I didn’t know whether to laugh or cry as I heard Jack Straw trying to explain why Mr Corbyn was wrong in arguing for People’s QE to build faster broadband networks and more homes. The problem for Mr Straw – and many others – is how do you persuade people that buying gilts with newly created money is just fine, but buying something else of more potential economic value is not?
My position on QE was I wanted other solutions to the UK’s banking and monetary crisis. I had after all warned of the impending crunch and suggested ways of avoiding it. I had urged the Bank and the government to offer more short term loans to the commercial banks against security to see them through the crunch once the authorities had created it. After the crunch I urged them to recapitalise the banks more quickly – not with taxpayers money but with asset sales and private equity with possible secured Bank of England loans, as I was always sure we could only have a decent recovery once we had banks capable of lending again to finance it.
Those who argued for QE and imposed it assumed it would do the following
1. Drive longer term interest rates down and keep them low – which it did
2. Force investors to buy riskier assets, driving up their price – which it did
3. Allow banks to sell their gilts so they would have more cash – which it did
Some also assumed it would boost lending. There was no obvious reason why it should do that, as at the same time the banks were forced to raise their capital to loans ratios, thereby preventing them taking advantage of the lower interest rates and possible increased demand for loans by offering more loans.
Some argued it would boost demand. It was never going to do much of that. Buying bonds from pension funds did not boost demand, as they were unable to pass on the rise in the value of their gilt holdings in the form of lower contributions, allowing people more spending money. Instead owing to the way pension funds are valued the lower interest rates increased the apparent deficits leading if anything to higher contributions! Allowing banks to sell gilts at a premium did not tackle their capital adequacy problem sufficiently and much of it was taxed back in fines and higher taxes. Some rich people maybe sold gilts at a better profit but overall this would not have boosted demand much.
The QE programme arguably made it easier to finance the large government deficit which both Labour and the Coalition allowed to run at high levels when demand was especially weak. It also probably added to the downward pressure on the pound, which increased inflation, cut living standards a bit more but may have helped some price sensitive exports.
The reason why all QE is usually wrong is very simple. It is pure inflation, if all other things are equal. IF you have functioning banks and reasonable use of resources in the economy and print a lot more money, you will find most of the printing just boosts the price of everything. Inflation is theft. You only get away with QE if the banking system is badly impaired and unable to lend all the newly created money on. QE to expand state spending is best left to Zimbabwe and Venezuela. Countries which try it on any scale usually end up with inflation, high debt and recession.