spending and invokes irrational emotional responses about hyperinflation with the Weimar Republic or Zimbabwe immediately entering the conversation, and reasoned debate then becomes impossible.

Second, there is a huge “difference between the two” proposals, such that if we want QE to have meaning, then PQE should be abandoned as terminology to describe the idea that governments should deficit spend without issuing debt whether it be on infrastructure or something else.

Giles clearly doesn’t understand the intrinsic monetary and fiscal operations involved in each policy (QE and PQE) or if he does he chooses to mislead his readership for the sake of indoctrinating them against the Corbyn proposal.

In his final assessment, Giles’ main point is:

The distinction between people’s QE and ordinary QE boils down to whether the government or officials at the central bank have control of the monetary printing press, and whether the assets are cancelled after purchase.

There is no doubt that people’s QE ends the operational independence of monetary policy as the government, not the BoE. would decide whether to pump more money into the economy to stimulate demand.

We will come back to this point because it is made by most of the critics.

Further, apparently, the “risk is rampant inflation or deflation” because of the indivisibility of large infrastructure projects. If the commitment to Project X was such that it pushed nominal spending above the capacity of the economy to absorb it by way of a real production response then there would be inflation.

The opposite is that there would be deflation because an output gap would be left.

This assumes that there are no other spending or tax initiatives that can be invoked to trim the net position of the government to the output gap. Of course, there is considerable flexibility in government fiscal policy parameters.

The introduction of a Job Guarantee would increase this flexibility. Please see the range of blogs under the category – Job Guarantee

Both Giles and Elliot claim that the government can always borrow to fund infrastructure spending so why discuss PQE.

This view is being pushed by so-called progressive commentators who are claiming that there is a huge “unsatisfied demand for government debt” as evideced by low government bond yields and so governments could easily fund their infrastructure spending by increasing public debt with low “costs”.

First, why would any progressive commentator advocate expanding corporate welfare. Public debt issuance is just that. It provides a risk-free, guaranteed annuity to the financial markets to allow profit-seeking traders to benchmark their risky products and to use as a haven to alleviate uncertainty.

The debt issuance is entirely unnecessary and if the private markets were efficient they would create their own low risk benchmark asset.

Second, underlying the recommendation is a flawed understanding of the inflation process. I have dealt with this on several occasions and will summarise it again below.

A truly progressive policy platform would wipe out corporate welfare and stop issuing public debt. In that sense, Overt Monetary Financing is the preferred Modern Monetary Theory (MMT) policy option.

Then there was the article by the British New Keynesian academic economist Simon Wren-Lewis (August 16, 2015) – People’s QE and Corbyn’s QE – which is being used by many commentators on the progressive side of the debate to attack Corbyn’s position.

The claim is that Wren-Lewis is a “respectable economist” and so his view carries weight.

The essence of the article rests on this paragraph:

With an independent central bank, that means that they, not the government, get to decide when helicopter money happens. In contrast, if your goal is to increase either public or private investment (or both) for a prolonged period, then its timing and amount should be something the government decides. While QE is hopefully going to be something that is unusual and rare, the goal of an investment bank is generally thought to be more long term, and not something that only happens in severe recessions

Note the use of the term “helicopter money”, which I will come back to.

But this also avoids the main question – who should be in charge of economic policy – the democratically-elected members of the government who are fully accountable every electoral cycle or a group of unelected and unaccountable technocrats in the central bank?

Of course, even that dichotomy is strained because the treasury and central bank arms of governments have to work closely together on a daily basis to ensure the monetary system functions effectively.

For example, the treasury makes it clear to the central bank what the daily implications of their spending and taxation patterns are for the state of liquidity in the banking system, which allows the central bank to design liquidity management strategies each day which are necessary if it is to achieve its target cash rate (the statement of monetary policy).

In this way, the idea that the central bank is ‘independent’ is a ruse that allows politicians to divert responsibility for unpopular interest rate decisions onto the faceless central bank board.

Please read my blog – The sham of central bank independence – for more discussion on this point.

There are also deep political links between the central bank and the treasury in most countries – for example, in Australia, the elected government appoints the central bank governor and can override interest rate decisions if they choose.

There is also the question of relying on an unelected, unaccountable (to the people) central bank board to make key decisions with respect to economic policy.

The evidence is that in advanced nations this semblance of separation of interest rate decisions from the daily government business has delivered poor outcomes.

The late Franco Modigliani, the famed Italian economist (who was hardly anything but mainstream – he coined the term NAIRU) saw it very clearly when he was reflecting on the legacy he had created in 2000:

Unemployment is primarily due to lack of aggregate demand. This is mainly the outcome of erroneous macroeconomic policies … [the decisions of Central Banks] … inspired by an obsessive fear of inflation, … coupled with a benign neglect for unemployment … have resulted in systematically over tight monetary policy decisions, apparently based on an objectionable use of the so-called NAIRU approach. The contractive effects of these policies have been reinforced by common, very tight fiscal policies.

[REFERENCE: Modigliani, F. (2000) ‘Europe’s Economic Problems’, Carpe Oeconomiam Papers in Economics, 3rd Monetary and Finance Lecture, Freiburg, April 6]

The points they are all missing

First, Quantitative Easing is a monetary operation that can be distilled down to being asset swap – bank reserves for a government bond.

Please read my blog – Quantitative easing 101 – for more discussion on this point.

By bidding up the price of government bonds in the secondary markets, the central bank forces yields (interest rates) down, given the inverse relationship between the effective yield and the price of the bond in fixed coupon assets.

Therefore, the only way it can impact positively on aggregate spending is if the lower interest rates it brings in the maturity range of the bond being bought stimulates borrowing and spending.

The problem is that borrowing is a function of aggregate spending itself (and expectations of where demand is heading) and if unemployment is persisting at high levels and governments are imposing harsh net spending cuts, the sentiment that might lead to increased borrowing is absent – lower interest rates notwithstanding.

But QE was based on a false premise – that the banks need reserves before they can lend and that quantitative easing provides those reserves.

Mainstream macroeconomics create the illusion that a bank is an institution that accepts deposits to build up reserves and then on-lends them at a margin to make money. The conceptualisation suggests that if it doesn’t have adequate reserves then it cannot lend. So the presupposition is that by adding to bank reserves, quantitative easing will help lending.

This is clearly an incorrect depiction of how banks operate in the real world. Bank lending is not ‘reserve constrained’. Banks lend to any credit worthy customer they can find and then worry about their reserve positions afterwards.

If they are short of reserves (their reserve accounts have to be in positive balance each day and in some countries central banks require certain ratios to be maintained) then they borrow from each other in the interbank market or, ultimately, they will borrow from the central bank through the so-called discount window. They are reluctant to use the latter facility because it carries a penalty (higher interest cost).

The point is that building bank reserves will not increase the bank’s capacity to lend. Loans create deposits which generate reserves.

Please read the following blog – Building bank reserves will not expand credit – for further discussion.

The major formal constraints on bank lending (other than a stream of credit worthy customers) are expressed in the capital adequacy requirements set by the Bank of International Settlements (BIS) which is the central bank to the central bankers. They relate to asset quality and required capital that the banks must hold. These requirements manifest in the lending rates that the banks charge customers. Bank lending is never constrained by lack of reserves.

Second, QE does not change the net financial asset position of the non-government sector at all. It is an asset swap. The non-government sector just rearranges is wealth portfolio – more cash, less bonds. No net change.

That is the essence of a – monetary policy operation – which alters the liquidity in the economy. It does it by portfolio swaps and in doing so influences the interest rates and the term structure.

Third, PQE is not QE because it is a fiscal operation – as is any so-called ‘helicopter drop’. Keep the helicopters on their pads and just spend

What does that mean?

PQE (like a helicopter drop) would increase the net financial assets in the non-government sector because it would increase national income (via spending on infrastructure).

That is the hallmark of a fiscal operation.

You might also like to read – Deficit spending 101 – Part 1Deficit spending 101 – Part 2Deficit spending 101 – Part 3 – for basic Modern Monetary Theory (MMT) concepts.

Vertical transactions – such as government spending, taxation – create national income changes which change the net financial position.

PQE as envisaged is a fiscal operation, not a monetary operation, whereas QE as practiced by the Bank of England, the Federal Reserve Bank of America, the Bank of Japan etc are not fiscal operations.

That is why I would not have called PQE, PQE.

PQE would involve the government instructing the central bank to credit some account so that the National Investment Bank could put in purchase orders for contractors etc

The accounting to support this operation is largely irrelevant – it could be a simple instruction to expand the treasury overdraft, for example. At any rate it is just one government hand putting liquidity into the other and then pushing that liquidity out into the non-government sector.

The spending would boost the contractor’s bank deposits (which increases their net financial assets or net worth) and the bank now has more reserves and matching liabilities (the contractor deposits).

That is the hallmark of a fiscal operation.

In QE, the central bank would buy a bond and exchange it for a bank deposit. The Assets of the bond holder would be unchanged but altered in composition (more cash less bonds). For the bank of the bond holder, deposits rise (liabilities) as do assets (reserve balances).

The essential difference is in terms of the impact on the net wealth of the non-government sector. QE leaves that position unchanged, whereas PQE increase net wealth via the net spending effects.

Another way of thinking about this is to ask the question: What would happen if a sovereign, currency-issuing government (with a flexible exchange rate) ran a fiscal deficit without issuing debt? That is engaged in Overt Monetary Financing?

First, governments spend in the same way irrespective of the monetary operations that might follow. There is no sense in the claim that the government gathers money from taxes or bond sales in order to spend it.

If they didn’t issue debt to match their deficit, then like all government spending, the Treasury would instruct the central bank to credit the reserve accounts held by the commercial bank at the central bank. The commercial bank in question would be where the target of the spending had an account. So the commercial bank’s assets rise and its liabilities also increase because a deposit would be made.

The transactions are clear: The commercial bank’s assets rise and its liabilities also increase because a new deposit has been made. Further, the target of the fiscal initiative enjoys increased assets (bank deposit) and net worth (a liability/equity entry on their balance sheet).

Taxation does the opposite and so a deficit (spending greater than taxation) means that reserves increase and private net worth increases.

This means that there are likely to be excess reserves in the ‘cash system’ which then raises issues for the central bank about its liquidity management. The aim of the central bank is to ‘hit’ a target interest rate and so it has to ensure that competitive forces in the interbank market do not compromise that target.

When there are excess reserves there is downward pressure on the overnight interest rate (as banks scurry to seek interest-earning opportunities), the central bank then has to sell government bonds to the banks to soak the excess up and maintain liquidity at a level consistent with the target.

Alternatively, the central bank can offer a return on overnight reserves which reduces the need to sell debt as a liquidity management operation.

There is no sense that these debt sales have anything to do with ‘financing’ government net spending. The sales are a monetary operation aimed at interest-rate maintenance. So M1 (deposits in the non-government sector) rise as a result of the deficit without a corresponding increase in liabilities. It is this result that leads to the conclusion that that deficits increase net financial assets in the non-government sector.

What would happen if there were bond sales? All that happens is that the banks reserves are reduced by the bond sales but this does not reduce the deposits created by the net spending. So net worth is not altered. What is changed is the composition of the asset portfolio held in the non-government sector.

The only difference between the Treasury ‘borrowing from the central bank’ and issuing debt to the private sector is that the central bank has to use different operations to pursue its policy interest rate target. If private debt is not issued to match the deficit then it has to either pay interest on excess reserves (which most central banks are doing now anyway) or let the target rate fall to zero (the long-time Bank of Japan solution).

There is no difference to the impact of the deficits on net worth in the non-government sector.

Mainstream economists would say that by draining the reserves, the central bank has reduced the ability of banks to lend and restrains the growth in the money supply. This is claimed to reduce the inflation risk.

However, the reality is that:

So the banks are able to create as much credit as they can find credit-worthy customers to hold irrespective of the operations that accompany government net spending.

This doesn’t lead to the conclusion that deficits do not carry an inflation risk. All components of aggregate demand – government and non-government – carry an inflation risk if they become excessive, which can only be defined in terms of the relation between spending and available productive capacity. The FT articles clearly recognise that point.

The ‘stock of money’ can expand by some percent per month without there being any additional inflation risk if real productive capacity is also expanding at a rate sufficient to absorb the extra nominal aggregate demand.

The idea that debt-issuance to the private sector in some way is less inflationary (for a given injection of government spending) is totally fallacious.

I covered the inflation risk argument in more detail on Monday – Governments do not need the savings of the rich, nor their taxes!


I am clearly in favour of governments no longer issuing any debt and ending the practices that are legacies of the fixed-exchange rate, convertible currency world we (mostly) abandoned in 1972.

In that sense, PQE is not “bad economics”. It is the obvious extension of the government’s currency-issuing capacity in a floating exchange rate environment.

It might be inflationary but that risk is inherent in the spending side not the particular monetary operation that might accompany that spending.

In fact, all spending – non-government or government – carries an inflation risk.

But the aim of government fiscal policy is to ensure that nominal spending growth keeps pace with the real capacity of the economy to produce goods and services and if that aim is managed well then there is little risk of inflation arising from PQE.

I am aware of the political considerations that might have led to the terminology “Peoples’ Quantitative Easing”. But in my view it is a case of being too cute and it leaves what is an otherwise sound policy open to spurious criticism.

Once again, progressives have to be mindful of language.

Upcoming Event – Reframing the Debate: Economics for a Progressive Politics, London, August 27, 2015

The organisers have changed the location to accommodate the increased demand for places at this event.

The NHA is very pleased to be able to present an evening with Professor Bill Mitchell, Professor of Economics and renowned proponent of Modern Monetary Theory, during his visit to the UK at the end of this month.

Come and join Professor Mitchell in conversation with Richard Murphy (Tax Research) and Ann Pettifor (Prime Economics), both currently economic advisors to Jeremy Corbyn’s campaign.

How can the debate on the economy be re-framed around the things that really matter – people and the environment? Does MMT hold the key?

The Event will be held on Thursday, August 27, 2015 from 18:30 to 20:30 (BST).

The location:

John Snow Theatre
London School of Hygiene and Tropical Medicine
Keppel Street
WC1E 7HT London
United Kingdom

WWW site for Registration.

The event is free and all are welcome.

Upcoming Event – Book Launch Maastricht, August 31, 2015

The official book launch for my new book – Eurozone Dystopia – Groupthink and Denial on a Grand Scale – will be held on Monday, August 31, 2015 at the Maastricht University, the Netherlands.

The Launch will be held at the SBE Building, Tongersestraat 53, Maastricht University.

Room: A0.4.

The event will run from 13:15 to 14:30 (drinks to follow).

There will be two excellent speakers:

1. Dr László Andor, former Commissioner for Employment, Social Affairs and Inclusion in the Barroso II administration of the European Commission.

2. Professor Arjo Klamer, Professor of Economics of Art and Culture at Erasmus University in Rotterdam, The Netherlands. He “holds the world’s only chair in the field of cultural economics”.

The public is welcome to the event. I hope to see a lot of people there in Maastricht on August 31.

That is enough for today!

(c) Copyright 2015 William Mitchell. All Rights Reserved.

This Post Has 53 Comments

  1. The politics behind the name is straightforward. It provides a good soundbite:

    “If we can do QE for the banks we can do QE for the people”.

    I think that needs to be extended with “in other words if we can create money for the banks we can create money for the people”

    Like a lot of scientific language QE has changed slightly to mean something different amongst the general public. It means ‘creating money’.

    And yes we need to head off the Oxbridge Mafia who are convinced the world will be fine if you just create a one party state at the central bank run by them. It’s very easy and very quick to get decisions past a one party state parliament as well. It’s the debate between opposing views that takes the time.

  2. Like Bill, I favour having the state print and spend money, and/or cut taxes, when stimulus is needed. However there’s a problem with PQE a la Corbyn and Murphy which Bill has missed, I think. It’s thus.

    Print and spend is stimulatory. Thus if infrastructure is funded largely from P&S, then in years when little or no stimulus is needed, infrastructure projects may grind to a near halt, which is daft. The moral is that P&S money should be distributed WIDELY.

  3. “First, why would any progressive commentator advocate expanding corporate welfare. Public debt issuance is just that. It provides a risk-free, guaranteed annuity to the financial markets to allow profit-seeking traders to benchmark their risky products and to use as a haven to alleviate uncertainty.

    The debt issuance is entirely unnecessary and if the private markets were efficient they would create their own low risk benchmark asset.”

    Not sure I entirely agree with this Bill. First of all, a lot of the money floating around the markets is pension fund money. Not all of it. There is some corporate welfare going on. But a lot of it is pension fund money. That is workers’ savings for retirement.

    Secondly, private markets cannot create risk free assets. That is the whole Keynesian point on liquidity preference and cash and fundamental uncertainty. The MMT position I thought was to put savings accounts with interest rates paid on cash. That seems like a good way to do it. But I’m not convinced that safe savings vehicles should be removed. I do not want pensions relying on private markets to create a ‘safe’ asset. I don’t trust them.

  4. Another great blog, Bill.

    Useful that you gave a link to Corbyn’s manifesto because I couldn’t find it anywhere on his website.

    Before reading your blog I read an article in The Conversation by Chris Martin, an ecomist at the University of Bath: “Zombie loans and a £300bn cushion: inside the Bank of England rates dilemma”.

    He states –

    “As a first step, the Bank of England has to stop paying interest on these [commercial bank] reserves. This will encourage banks to run down reserves and increase lending. But reducing bank reserves by, say, £200 billion will increase lending by roughly £2 trillion (economists call this the “money multiplier”: historically the multiplier has been around 10). Doing this too quickly risks destabilising the economy.”

    Someone more qualified than I am ought to put Martin right. As a student of MMT I know that (as you repeat yet again in today’s blog) bank reserves in no way constrain their lending, and the “money multiplier” would only be relevant in a fractional reserve banking system, which does not exist. If he doesn’t believe it he should be pointed to the Bank of England working paper no. 529 “Banks are not intermediaries of loanable funds – and why this matters”.

    Good to hear (from your response to some posts on yesterday’s blog) that Sky are making a program about MMT. However, a few words of caution are that it depends how the program is presented (or mis-presented), and you may not be in control of that editorial decision. If “MMT – how use of the currency-issuing powers of the State can lead to prosperity for all”, well and good. But TV programmers know that bad news sells, so “MMT – a nutty plan to print money that will lead to inflation” would not be good. I’ve seen this happen too many times. Easy to do in the cutting room.

  5. Dear Bill

    Does Britain really need more infrastructure? I know that housing prices in London are horrendously high, but that is because so many rich foreigners are buying property in London. Perhaps Labor should consider putting severe restrictions on the ability of foreigners to buy property in the UK. Just as foreigners have no fundamental right to emigrate to the UK, so foreigners should have no inalienable right to invest in the UK. It is only a neoliberal tenet that everyone should have the inalienable right to invest everywhere, which of course means that every asset in the world should become available to the highest bidder from everywhere.

    Regards. James

  6. “This is shorthand for saying it creates electronic money – a liability on its balance sheet ”
    But selling bonds magically controls inflation, does it not? It’s soooo not like Gilts are mon…. Er liabilities.

  7. Dear Bob (at 2015/08/19 at 21:11)

    Perhaps your humour escapes me.

    You said:

    All government spending works by printing money, idiots!

    In fact, no government spending works by printing money.

    But then that is only relevant if you were serious.

    best wishes

  8. MMT says you don’t borrow in your own money, because you can pay for any purchase ad hoc.
    Neil says “…we can create money for the banks, we can create money for the people” We don’t create money for the banks. They do it for their customers and only if they have customers. Creating money for the people is the same as spending into the non government sector which is where all money is. The CB itself has no money of it’s own.
    For me the whole exercise is some sort of spin document but it might be useful if it gets MMT into more people’s awareness. Bob mentions printing money. That is a tired and misleading analogy. Governments can only create money to pay for bills, not to store or anything like that. Printing money as banknotes and coins is not the issue here.

  9. Unfortunately with the Anglo-Saxons Bill they are very conservative in their thinking about some things and I think money is one of them. In the UK there is a long history of compromises and the setting up of the Bank of England to deal with feckless debt defaulting monarchs who’d forgotten their money from nothing generating powers (tally sticks Henry I, 1100AD) resulted in the gilts issuing method of funding the gap between government revenue and spending. The PQE proposal is a typical work-around compromise to monetise the government’s spending gap until the British finally take the trouble to understand how modern fiat monetary systems can and do work. You might have thought that in a Chancellor of the Excheqeur, George Osborne, with a history degree he would of known about the practice of ancient governments announcing a debt jubilee every four to five years on average to maintain demand in their economies but no his loyalty lies with the wealthy and the City of London who fund his party. “Jubilee-isation” of course lies at the heart of the PQE compromise.

  10. I suppose to put my comment more more pithily in British phraseology:-

    “If the bloody Queen can have a Jubilee so can the British people!”

  11. I am assuming that James Schipper lives in the UK judging by the time of his post. If so he wants to get out and look at the potholes in the roads, the surfaces cracking up, the overcrowded trains, where I live the buses that break down because they’re 10 years old. Even ther Houses of Parliament are tumbling down. We don’t need more infrastructure but we do need the existing infrastructure replaced. Much of it was built in Victorian times.

    MMT says the government can only buy what is for sale. But in a progressive industrialised society there’s always something to buy. Even if it’s Trident.

    And John Doyle, you are absolutely right that “printing” money is a completely outmoded concept. We need to get away from it as it clouds the real issue and sends the wrong message to the unenlightened public.

  12. “Thus if infrastructure is funded largely from P&S, then in years when little or no stimulus is needed, infrastructure projects may grind to a near halt, which is daft. ”

    Is it?

    The countercyclical bit works on the small projects – insulating houses for example. They get shelved when staff demand is high because that bit of Green QE doesn’t chase the wage. There are lots of ‘nice to have’ things that can be queue up as projects. If you’ve driven down motorways in the UK over the last five years you’ll have seen some – replacing central reservation crash barriers with concrete. You can dole that out by the mile.

    The main problem is that PQE is locked to the capital budget, and that means things like education and training or simply just operating nice to have services are out of scope *for no good reason* – because somebody thought that balancing the current budget is something that needs doing.

  13. “We don’t create money for the banks.”

    We do when we re-capitalise them. Normal commercial banks cannot recapitalise themselves.

  14. @Phil

    I think these are some good points. I think one of the major vulnerabilities with our monetary system is the money markets which needed to be bailed out in 2008. Right now they have to try and eke out positive gains by participating in tri-party repo.

    I think it would make more sense to let the small saver have access to much more risk free Treasuries which the Fed could support at the 2-3% level giving people a safe place to park any leftover funds they want to save.

    Most money market investors think their money is safe there anyway. If someone wants to participate in the riskier tri-party repo I think they should be aware that that is what they are doing and get a higher return and no bailout.

  15. I sometimes wonder whether the taming of the English kings ability to act as autocratic warlords didn’t result in later kings engaging in a form of William Black style “control fraud” by conveniently forgetting their sovereign power to create money from nothing (tally sticks) in order to personally profit from the issue of gilts used to fund their wars. Certainly it is said that George III had stock in the East India Company which persuaded Parliament to grant them a monopoly for the importation of tea into their American colony. Also, of course, when Benjamin Franklin went to London he made the mistake of talking about the success of the Pennsylvanian state government issuing its own currency, colonial scrip, which must have rang alarm bells amongst those who were doing very nicely from their investment in the Bank of England and the Bank’s monopoly on issuing bank notes and gilts. Indeed on page 19 of P. G. M. Dickinson’s book “The Financial Revolution In England” reference is made to:-

    “…..monopolies in foreign trade had been subject to constant and not unsuccessful attack. Criticism of the political influence which the Bank (BoE) derived from its monopoly powers continued. In 1705 another writer complained that the Bank and New East India Company had inter-locking directorates, whose joint power gave the companies a sinister control of City and Parliamentary elections.”


  16. Dear Bill,

    Will the event on thursday be televised someway (youtube, etc.) or be available later for watching?

    thank you,

  17. Disclaimer – I have no formal economics training, just keen interest. My mind tends to wander when posting too, so I hope this doesn’t ramble too much!

    I’m familiar with MMT from the various blogs I enjoy reading (here, Alex Little, Neil Wilson to name just a few) and know that the UK government is never cash constrained, and can always afford to buy the goods and services it needs, the majority of people do not know this, instead understanding the (incorrect) version that the government is like a household. Because of this, it’s not hard to see that there would be considerable opposition to the idea of the government “printing money” to fix roads, build social houses, update infrastructure and invest in green energy production, even by the people who would most benefit, lead by the Right wing press and their political puppets. I wonder if Jeremy Corbyn recognises this too? What’s more, with a compliant media (either benefitting from the status quo, a la Murdoch and his ilk, or cowed into submission (BBC, Guardian? Or are they right-wing Trojans, appearing progressive while undercutting any truly progressive ideals?) it’s highly likely this disinformation will remain, and thus progressive policies and individuals/parties will rarely get fair representation.

    I read another critique on a blog somewhere a few days ago that tried to paint PQE as a form of QE, and it got me thinking. This is kind of my take on how it would work, as mentioned I think it’s someone else’s idea essentially, but the way my mind interpreted it:

    Instead of following the model of QE, that is, issuing new money to buy assets from the financial markets, PQE could be the “winding down” phase of QE. There are many who (incorrectly) believe that the BoE retains the bonds that it bought from banks in the asset swap. This is of course, completely wrong, since the bonds are in essence BoE debt (IOUs) issued to the market, so when buying them back with the new money, they are cancelled (Richard Murphy demonstrated this recently). But why not use that misunderstanding in a positive way. The BoE could “issue” some of the £375b bonds it “apparently” holds to a Green Investment Bank (publicly operated, ofc), which could sell the bonds on the open market, then use the funds generated to fund infrastructure projects earmarked under PQE.

    I know this is no different to the government using borrowing to fund the infrastructure projects, and I’m with Bill and Richard that this would be a daft way of going about it, since it would be more expensive long-run than Overt Monetary Financing (which would also be my preferred option), but as Neil has pointed out, perception is important. This is a kind of half-way house.

    Please feel free to rip this to shreds!

  18. Thanks for coming to London Bill, I am hoping you may help the few UK MMT types, light a fuse wire to a paradigm shift in UK macroeconomics. Who knows, we might split an MMT-based Social Democrat faction out of the Labour Party; and, collect some like thinking Conservatives etc, before a 2020 election! But, we can’t go back to the seventies Trade Union thinking. Trade Unions need CEOs not General Secretaries. They have to understand they are contracting the “labour” resource into a “capital” market, for a “win win”, not a duel to the death of the economy.

    The Brits are experts at cutting off their noses to spite their faces. Most of the “middle class” think the Conservative Party is their natural habitat. They don’t understand that the Conservative Party works for the top 1%, NOT the top 30% that the middle class think they are safely in!

  19. It certainly seems to me that it would be best if bonds were not issued to
    ‘account’ for government sector deficits.I know that MMT regard the Bics
    international agreements to issue bonds as a form of voluntary agreement.
    I suppose the term people’s QE is to invoke the precedent of QE .
    Did QE support banks not in the sense of allowing them to lend more via MM
    but in the sense of supporting financial transactions in the bond markets and
    associative derivatives(I suspect).So my question is what opposition would
    moves to lay bare the reality of state monetary sovereignty bring?
    It seems unlikely that the elite would take such a threat to their spending power
    lightly ,Active undermining of a state set on such a course must be a possibility?

  20. You are right it works by crediting bank accounts. I should have said “electronic money creation.”
    I didn’t mean literally printing money.

  21. Infrastructure whether “productive” or not creates costs.
    We almost all live in urban overbuilt usury concentration camps .

    The total failure of Dirigisme and indeed society in the home of central planning (France) is what has turned me on to Social Credit.
    Only the consumer can liquidate final costs.
    The solution is obvious – distribute purchasing power without conditions to humans rather then central planning authorities.
    The state as currently contrived is a alien body politic embedded within the nation.
    It serves no purpose other then the infliction of pointless physical and psychological trauma on the mind body and spirit.
    It is inherently evil.
    Further concentration using continued centralized state planning will lead to further societal collapse.

  22. @ Kevin Harding

    I think Treasuries can have an interesting role in letting people ‘fund’ the government. They are rewarded for this by a small amount of stable interest. In a superficial sense this is artificial because the government just creates this money to pay as interest. But in a deeper sense I think it is the stability of the monetary space that allows this interest to have value.

    The reality of the state monetary sovereignty is a fragile creditor/debtor balance that I think can be upset if used indiscriminately to provide liquidity to unsound derivatives. This money is being funneled to elites rather than more of a ‘peoples’ oriented program. I think future stability requires a much better socially oriented distribution.

  23. “or example, in Australia, the elected government appoints the central bank governor and can override interest rate decisions if they choose.”

    The central policy plank is the issue of credit and not interest rates.
    The “government” has no control over this.
    It merely rides the wave as Richard Werner observed(Although I disagree with his solutions) or taxes for the banks when the tide goes out.

    Anyhow the issue of a national dividend should be automatic rather then under any bodies control whether hidden or in plain political sight.
    The industrial surplus in any given year can be calculated easily enough and the surplus distributed on a equal basis.
    Functional equity based democracy can thus begin to happen for the first time in a long long time.
    The Industrial surplus belongs to everyone and not some centralized masonic / Jewish / Jesuit clique of iinsiders who live for the will of power
    People can then be freed to earn income from either wages or investments outside this dividend if they so wish or if non materialistic engage in non paid work and leisure
    We can begin to dump all of the junk organisations one must join to gain access to such purchasing power be they unions , corporate bodies or secret societies.

  24. Dear Nigel

    I live in Canada. that’s why I can’t see the potholes in British roads. Cheers. James

  25. I think the deepest point underlying this sort of discussion is that the (“mainstream”) economics profession at large is disastrously ignorant on the basics of financial accounting, and how those basics are applied to an understanding of how monetary systems work and therefore of how economies work. This is bedrock analytical stuff that is simply not recognized or understood as bedrock analytical stuff by most. But it is essential in untangling the essence of questions like the one discussed here.

    You folks of course understand the importance of this. You understand you can’t move on to a coherent discussion of flexibility in monetary arrangements without understanding this first. And this discussion here is about coherence in understanding and analyzing options and flexibility in monetary arrangements. People can then possibly disagree in coherent ways on the policy questions such as the wisdom of issuing bonds, but not before understanding how to get to those kinds of questions in a logical way.

    It is not possible to have a broadly constructive debate on the policy issues unless these basics are absorbed seamlessly into the language and the analysis of economics. It is at this stage still a black hole omission in the standard education of the economics profession, which itself needs a great big spanking in order to get moving on what should be understood obviously as common sense in how to start to think about and analyze these things. Until then, it is mass head banging.

  26. Bill – re Bob & printing money.

    Bill: It is loaded language, which is not descriptive of the actual process that underpins government spending and invokes irrational emotional responses about hyperinflation with the Weimar Republic or Zimbabwe immediately entering the conversation, and reasoned debate then becomes impossible.

    Yes, it might evoke irrational & emotional responses. Good! The sooner Weimar & Zimbabwe are gotten out of the way, the better. Let people run riot with and exhaust their emotions! Far from becoming impossible, Then is the best time to begin reasoned debate! Then is the best time to educate them, to show them that if they don’t believe in the “theory of the immaculate conception of money” = “money is provided not by human action but by Nature with a capital “N” then as Bob said, “All government spending works by printing money, idiots!” Once you’re old enough to know where babies come from, it’s time to learn where money comes from.

    Abba Lerner used the phrase “printing money” a lot. IMHO he was absolutely right to do so, and it is just as descriptive as “crediting accounts” – and far more likely to be immediately understood. There might be an even better name for Lerner’s abandoned rhetorical device, but he used a form of protocatalepsis. Unfortunately Modern MMTers have not followed Lerner’s wise example, but that of what Lerner called “Keynes’s timidity”.
    Aspromourgos’s recent paper that Neil just linked to as well as Colander’s old one are great, thoughtful sources. But they ultimately endorse this timidity under the guise of “realism”, and consider Lerner unrealistic. But there is nothing as unrealistic and blind to history as this kind of “realism” – that people can’t handle the truth told in simple, familiar terms. That doing so is not “serious”. No, not doing so is unrealistic and unserious. Lerner said “Reformers naturally underestimate social rationality”. “This .. leads to a most uncritical exaggeration of the degree of irrationality in our social life & the difficulties of bringing about acceptance of a rational program like Functional Finance. ”

    “Printing money” is in no way misleading. Making “printing money” taboo, implicitly suggesting a nonexistent difference between “crediting accounts” and “printing money” is what is misleading, confusing & unconvincing. Many reject MMT because of how unconvincing this taboo is! They think MMTers are inflationists who just imagine that changing a word would change the reality. IMHO, abandoning this & some other taboos – other attempts to convince by excessive reframing – would lead to both increasing popularity & better understanding of MMT. The problem with bad economics is not so much the framing & the words used to frame discussion – but the faulty logic, the wild leaps, the non sequiturs. Compare what JKH just said.

  27. Belloc describes the past and present condition of “free to choose” democracy almost perfectly.

    section one of his book (Servile State)he defines capitalism in the following terms:

    A society in which private property in land and capital, that is, the ownership and therefore the control of the means of production, is confined to some number of free citizens not large enough to determine the social mass of the state, while the rest have not such property and are therefore proletarian, we call capitalist. …
    Later, in section five, he reiterates this definition, describing a capitalist society as that “in which the ownership of the means of production is confined to a body of free citizens not large enough to make up properly a general character of that society, while the rest are dispossessed of the means of production, and are therefore proletarian”.(wage slave)

    Somewhow I don’t think yet another socialist will solve the core problems of modern human roboten.

  28. “In essence, Belloc’s view of socialism is that it is strikingly similar in practice to “capitalism” insofar as both systems place the means of production into the hands of a privileged few at the expense of the proletarianized masses. Whereas “capitalism” or economic proletarianism centralized the ownership of land and capital into the hands of a small number of powerful businessmen, socialism centralized or collectivized it into the hands of a small number of powerful politicians. In both cases the vast majority of ordinary people remained without either land or capital and was therefore proletarianized. As such, the choice between “capitalism” (as Belloc defines it) and socialism was a choice between economic proletarianism and political proletarianism. It was a choice between being ruled by Big Business or Big Brother, a choice between Tweedledee and Tweedledum, or between Tweedledumb and Tweedledumber!

    In many respects The Servile State is as pessimistic as it is prophetic. His conclusion is that the two forms or proletarianism, economic and political (“capitalist” and socialist), would not fight to the death, with one or the other ultimately emerging triumphant, but would meld into a single politico-economic proletarianism, in which Big Business and Big Brother reach a mutually agreeable modus operandi. This understanding between Big Business and Big Government at the expense of the perennially powerless majority would herald what Belloc calls the servile state and which we might prefer to call the welfare state”

    Joseph Pierce.

  29. Printing money is a balance sheet transaction, one is increasing a physical stock of money. It goes nowhere other than to vaults of the legal construct (Central Bank etc.) that is doing the printing. It is simply an asset of the CB like a firm building inventory. Yes there are some income statement impacts, expenses for ink, paper, etc. for record keeping purposes, but, those are capitalized into the stock of physical money created and have an income effect, albeit minor, for the private sector who supplied the printing services.

    The only balance sheet impacted is that of the currency issuer, not the private sector’s. In short it doesn’t have any of the oft suggested impact regardless of the FUD, since there is no channel to the private sector. We know this is true because the only way the private sector’s net financial assets can increase is by the government spending it’s currency into existence at a rate greater than it’s taxation over a period of time. Printing money is not equal to nor analogous to crediting accounts of the private sector.

    The treasury crediting accounts of members of the private sector, through electronic journal entries, issuing checks, drafts etc. is a financial transaction that involves both income statement (an expense for government, and income for the private sector) and the balance sheet (decrease in assets for government, and an increase in financial assets for the private sector).

    Printing money does nothing other than supply stock for vault cash and take up physical space at some storeroom or vault.

    JKH: Has a more than a reasonable argument.

  30. “the evil ones who have accused Corybyn of being antisemitic and a friend of Islamic terrorists”
    The people,evil or otherwise, who make those statements may well have valid reasons based on fact,whatever their motivations.
    The writer of this blog,if he wishes to be taken seriously on economic matters,would do well to avoid making blatantly political and ideological pronouncements.

  31. Schofield
    it seems to me you are describing a historical compromise amongst power.
    The wealthy lack the legitimacy to govern but want the protection of the
    law and armed bodies of men.The Magna Carta is the famous English compromise
    between the king and the barons but I expect this is the historical norm.
    current bond issues are a continuation of this compromise/corruption.
    With democracy and fiat currency a solution is at hands which favours the people.
    Peoples QE frames the concept well but confuses the monetary mechanics.
    Still I think it is very naive to expect the wealthy to except this solution.
    The corruption of wealth and power is pervasive it gets internalized it becomes
    common sense some guy has a good point it may be time to embrace the print
    money concept, If someone throws up the magic money tree perhaps the best answer
    is if you want to call the Bank of England a childish name ok but it does not change its
    power to print money

  32. Dear Podargus (at 2015/08/20 at 15:54)

    I think I will make whatever pronouncements I like.

    You are free not to read my blog.

    best wishes

  33. Dear James,

    Of course. I should have realised. Please visit Britain one day. I’ll be happy to give you a tour of the creaking infrastructure. Not at all like I image Canada to be. (Nearest I have been is to look at it across Lake Ontario from New York State).


  34. Bill,

    The whole MMT and OMT concept is fascinating.

    The differences between what you espouse and that of Positive Money?

    That you believe that the amount made available to the Treasury by the BoE should be determinable by the Government and not as PM believes, a new MPC instructed to deal with inflation (as now) AND the size of the Money Supply needed by way of increase to stimulate the economy or reduction to deflate when overheated?
    That you believe the banks should be allowed to continue with their ability to create money and so bandjax the Money Supply by their powers of Fractional Reserve Banking?

    Can you enlighten?

    Can you also then tell how Jeremy Corbyn’s so styled ‘PQE’ differs from the tenets of PM?

  35. I’m in agreement with Neil. When I first heard the term PQE, I thought to myself, that it should really be called OMF, or Overt Money Financing (?), which isn’t quite the same, or Bill might say, not at all the same as QE.

    But politically, its a brilliant move to call it that. If QE can create money to bail out the banks, why not the real economy too?

    I’m always torn between what is politically expedient and what is technically correct, though. I accept that Bill, as a professional economist, may be less concerned with the politics than some of us.

  36. Bill,
    From what I can tell, the normal QE that you describe and attribute to institutions such as BoJ, the Fed etc. seems to be of the variety otherwise known as “sterilised QE” where, as you say:
    “the only way it can impact positively on aggregate demand is if the lower interest rates it brings in the maturity range of the bond being bought stimulates borrowing and spending”
    In which case I have 2 questions (assuming my perception is correct):
    1. If the level of bank reserves makes no difference to bank lending, aggregate demand or inflation why is it “sterilised”, why, for example, is the Fed. paying the banks interest on their excess reserves in order to keep them out of circulation?
    2. It would also appear that not all of the Fed’s QE has been sterilised and that in the period from late 2008 to 2014, roughly 20% of the QE liquidity was added to the normal (circulating) monetary base. At least, that is what is implied by the Fed chart that appears in this article:

    The article’s author is under the impression that it was all sterilised (or “sequestered”) but he wasn’t paying due attention as the chart reveals that about $400bn was added to the normal (‘red line’) monetary base in the 14 year period between 1994 and 2008 – but an additional $400bn was added in just 4 years from late 2008 to late 2012, which, all things considered, is a significant rate of increase.
    That estimate is verified by observing the difference between the increase in the monetary base and increase in the “excess reserves” – according to this data:
    The gap between monetary base & ‘excess reserves’ narrows a little after 2012 but not that much.
    In any case, my 2nd question is: would the 20% that wasn’t ‘parked at the Fed – that went into circulation, make a difference to aggregate demand, inflation etc.?

  37. By the way, I agree with Peter Martin, politically, People’s QE is a good name even if it is wrong. OMF is too close to the slang acronym: OMFG! And trust me, some unsympathetic person would be bound to pick up on that one sooner or later.

  38. Correction: In the previous post I said,
    ” in the period from late 2008 to 2014, roughly 20% of the QE liquidity was added to the normal (circulating) monetary base”.
    To fairly measure the QE contribution to the normal monetary base one should consider the counterfactual – calculate the pre-existing (pre-QE) rate of growth and the expansion that would have occurred if that rate had continued. Then compare that with what actually occurred and observe the difference.
    Its still very a big difference.

  39. Daniel D: That is an unusual interpretation of the phrase “printing money”. I was clear that such an unusual interpretation was not the one I had in mind. I used “printing money” as Lerner & Keynes meant & understood it, the way it is commonly used and has been understood for centuries, millennia really – governments printing bills or minting coins and spending them, of course. It is then, for all practical purposes, “equal .. to crediting accounts of the private sector”. The difference is that the number of people who understand & use & are familiar with “printing money” is far greater. Wray even implicitly excludes the interpretation I did not intend of “printing money” in his 1998 book when he observes that paper currency notes printed by governments are not money until they enter banks & the economy at large.

  40. “Can you also then tell how Jeremy Corbyn’s so styled ‘PQE’ differs from the tenets of PM?”

    The PM crew believe in Sovereign Money, which is just a jiggling of the accounting of banks to make it look like something else is happening. It doesn’t actually change banking at all.

    If you hear them saying it changes banking, then that is purely PR and marketing. It doesn’t. IMV it makes it more dangerous because people will think they’ve fixed banking when they haven’t – and the state will become complacent, leading to another banking crisis.

    People I know in banking laugh when they hear what PM propose and know full well it changes nothing of substance.

    The state creating money and spending it can be done without redecorating the banking system. The two are not linked in any way. And parliament should decide what can and can’t be spent, or set the parameters for direct spending. The central bank should just service the decisions of parliament in a passive manner. We already have departments for assessing claims. There is no need to duplicate them within the banking structure.

    The idea of a central bank able to lord over parliament and countermand its wishes (which in reality mean bankers and corporations able to lord over parliament and countermand its wishes) is fundamentally anti-democratic and autocratic. Some would say Facist in nature (no next government. no change possible. In league with corporations).

    Even the courts can only constrain *government*. They cannot constrain *parliament*.

    You can see the results in Greece, where the ECB has effectively boxed in the Greek government and forced them to back down.

  41. Some Guy:

    My post was a follow up to the point that JKH was making and not directed at anyone in particular.

    I think the deepest point underlying this sort of discussion is that the (“mainstream”) economics profession at large is disastrously ignorant on the basics of financial accounting, and how those basics are applied to an understanding of how monetary systems work and therefore of how economies work. This is bedrock analytical stuff that is simply not recognized or understood as bedrock analytical stuff by most. But it is essential in untangling the essence of questions like the one discussed here.

    If the object is to convey a general understanding of how the / a monetary system works to great unwashed masses, then say it like it is.

    Clearly the act of a sovereign government printing money is not equal to nor analogous to the act of a sovereign government spending money. That is an irrefutable reality, with all due respect to the halls of economic academe.

    It is more than painfully clear that professional economists the world over, which are members of the chattering class (with few exceptions) have no idea what “printing money” actually means. QE was printing money, it will cause hyperinflation, it will devalue the currency, yet no spending (increasing the net financial assets of the private sector, no inflation, no currency devaluation) was taking place and neither was there the physical act of printing money occurring. Yet here we have legions of economist and economic organizations (IMF, OECD etc.) and many others equating the “loaded term” with government spending?

    So which is it ?

    Professor Mitchell in my view is correct in his assertion that the term “printing money” is a loaded term.

    JKH is equally correct in his view that “the economics profession in general demonstrates little to no knowledge of the basics of financial accounting, and how those basics are applied to an understanding of how monetary systems work and therefore of how economies work.”

    Let’s be frank, the mainstream economics profession (what they teach in higher education included) has no idea how banking or the monetary system actually works or could it be a giant conspiracy? The legions of textbooks make that abundantly clear. Even a basic walk through of a single banking transaction from cradle to grave or grave to cradle (take your pick) renders the textbooks fictional.

  42. My preferred option would be to have the Gov. issue credit to citizens accounts, on a debit card type platform, at a subsistence+ rate freeing them from welfare but allowing them concrete proof of their debt to society. They could seek work voluntary or paid without penalty, train, study -as they please. Have a 2% transaction tax, a 10% tax on when spent into commerce deductable but not reclaimable from their tax bill. No one would be forced to accept an account but those that do would be taxed at 25% on all other income until their debt is cleared. It would not be a store of value and any balance in an account at the end of a financial year would be first deducted from the overall debt and anything left taxed at 25%. Interest would be charged at or below the rate of inflation, but would tend to follow it, but an extra 1% would be added for every years worth of debt incurred. The overall amount of credit available would be geared to maximise economic activity and there would be periodic equal jubillees and discretionary distress debt forgiveness for those that need it. The important thing for me would be to place some of the power to create money into citizens hands, and as the system evolved I’d hope that a citizens established ‘credit’ would allow them to draw down larger sums for emergencies or personal business purposes.
    That said I’d be happy to see Corbyns version

  43. WAY Out of time comment.

    Great that Bill addresses the PQE concept, advancing ‘money-printing’ in MMT-translated forms.
    Thanks, Bill.
    I wish I could also conclude that the new BoE mandate called for by Corbyn involved ‘money printing’, no matter the language. From Corbyn.
    ‘One option would be for the Bank of England to be given a new mandate to upgrade our economy to invest in new large scale housing, energy, transport and digital projects:
    Quantitative easing for people instead of banks. Richard Murphy has been one of many economists making that case.’

    To my way of thinking, any bank that ‘invests’ something that actually results in wealth creation must use real money, and not reserves, the only thing that any CB actually issues.
    I hope I’m wrong on that point, and that Bill’s interpretation of Corbyn’s plans are correct.

    Totally agree with SomeGuy’s interpretations of MMT’s missing completely Lerner’s money-printing policy mandate when the national economy needs ‘money’ to achieve its potential …. point being that obviously Lerner was aware that the Guv does not just create new money by spending money.
    One of many, perhaps the greatest, fix needed in the MMT construct.

    Bill has always been MMT’s strongest advocate against public debt, for his obviously deeply-held, pro-democratic, anti-corporate personal philosophy. Pressure Drop 2011 !

    But my fear is that the Corbyn-ites out there are grasping the Keltonian – Newman-esque version of MMT “How We learned To Love Government Debt”.
    While it might make sense for those who see public investment in infrastructure, as worthy of a kind of “capital budget” investment item, requiring “funding” that today can only come from increasing taxpayer indebtedness (because we never adopted the Lerner method of financing deficits), an understanding of the Ford-Edison recommendation at Muscle Shoals in the US in the ’20s would result in paying only ONCE for all that infrastructure. Why NOT??

    Of coure, this is exactly what IS proposed in the Kucinich monetary reform legislation from the 112th US Congress.

    What Neil Wilson meant to say is that he has no idea how PQE compares to PositiveMoney’s construct, such that anyone who is interested should read PM’s “Modernizing Money” book on exactly how this changes banking, and come to their own conclusions.

    Finally, wow, thanks as always to JKH ‘s insights on moving our understandings forward, with one caveat.
    Respectfully, always, financial accounting does not drive the money system. The money system is the foundation for driving all of finance and economy. WHATEVER financial accounting is advanced to both explain and operate the money system, the money system is paramount. Respectfully.

    For the Money System Common.

  44. ” such that anyone who is interested should read PM’s “Modernizing Money” book on exactly how this changes banking, and come to their own conclusions.”

    The only conclusion is that it is confused thinking, but like most pressure groups they refuse to change their mind when the flaws are pointed out.

    It doesn’t work, and believing it works is dangerous. Much like all quack medicine.

  45. 2. It takes away the ‘debt monkey’ that is used to clobber governments that seek to run larger fiscal deficits.

    Don’t you need to be a little more careful with these sorts of statements. Govt debt will still increase. And the conservatives will not let Govt off the hook this easily. It will be rightly pointed out it’s an accounting fiddle if these amounts are buried somehow.

    All PQE will mean is that Govt deficit spending will be funded using reserves instead of bonds. So what. This is what QE achieves. What’s the difference between bonds that will never be paid down in total and BoE reserves. Almost none.

    I personally think bonds are better as it drains bank credit (unless banks hold the bonds) so is less likely to cause investment asset price rises and results in more interest income for the non Govt sector (I know MMT does not seem to agree with this viewpoint). So it would be better to educate people and counter this Govt debt is bad nonsense rather than hiding behind PQE or whatever it is called. But the Govt debt is bad brainwashing is so deep that maybe a confusing name change is the only option.

    Otherwise a great post. I have referenced it at the UK’s PM. Along with Ellens browns article on your blog post

  46. Don’t know how I missed the subsequent replies.

    Daniel D:Clearly the act of a sovereign government printing money is not equal to nor analogous to the act of a sovereign government spending money. That is an irrefutable reality, with all due respect to the halls of economic academe.

    This is not “irrefutable reality”, not saying it like it is, but confused, confusing & wrong, if one uses the phrases “spending money” “printing money” or “crediting accounts” in their common usage, their plain meaning as understood 99+% of the time. Then they are precisely the same thing – for as Wray noted, the government can print things on pieces of paper, but they aren’t money until they are spent somehow. These are just three different ways of stating the initiation of a credit/debt relationship between the government (debtor) & a private creditor.

    Professor Mitchell in my view is correct in his assertion that the term “printing money” is a loaded term.
    As I said above, in my view, Professor Mitchell ( & Keynes & Colander & Aspromourgos) are wrong on either or both of the logical & rhetorical points. Lerner is 100% right – both logically & rhetorically.

    Joe Bongiovanni: Lerner was aware that the Guv does not just create new money by spending money.

    No, Lerner was 100% aware that the government creates new money when it spends. He said so. He rightly criticized people confusing what he called “borrowingandspending” with “spending” (simpliciter, the gov spending/printing money). Borrowingandspending is spending/ printing money and “borrowing” (really reserve-draining a la MMT) by exchanging a bond for a dollar; it is what Keynes called “loan-expenditure” and is the usual way governments spend. But “Spending/printing” is a component of “borrowingandspending”, not something distinct from it, not something to do instead of it.

  47. Some Guy is correct, IMHO.

    The problem arises from the accounting where it is conceived in terms of spot transactions in which money is exchanged for other financial assets or real goods.

    Government finance is not like that any more than it is like currency use by currency users. The currency issuer is essentially different. Currency sovereigns don’t need money to emit currency. This is simply a truism in that this is what defines a currency issuer in contrast to a a currency user.

    Government can issue currency as deposits in accounts at the central bank or as securities accounts there. Banks then mark up accounts on their own books based on the recipients of expenditure or owners of securities. The difference is minimal since the central bank freely shifts government liabilities in these accounts using OMO without changing the amount of aggregate nongovernment net financial assets.

    As Warren Mosler has said, the monetary base should also contain the securities accounts at the cb to reflect this. Government bonds don’t “sterilize” money since they are the most liquid financial asset next to currency, and the central bank acting as lender of last resort always provide liquidity to clear the payments system.

    The currency issuer issues “money”: by emitting its currency into the economy, increasing the aggregate net financial assets of currency users by the amount of emission, which can include spending, transfers and interest payments for example.

    Like other institutions that use money the government has a (consolidated) set of books in which uses of funds corresponds to sources of funds as a matter of accounting procedure. There are various ways of doing this based on political choices and the type of monetary system involved.

    Under the present system currency emission is separate from currency withdrawal, being based on different procedures within government. They are brought together in the budget but the budget doesn’t establish the fiscal balance since some emission is non-discretionary based on previous political decisions.

    Under the present system the general rule is that when funding as a source is insufficient to balance based on withdrawal alone, securities are issued. It’s part of the scorekeeping. There are no individual transactions comparable to spot transactions, for example. It’s batched.

    Commercial banks operate similarly in creating and funding deposits by extending loans. Loans are not funded individually with saver’s deposits, as supposed. The ALM department stays on top of funding and settlement requirements with batch processing rather than individual matching. Loans are individually matched in the deposit created, which balances source and use of funds. But as soon as deposits are drawn down that link is broken and requirements are batched for settlement over a period. Generally books are balanced at the end of the day in banking.

    “Paying for” government expenditure with taxes or “financing” it with bonds is an illusion to the degree that it suggests that a currency issuer needs to obtains what it issues elsewhere. These are simply ways of keeping score internally that are chosen for political reasons rather than being operationally necessities of the system. The scorekeeping could be different without substantial change in the result other than in reports. Sources of funding would just appear in different accounts.

    The actual differences occur in terms of political decisions about distributive effects, who the recipients of government expenditure are and who withdrawal hits. These are political decisions that have social, political and economic impact on a society through policy. This is the subject of political economy, including poli sci and sociology.

    Focusing on the illusions that misinterpretation of scorekeeping involve misses the point of “political” in political economy. Used sophistically and rhetorically to persuade people to choose (vote) against their interests is also part of the political process. It has nothing to do with finance and economics per se. It only obscures them by shifting the framing from reality to appearance.

    As a result the arguments are over the wrong things, which suits some people’s interests just fine. In fact, it is in their interest to complicate finance to the degree that most people can’t understand it and therefor don’t see through the shell game.

  48. To my way of thinking, any bank that ‘invests’ something that actually results in wealth creation must use real money, and not reserves, the only thing that any CB actually issues.,/I>

    Reserves include settlement balances in the reserve accounts held at the cb and currency in held as vault cash by banks, which is only obtained by exchanging settlement balances in reserve accounts at the cb.

    “Money” is the money stock, which has different measure. M1 includes banks deposits and currency in circulation, while M2 includes time accounts. These are the chief stock that people usually think of as money. The monetary base in not included. The MB is not in spendable form.

    Government that are currency issuers neither have nor don’t have money. They create and destroy money in nongovernment accounts through emission and withdrawal that results in changes in the money stock, chiefly M1 by crediting and debiting deposit accounts.

    Banks mark deposit accounts up and down based on government emission and withdrawal, and banks’ settlement balance account are marked up and down correspondingly as banks clear with government in the payments system.

  49. “real money”

    What’s real money?

    Reserves isn’t our money. Its mainly used for banks and monetary sovereign Govt’s to settle with each other.
    Our money is either bank credit or notes and coins

  50. @ RJ

    Exactly. There’s a big difference between a system in which the government needs to obtain that which is at the apex of the money hierarchy or has to honor obligations incurred in a currency that it doesn’t issue and a system in which a government is the issuer of a currency that it alone provides and sets the rules. In the latter case, it’s just a matter of marking accounts up and down iaw the rules that the government sets and printing some paper it alone issues. This is brought home on the currency push to end cash and go entirely digital, where it’s all done by keystroking.

    Because the government sets the rules, these issue become political- often political footballs in a debate where many if not most are ill-informed or misinformed.

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