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Monetary liquidity operations and fiscal policy interventions

Today, is the official launch of my new book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale – in Maastricht, which is an appropriate geographic location given the book proposes to dismantle the Eurozone. It just happens to be the place (Maastricht University), where we established CofFEE-Europe (a sister centre to my research centre in Australia). There are two excellent guest speakers (see below) and I am very grateful that they agreed to accept the invitations. The upshot is that I haven’t all that much time today. Over the next few days I will address some points that were raised in question time or at the reception (aka cup of tea and cakes) after the event in London last Thursday evening. There is still work to be done if the progressive side of politics is to fully understand Modern Monetary Theory (MMT) and the implications of it for policy development and choice.

PQE will fail

A person challenged me on Thursday about the policy proposal advanced within the Jeremy Corbyn camp which they, unfortunately, call People’s Quantitative Easing (PQE).

I wrote about this proposal in detail in this blog – PQE is sound economics but is not in the QE family.

I think it was unwise to call a policy approach PQE and thus suggest it is related to QE in some way but is ‘fairer’ because the ‘people’ get the benefits rather than the ‘banksters’.

This is a case when so-called smart politics shoots itself in the foot because the language is wrong and introduces unwarranted criticism which derails the underlying policy sense of the proposal.

PQE is not related to QE in any fundamental way – the latter is an asset swap that does not change the net wealth (net financial assets) of the non-government sector and is best seen as a central bank liquidity management operation.

PQE is, in fact, what has been called Overt Monetary Financing and is clearly a fiscal operation because it would alter the net wealth (net financial assets) of the non-government sector – it would increase the net financial assets in the non-government sector.

The operational realities of QE and PQE, in this respect, are fundamentally different and the terminology used by the Corbyn camp is profoundly misleading and in my view unhelpful.

You just have to see some of the conservative responses to the proposal when it was launched to see how the language has diverted the debate into irrelevant and erroneous disputes.

Please read the blog – OMF – paranoia for many but a solution for all – for more discussion.

The mistakes continued on Thursday night in London. I was told that the proposal was not worthy of support – some rather unfortunate descriptors were used – because the central bank would apparently counteract or offset the fiscal stimulus by selling bonds anyway, apparently reversing the spending stimulus.

Dear me!

So let us get this straight.

The argument presented was this (I note it has been articulated in some detail on a blog the following day and the term “monetary snake oil” was used to describe PQE). I won’t link to it because it doesn’t warrant receiving traffic.

The points raised though are raised regularly by those who want to have input into the debate but do not really understand fully what they are writing.

The discussion is about operating factors that govern a central bank’s ability to maintain a stable interest rate as an expression of its policy stance.

Modern Monetary Theory (MMT) has articulated this process more accurately and clearly than the mainstream (and for that matter, the more standard Post Keynesian thought).

Central bank operations aim to manage the liquidity in the banking system such that short-term interest rates match the official targets which define the current monetary policy stance.

So the central bank sets a particular interest rate as its policy position, believing that rate will condition all the borrowing rates in the economy and produce desirable influences on total spending (via the interest rate sensitive components of spending – investment and consumer durables).

The fact that spending may not be particularly sensitive to interest rates movements (and levels) is beside the point in the context of our discussion.

Commercial banks maintain accounts with the central bank which permit reserves to be managed and also the clearing system to operate smoothly.

If the demand for reserves is higher than the supply at any point in time, then there will be upward pressure in what we call the interbank market which is where banks shuffle reserve balances between themselves according to their own particular needs on any one day.

The opposite pressure will occur if there are excess reserves (supply exceeds demand).

Banks need reserves to ensure all the transactions drawn against them will be honoured within the payments or clearing system. If they are caught short on a particular day then they seek the funds from other banks (who might have more reserves than they need) or, ultimately, from the central bank.

Banks have an incentive to hold minimal reserves because they usually earn low rates of return, which could include a zero return.

The central bank has to ensure that there is no excess demand or supply in this ‘cash’ market, which is what liquidity management is all about. By ensuring that all demands for reserves by the banks are met, the central bank can eliminate pressures on short-term interest rates and thus sustain its policy position – as represented by the current short-term interest rate.

In managing liquidity, the central bank may:

(a) conduct so-called open market operations which means they will buy from the banks to add reserves (when there is excess demand) or sell government bonds to the banks to drain reserves (when there is a shortage of reserves) to ensure there is no reserve imbalance in the cash market.

(b) buy certain financial assets at discounted rates from commercial banks in exchange for reserves (a ‘reserve drain’).

(c) impose penal lending rates (‘discount’ rates) on banks who require urgent funds (a ‘reserve add’).

In practice, most of the liquidity management is achieved through (a).

That being said, central bank operations function to offset operating factors in the system by altering the composition of reserves, cash, and securities, and do not alter net financial assets of the non-government sectors.

It is crucial to understand the last point about the effects of these monetary or liquidity operations on the net wealth of the non-government sector.

In addition to setting a lending rate (discount rate), the central bank also sets a support rate which is paid on commercial bank reserves held by the central bank.

Prior to the GFC, many countries set the rate at zero (the US and Japan, for example), while other nations, such as Australia and Canada gave some return on surplus reserve accounts which was below the policy target rate.

The support rate becomes the interest-rate floor for the economy.

The short-run or operational target interest rate, which represents the current monetary policy stance, is set by the central bank between the discount and support rate. This effectively creates a corridor or a spread within which the short-term interest rates can fluctuate with liquidity variability.

It is this spread that the central bank manages in its daily operations.

At the end of each day commercial banks have to appraise the status of their reserve accounts. In most nations, commercial banks by law have to maintain positive reserve balances at the central bank, accumulated over some specified period.

Those that are in deficit can borrow the required funds from the central bank at the discount rate. Alternatively banks with excess reserves are faced with earning the support rate which is below the current market rate of interest on overnight funds if they do nothing.

Clearly it is profitable for banks with excess funds to lend to banks with deficits at market rates. Competition between banks with excess reserves for custom puts downward pressure on the short-term interest rate (overnight funds rate) and depending on the state of overall liquidity may drive the interbank rate down below the operational target interest rate.

When the system is in surplus overall this competition would drive the rate down to the support rate.

The demand for short-term funds in the money market is a negative function of the interbank interest rate since at a higher rate less banks are willing to borrow some of their expected shortages from other banks, compared to risk that at the end of the day they will have to borrow money from the central bank to cover any mistaken expectations of their reserve position.

The main instrument of this liquidity management is through open market operations, that is, buying and selling government debt.

When the competitive pressures in the overnight funds market drives the interbank rate below the desired target rate, the central bank drains liquidity by selling government debt. This open market intervention therefore will result in a higher value for the overnight rate.

Importantly, we characterise the debt sales by the central bank as a monetary policy operation designed to provide interest-rate maintenance. This is in stark contrast to orthodox theory which asserts that debt-issuance is an aspect of fiscal policy and is required to finance deficit spending.

It is also important to understand the impact that fiscal deficit spending (government spending in excess of taxation receipts) has on the ‘cash’ position of the economy each day. The obverse impacts occur for surpluses.

Government spending (G) adds to bank reserves and taxation (T) drains them. So on any particular day, if G > T (a fiscal deficit) then the level of bank reserves are rising overall.

Any particular bank might be short of reserves but overall the sum of the bank reserves are in excess. It is in the commercial banks interests to try to eliminate any unneeded reserves each day. Surplus banks will try to loan their excess reserves on the Interbank market. Some deficit banks will clearly be interested in these loans to shore up their position and avoid going to the central bank’s discount window which usually will be a more expensive option.

The upshot, however, is that the competition between the surplus banks to shed their excess reserves puts downward pressure on short-term interest rates.

But the non-government banking system cannot by itself eliminate a system-wide excess of reserves that the fiscal deficit created. A loan by one bank to another doesn’t alter the reserve position overall.

But the central bank can obviously alter the overall reserve position – in this case it would sell bonds to the banks to drain reserves. The bonds are attractive to the banks because they are risk-free and bear interest.

The alternative is to offer a support rate on the excess reserves. This decouples the relationship between the bond sales and the central bank interest rate maintenance operations.

This background is essential to understand and demonstrates why the “snake oil” accusation levelled at PQE is … um … snake oil.

We read from the un-cited article:

And here’s why People’s QE (PQE) is snake oil. So long as the BoE is still targeting inflation, it will still be pushing and pulling money in and out of the system, as required to meet demand for money at the interest rate it has set. If the BoE is still targeting inflation, then whatever money PQE puts into the economy on one hand, the BoE is going to be taking out with the other. Or, if the BoE happens not to take the money out, that implies it would have been putting it in, anyway. And that means that over the long run … the extent to which the government is able to spend without borrowing, is not affected by PQE.

Spot the confusion?

First, the central bank expresses its inflation target as a particular inflation rate and sets the interest rate that it thinks will scale total spending in the economy to be consistent with the available real productive capacity of the economy to produce goods and services for sale.

The reserve operations we described above are not designed to reduce or increase total spending in the economy but, are rather, designed, as explained, to manage the reserve position in the cash markets and ensure the interest rate target is met each period.

Second, there is a confusion here between the reserves in the banking system (stocks) and the flow of spending that the PQE would generate.

The implication that PQE adds “money” which is then taken out again by the central bank intent on controlling inflation is quaintly inaccurate.

The monetary operations influences the reserve position of the system and the way non-government wealth is expressed (the so-called portfolio composition of wealth) but not the spending capacity of non-government sector. That is quite another thing.

The central bank operations do not ‘take money out of the system’ – in the sense of taking purchasing power from the non-government sector. Reserves are not loaned out by banks to those seeking credit.

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

Third, the central bank does not have to conduct any open market operations (reserve adds or drains) to sustain its target rate of interest. It can simply make it costless for banks to hold the extra reserves by matching the support rate to the target rate. Then the excess reserves are indistinguishable from holding an interest-bearing government bond.

Fourth, and most importantly, the fiscal effects of the PQE deficit spending, which increase net financial wealth (assets) in the non-government sector are not altered by the particular monetary operation that the central bank deploys to sustain its monetary policy interest rate target.

The latter operations do not alter the net financial assets in the non-government sector. They merely alter their composition (cash or bonds, for example). The fiscal intervention directly boosts spending whereas a bond sale has no obvious impact on overall spending given that it involves a swap of a reserve balance (cash) for the bond.

So depending on the operations conducted by the central bank to manage liquidity, there is no reason to every issue government debt to match deficit spending.

The central bank would not have to conduct any open market operations and could just leave the reserves in the system, which effectively means the interest-earning reserve accounts are identical to interest-earning bonds, just the name of the ‘account’ with the central bank (government) is changed. Trivial.

Which means the statement that “that over the long run … the extent to which the government is able to spend without borrowing, is not affected by PQE” misses the point entirely. The PQE changes the net financial assets in the non-government sector, the monetary operations do not.

The author indicated that PQE was different to QE because the latter is an asset swap that has little impact on total spending (if any), whereas PQE directly impacts on total spending.

Which makes the previous comments about the central bank effectively stifling the expansionary impact of PQE rather odd to say the least.

But apparently this means PQE will cause inflation:

For PQE inflation is a feature, not a bug. Now it’s true that there may be some slack in the economy and some of the things the envisaged PQE-financed National Development Bank would do might raise productive capacity, so there might be some scope to raise demand without inflationary pressure. But step beyond that and either the BoE would neutralise it, or, if prevented from doing so, we’d get inflation.

First, inflation is not a feature of what has been termed PQE. Inflation is a risk associated with all spending – government or non-government.

Second, it is also not an inevitability of an ever expanding money supply. As long as there is real productive capacity available to absorb the nominal growth in spending, firms will increase output when sales demand increases.

Third, issuing bonds to the non-government sector does not reduce the inflation risk of government deficit spending. That operation just alters the cash-bond-other financial asset mix of non-government wealth.

Fourth, of course inflation will result if nominal spending (whether it is called PQE or whatever) outstrips the real productive capacity to respond. Hardly insightful and a point that is not exclusive to ‘PQE’ or what I would prefer to call Overt Monetary Financing (OMF).

Stephanie came up with the extension – Overt Monetary Financing for Government (OMFG), which I thought was cute but ranks up there with my original name for the Job Guarantee – the Buffer Stock Employment scheme (BSE). That acronym fell into disrepute into the 1990s when cows became ill in Britain!

So essentially all this nonsense about monetary operations etc come down to an argument that OMF would be inflationary. Well a well managed policy framework would take care of that.

It would not be up to the central bank to “neutralise it” How actually would it do that? The only tool it has is to try to raise interest rates, which might actually deliver perverse results.

Given inflation risk is about spending not these monetary operations, the sensible policy framework, should the government consider it desirable to utilise a particular quantity of real productive resources in an infrastructure program and know that that spending would drive the system beyond its real limits, is to deprive the non-government sector of purchasing power through taxation increases.

The taxation increases directly reduce net financial assets in the non-government sector just as the spending adds to them. The central bank would have nothing to do with these policy shifts.

The rest of the un-cited diatribe is more inflation scaremongering – out of control left-wing politicians sacking central bank governors and spending too much.

It also propagates neo-liberal myths that governments should finance deficits with debt issuance especially when interest rates are low which, according to this economist, makes OMF “entirely unnecessary”.

Same old.

Conclusion

There were several other issues raised that I will address in the coming days (maybe).

But the arguments about OMF (or ‘PQE’) are a good vehicle to really demonstrate the difference between a monetary operation and a fiscal policy intervention.

Unfortunately, the differences are no well understood which leads to the conclusions that OMF would be inflationary. It might be but not because there is no debt issued. It would be inflationary if it pushed nominal spending beyond the capacity of the economy to respond in terms of producing more real output.

A related issue that came up was the need to issue bonds at all. OMF is criticised by some who seem to understand the operational differences I have discussed in this blog because, as best I can understand, the workers need a safe asset in which to park their savings.

We might agree on the last bit but that doesn’t require any public debt being issued. I will come to that argument in the following days.

Today’s 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. Refreshments will be served afterwards (aka tea and biscuits) with 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 today.

Just rock up to the venue.

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    This Post Has 29 Comments
    1. “Stephanie came up with the extension – Overt Monetary Financing for Government (OMFG), which I thought was cute but ranks up there with my original name for the Job Guarantee – the Buffer Stock Employment scheme (BSE). That acronym fell into disrepute into the 1990s when cows became ill in Britain!”

      Thanks for the LOL moment (in the office) in an otherwise seriously important piece.

      Looking forward to hearing about the other interactions in London and the state of mind of the Corbyn camp.

    2. Great piece Bill.
      So that’s what they were arguing about.
      Wouldn’t you think with Danny Blanchflower on board, Murphy would be more clued in on this stuff though ?

    3. You’ll love this one Bill although it makes me want to cry. How do you stay so calm when you engage with these people? Owen Jones has written an article here about Corbyn’s economic strategy under the heading “Economic credibility”

      Economic credibility is key. So a Corbyn-led Labour party should set up some sort of ‘Council of Economic Advisors’ composed of the various economic brains who back an alternative to austerity, and use it to flesh out a viable alternative based on clearing the deficit in a way that doesn’t punish working people, disabled people, and so on. A big coup would be the use the Labour Party’s considerable economic resources to hire the Nobel Prize-winning economist Paul Krugman as an advisor.

    4. Excellent!
      Let me remind that a reserve deficiency is best considered to already be an overdraft.
      So it’s not about the cb adding reserves but always about price and not quantity

    5. I’m glad that we agree that QE and PQE are not the same thing, and PQE is essentially overt monetary financing.

      Having said that, I’m afraid I think that the central tenet of your argument is flawed.

      “Third, the central bank does not have to conduct any open market operations (reserve adds or drains) to sustain its target rate of interest. It can simply make it costless for banks to hold the extra reserves by matching the support rate to the target rate. Then the excess reserves are indistinguishable from holding an interest-bearing government bond.”

      If this is the case, then a bank lending it’s excess reserves to the BOE will effectively be buying a bond from the BOE. Which will be removing reserves from the system, so there is no change when compared to bonds sales. Certainly on banks ALCO books they would be treated in almost identical fashion. If it looks like a duck, walks like a duck……

      If the bank doesn’t place it’s excess reserves with the BOE (which will only happen if there is no more profitable way of placing them), the bank will likely lend out these reserves – which will lead to re-hypothecation and a more pronounced increase in broad money supply.

      We know there is a link between M3 and inflation (thanks to work done by the ECB at https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1027.pdf) so the questions really is this: if we increase M0 through PQE, what will the effect on M3 and thus CPI be?

      MMT relies on either bond sales (which are the same as OMO at a support rate) or taxation as the primary mechanism to withdraw liquidity from the system. Both allow broad money supply to increase (through leakage) before it can be properly sterilised through these mechanisms.

      If we add 50bn of M0 through PQE to the system (when UK M0 is currently 72.6bn) what will the effect on M3 be and how much will it drive inflation??

      More importantly, would bonds sales (or equivalent) be enough to control any resulting inflation, let alone tax increases which have an effective event horizon (taxation can’t exceed GDP, before accounting for Laffer curve effects – it’s unrealistic to expect 100% tax collection.)

    6. “The central bank operations do not ‘take money out of the system’ – in the sense of taking purchasing power from the non-government sector.”

      yes but that’s not what I was talking about. I am talking about reserves, base money. Yes i know that’s about composition not change in quantity of assets. The reasons I am talking about that is that my argument concerns idea that PQE can deliver a material and sustained increase in spending without borrowing or inflation. To deliver that, we need sustained increase in rate of seigniorage, permanent monetary expansion. That is how this idea of spending without borrowing is suppose to work – bonds are purchased by BoE, and those bonds are not later sold into private sector (in fact Murphy says would cancel them). My argument is merely that under current MP regime an inflation targeting central bank cannot commit to do that. You may not think that’s the point of PQE, but it’s the point I was addressing because that’s what it’s proponents are claiming. Yes I know CB expanding its balance sheet needn’t be inflationary, if you want to believe that Corbyn could manage PQE *and* deliver a sustained an material increase in govt spending relative to the counterfactual, without causing any inflationary pressure that the BoE would want to counteract, I have a bridge to sell you. Fine, inflation is a risk associated with all spending. PQE financed govt spending comes under “all spending”.

      As you say, central bank policy affects reserve position. What do you think happens when CB starts raising rates in effort to tighten? “When the competitive pressures in the overnight funds market drives the interbank rate below the desired target rate, the central bank drains liquidity by selling government debt.” Well quite. That’s my point. Unless you believe PQE can be managed judiciously enough by politicians to avoid inflationary pressure, BoE going to tighten, sell govt debt, meaning PQE will not achieve that its proponents claim.

    7. Great piece Bill-

      There is one point I’d like to bring up. Dan Kervick over at Mike Norman Economics brought up an interesting question the other day about PQE. I have not seen the actual PQE proposal so I’m not sure on the technical details exactly, but if the purpose of PQE in the UK is to create a National Investment Bank whose bonds are purchased by the BofE to fund the NIB (so far so good with your description above), but instead of the NIB spending the money directly (fiscal policy, NFA increase), Kervick had mentioned that he read the PQE proposal as the NIB would simply be making loans to different state entities in order to pay for infrastructure spending.

      So it appears we have two alternative scenarios for PQE,

      1) the NIB spends its bond financed (via CB purchases) money on infrastructure projects around the UK, clearly a fiscal policy operation

      or

      2) The NIB LENDS its bond financed (via CB purchases) money around the UK so that different state entities can take on infrastructure projects with low interest costs. In this case this PQE would be more a little more complicated from a MMT perspective. Because the NFAs of the private sector do not increase in scenario #2, this is more like the Chinese model where they dont necessarily do alot of traditional deficit spending but their state owned banks lend widely and increase domestic spending in this way.

      I really hope that PQE is more #1 than #2.

    8. Could you do a what all this means in simple terms kind of a piece?

      Does it roughly equate to printing money to spend to stimulate the economy when monetary policy can’t do the job?

    9. We are getting to the core of the problem.
      Why attempt to increase capacity or productivity when there is clearly enough stuff, indeed far too much stuff which of course depreciates into dust.

      Why is not the debt self liquating Bill?
      Why do people need to save in all seasons rather then the autumn gathering of the past.
      How much claims on the real economy do we need.
      Surely the purpose of the economy should be to service real human level demand.
      Capitalists as diverse as Bill and Larry and Mo share one common characteristic.
      The need to preserve concentration at all costs be it in a market state of the european union or uk union or post treaty of westphalia hybrid banking / nation states
      There is little difference other then the scale of such operations.

      Capitalists are little more then money monopolists.engaged in the business of concentration.

    10. I believe it’s being called PQE, formerly GQE (G being for green when it was part of the Green Party’s manifesto) because the public are already familiar with the term QE and associate it with, to a degree, non-inflationary money creation. They probably shouldn’t, but, thanks to Osborne’s earlier gift to the bankers and the media treatment of it, they do. If Corbyn (or the Greens) went for technical accuracy and called it OMF they’d have to sell the public all over again on this (to them) entirely new concept. As things stand, QE is now a blanket term for money creation or printing. It’s not what one might wish, but there you are. The important thing is the voting public are becoming accustomed to the idea that money can be created from nowhere without the country immediately fast-forwarding automatically into hyper-inflation, effectively undermining, in the popular understanding, Osborne’s justification for austerity. Chickens, then, are noticeably closer to roosting, and it’s not before time; people are dying here.

    11. In a land still in a state of “Animal Farm” mentality where “Invisible Hand” Neoliberalism believes government creation of money from nothing is not only impossible but “bad” but banks creating money from nothing is sort of possible (because the BoE says so) and “good” the BoE creating non-repayable loans to fund a “patriotic” National Investment Bank ruffles hardly any feathers or hackles. Add in a few “Granny Bonds”(Neil Wilson’s term not mine) as camouflage and hey “Rule Britannia!”

    12. The fallacy in connection with PQE is to believe that a sovereign central bank can create from nothing only one type of money “reserves money” when in fact it can also create “broad money.” In other words liquidity is liquidity is liquidity!

    13. Dear Tyler (at 2015/08/31 at 21:12)

      Please tell me how banks loan out reserves! None that I have ever studied ever do or can. They never loan out reserves.

      best wishes
      bill

    14. Bill: “Please tell me how banks loan out reserves! None that I have ever studied ever do or can. They never loan out reserves.”

      It’s obvious from the accounting. Reserves only exist as entries on the spreadsheets of central banks in the deposit accounts that members hold there. The deposits that banks create by extending loans are all on banks’ spreadsheets in customer deposit accounts.

      Confusing reserve balances with bank customer balances is a category error.

      Bank reserves consist of banks’ reserve balances in the payments system run by the central bank and also vault cash that banks obtain by exchanging reserve balances for bills and coin at the central bank to meet window demand. So it is true that the cash component of reserves passes from vault cash to currency in circulation when bank customers draw down deposit balances for cash at the window.

      As soon as the cash passes through the window it is no longer counted as part of the bank’s reserves. Cash withdrawals are counted as cash in circulation as a component of M1, along with customer deposit balances. When customer deposit balances are drawn down for cash, M1 remains unchanged but bank reserves decrease in the amount of the cash withdrawal.

      Bank loans increase M1.

      Banks only lend reserve balances to each other in the overnight market and the rb never leave the payments system other than being exchanged for vault cash. Their function is as settlement balances in the payments system.

    15. @ Bill

      I said “excess reserves”. I should probably have been clearer and said any cash over and above that needed for regulatory reasons. If a bank has too much cash at the end of a day anything it doesn’t need will get placed in the money markets – otherwise the bank will be losing money on any cash that isn’t placed. That money has to “work” for it to earn interest – banks don’t can’t pay themselves you know….

    16. Disclaimer this is not a real policy suggestion just making a point.
      I have devised a new QE.RRQE- revenue raisng quantative easing.
      The BOE will offer an unlimited amount of bonds at 25% apr under condition it will
      buy back 99% of them next day in the secondary market.As currently with bonds held
      by central banks the interest will be revenue for the treasury’ providing ‘money
      for infrastructure investment.
      My point all these interesting money mechanics are cases of not seeing the wood for the trees.
      Are governments soveirgn in their own currencies? In the long run can governments spend more
      of their currency than they take in taxes.Well its been doing that for over four centuries in the uk
      even with a gold standard for much of that time.
      The inflationary consequences of economic growth (increased spending) are complex and secondary.
      Do we want government to direct real resources (mainly labour) for the benefit of the many?

    17. Snake oil is traditionally associated with cons and con-men. By labeling PQE as snake oil, you’re overtly making the obviously unwelcome suggestion that the purveyors of PQE are somehow engaged in knowingly conning the public, in this case presumably to advance their own nefarious political ends. I must say, if I was Murphy I’d have shrugged this off because, really, who cares what you think? At the same time I can quite see why he’s upset. In my view, you should be apologising, not trying to justify your entirely inappropriate language.

    18. “PQE won’t do what its proponents claim whilst the BoE still has an inflation targeting mandate.”

      Yes it will, because you have made the mistake of assuming that the projects so funded are time sensitive. They are not. At least not all of them.

      So if there are no bids, then they stays on the shelf and the PQE funding stays in the bank.

      There is no need to chase the wage, so why assume that it will be designed that way?

      It works like this:

      The government decides which infrastructure projects are time sensitive and required. It makes sure, via taxation or planning control, to free up space to ensure those projects happen. The private sector is then allowed to use the rest of society’s resources as it sees fit. Any resources the private sector chooses not to use are then deployed on ‘nice-to-have’ public infrastructure projects.

      If you are balancing the current budget in a system with a social security spending arrangement of any sort, and particularly if you have excess imports, then you will tend to over tax the economy. That creates space, which the public infrastructure projects fill and make sure that the current budget balancing nonsense actually occurs.

      What you are missing is the over tax to balance the current budget, which is guaranteed to slam monetary policy straight into the lower bound, and the countercyclical time-insensitive nature of a lot of the infrastructure projects.

    19. “BoE has to sell bonds to defend its policy rate, that is still because it’s inflation targeting”

      BoE hasn’t sold bonds to defend rates for years. Since it pays interest on reserves and there are excess reserves in the system it has no need.

    20. “If a bank has too much cash at the end of a day anything it doesn’t need will get placed in the money markets”

      That ‘money market’ is other banks. Net they can’t get rid of it. It just moves from one bank to another. Since there are excess reserves they just bid it down until somebody decides to leave it on overnight deposit at the BoE (i.e. ‘lend’ it to the BoE) and collect their 0.5%.

    21. Bill,
      I wonder if you have commented elsewhere on the proposals of the Positive Money movement.

      [Bill deleted a link to PM on the grounds that I will not send traffic there]

      PQE all seems on fours with the PM proposals, with the difference that PM proposes to give the power to determine the amount of Sovereign Money ‘created’ to the MPC.

      The extra money thus made available is transferred to the Treasury to spend where it politically decides, but the Government has no sticky fingers on the amount itself.

      The hope is that the MPC will make their decision based on the needs of the economy as it does now in respect of rates of inflation….

    22. I always love these descriptions of operations by Bill. I cannot hear them often enough, as I try to ram the ideas into my head!

      It struck me that there is an operation that could accurately fit the term People’s Quantitative Easing (PQE), to whit:

      The Crown offers to restructure all credit card debt and other high interest household debt into unsecured, very low-interest loans.

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