The ECB should not become a fiscal agent

On November 29, 2016, Mario Draghi, the President of the ECB wrote to Mr Jonás Fernández, a Spanish European Parliament member in reply to a request for clarification from the Chairman of the EP’s Committee on Economic and Monetary Affairs (ECON). The Letter discussed whether it would be legal under the Lisbon Treaty for the ECB to engage in direct monetary transfers to citizens bypassing the Member States and whether such a policy would be beneficial for economic growth. Several commentators have seized on the response from the ECB as saying that such a policy innovation would be both legal and beneficial. My view is that, in forming this conclusion, they have not fully understood the difference between a monetary and a fiscal operation. While I think the policy would produce positive results, in the sense that it would stimulate growth and employment and reduce unemployment, I also believe it would be illegal under the Treaty. Further, I don’t think it is a progressive position to argue that a group of unelected and unaccountable technocrats in the central bank should be in charge of economic policy. That should be the responsibility of the democratically-elected members of the government who are fully accountable every electoral cycle. The ECB should not become a fiscal agent. Rather, if the Eurozone elites cannot implement (which they cannot) a full federal treasury function then it should disband the monetary union in an orderly way.

The letter trail began on July 28, 2016, when Mr Jonás Fernández and Dutch MEP Paul Tang posed a question (Z-000081/2016) to the ECB – ECB-financed capital allocation for eurozone citizens – which required a written answer.

In that letter, Fernández and Tang explicitly asked the ECB to comment on statements that were in a research paper published by Frank Van Lerven (a prominent Positive Money proponent and associated with QE for the People) that:

It would be more effective … if the money intended for each NCB [national central bank] to conduct QE [quantitative easing] were divided equally amongst all citizens. In effect, the money that would have been created through QE would be paid directly into people’s bank accounts and would put additional purchasing power directly into people’s pockets. This increased purchasing power should translate into increased consumer spending, which would lead to higher incomes, a rise in output of goods and services as well as reduce unemployment.

See the comments (below) for clarification by Frank Van Lerven on the source of the statements attributed to him by the MEPs.

As an aside, I agree with the statement but more on that later.

Frank Van Lerven was then quoted in the Letter as saying that such a move by “the ECB would not actually be breaking any EU laws”.

The MEPs wanted to know if the ECB agreed with the legal view that direct transfers to Eurozone citizens from the ECB would be consistent with the ECB’s Treaty obligations and whether the ECB thought that such a policy innovation would be beneficial to the real economy of the Eurozone.

Mario Draghi replied on September 19, 2016 – Letter from the ECB President to Mr Fernández and Mr Tang, MEPs, on monetary policy – where he said:

The Court of Justice of the European Union (CJEU) … held that the ECB must act within the limits of the powers conferred upon it by primary EU law, have a legitimate objective of monetary policy, and use its available instruments for the purpose of implementing that policy. Any monetary policy measures adopted must also be proportionate to the objective of that policy and observe the prohibition on monetary financing laid down in Article 123 of the Treaty on the Functioning of the European Union.

So Chapter and Verse of the official Eurozone line about the ECB and the Treaties. No direct funding of Member State fiscal deficits.

Draghi also noted that the proposal outlined in the MEP’s Letter referred to “helicopter money”, which he had addressed in an earlier letter – Letter from the ECB President to Fabio De Masi, MEP, on monetary policy – on April 18, 2016.

He referred Fernández and Tang to that response.

Fabio De Masi, a German MEP on the Left had posed the question (Z-000023/2016) to the ECB – Helicopter money/citizens’ dividend:

1. Is the ECB considering unconventional policy measures, such as ‘helicopter money’ or a citizens’ dividend, i.e. where the ECB would directly pay money to residents of eurozone Member States to stimulate private demand?

2. Are such measures in accordance with the ECB’s mandate (regardless of whether or not they are currently being considered)?

3. Would such measures provide a sufficient economic boost to push inflation rates towards the ECB’s target?

So, the later question in November 2016 from Fernández and Tang was essentially asking the same thing, hence Draghi’s deference to his earlier response.

In his Letter to De Masi, Draghi wrote that the current policy suite adopted by the ECB was “working” and added that:

Helicopter money means different things to different people, but all these schemes are fraught with complexities from accounting, operational, and legal perspectives, especially as regards compatibility with Article 123 of the Treaty on the Functioning of the European Union.

In other words, Draghi considers that helicopter money (whatever it is) would violate Article 123 of the Lisbon Treaty (Treaty on the Functioning of the European Union), which says:

1. Overdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of the Member States (hereinafter referred to as ‘national central banks’) in favour of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments.

2. Paragraph 1 shall not apply to publicly owned credit institutions which, in the context of the supply of reserves by central banks, shall be given the same treatment by national central banks and the European Central Bank as private credit institutions.

Apparently, not satisfied with that answer, Mr Jonás Fernández pushed ahead. On November 15, 2016, he posed a further question (Z-000107/2016) to the ECB (Extending the LTRO programme to households) which required a written answer.

He sought to clarify what Mario Draghi had meant in his April Letter to Fabio De Masi about helicopter money.

Explicitly, Fernández asked:

Since Article 123(1) of the Treaty on the Functioning of the European Union (TFEU) forbids lending to EU and Member State bodies and public sector companies, it is clear that direct lending to Eurozone households through the LTRO programme, for example, is not within the scope of this prohibition, since private citizens cannot, with all certainty, be considered in any way public entities.

Can the ECB President therefore explain what the ‘legal complexity’ of the said monetary policy option is in connection with Article 123(1) of the TFEU?

Draghi’s response (November 29, 2016) – Letter from the ECB President to Mr Fernández, MEP, on monetary policy – noted that:

1. “helicopter money as an instrument of monetary policy has never been discussed by the Governing Council.”

2. He once again referred Fernández to his reply to Fabio De Masi (as above).

3. On the legal issue (compatibility with the Treaty, he wrote:

While the governments of euro area countries would not be the direct recipients of a cash transfer involved in such a scheme, legal complexities could still arise if the scheme could be seen as the ECB financing an obligation of the public sector vis-à-vis third parties, as this would also violate the prohibition of monetary financing. In order to determine what constitutes a form of financing of the public sector’s obligations vis-à-vis third parties, an assessment has to be made of whether the task concerned is a central bank or a government task, i.e. a task falling within the responsibility of the Member State institutions mentioned in Article 123 of the Treaty.

Draghi finished by claiming that “the transmission of our monetary policy measures is proving to be very effective” and that there was no need for additional measures, such as “helicopter money”.

So the legalities come down to an assessment of whether a direct transfer of ECB funds to Eurozone citizens was a monetary operation or a fiscal operation. If it was deemed to be the former then it would be legal under Article 123. If the latter, then clearly not.

The QE for People group waded in claiming this interchange as some sort of victory.

On December 3, 2016 they wrote a blog – ECB confirms ‘helicopter money’ is legally feasible under conditions – where they cite Draghi’s November 29, 2016 Letter (above) as evidence that the ECB could hand out money directly to citizens of the Eurozone under Article 123.

QE for People is a group that considers the current QE program of the ECB to be “an ineffective and unfair response to the financial crisis” (Source).

Instead, they “propose an alternative form of QE which would make sure money is spent into the real economy and benefits those that need it the most. We call this concept ‘Quantitative Easing for People’.”

The same terminology came up when Jeremy Corbyn was campaigning to take over leadership of the British Labour Party. At the time, I wrote this blog about the proposal – PQE is sound economics but is not in the QE family.

Other blogs of relevance:

1. OMF – paranoia for many but a solution for all.

2. ECB should start funding government infrastructure and cash handouts.

3. Helicopter money is a fiscal operation and is not inherently inflationary.

4. Keep the helicopters on their pads and just spend.

5. Quantitative easing 101.

My opinion hasn’t changed since I wrote those blogs.

The QE for People think the ECB Letter means that “helicopter money must be framed as a monetary policy tool if it is to be legally implemented in the Eurozone” – that is, a “central bank task” (relating to monetary policy).

The spokesperson for QE for People wrote:

This clearly is the core question, but in fact the letter shows that the ECB already knows the answer: if a helicopter money programme is independently designed, decided and implemented by the ECB for the purpose of price stability, then clearly it is a monetary policy task.

I disagree.

The ECB letter does not say that helicopter money is legal under the Treaty. What it says is that the matter would come down to “whether the task is concerned is a central bank or a government task”.

That is, whether it is a monetary policy action or a fiscal action.

It is all very well to claim that because it is the central bank doing something, that that means it is a monetary policy action.

The ECB has been getting around the Treaty for years (since May 2010 when it instituted the Securities Market Program) by claiming that its massive bond purchase program in the secondary markets was to facilitate its liquidity management operations.

First, the scale of the bond buying exceeded any reasonable estimate of open market operation requirements by a considerable margin.

Second, the ECB was paying (through its standing facilities) interest on the excess reserves anyway, thereby avoiding the need to maintain its (low) interest rate target with bond sales. So it was creating the excess reserves through bond purchases and then paying income on those reserves – the latter being a fiscal action.

The QE program that the ECB embarked on in 2010 was clearly a fiscal action designed to keep bond investors happy and buying debt from troubled governments (for example, Italy) in the primary market to avoid a Member State becoming insolvent. The investors knew they would be able to quickly off load the debt at a profit in the secondary market courtesy of the ECB’s QE program.

The fact that the European Commission (and Council) turned a blind eye to it just tells us that the elites in Europe will do anything to defend their position.

So the ECB can clearly engage in fiscal actions, given the flawed way in which the monetary union was designed and implemented. It has been playing the role of federal fiscal agency for several years now.

As I wrote in the blog cited above (PQE is sound economics but is not in the QE family), it is highly misleading to conflate the current practice of quantitative easing, where the central bank swaps bank reserves for financial assets such as government and corporate bonds (purchased in the secondary market) with the proposal known as helicopter money.

While it sounds rather cute to call QE the policy for the banksters and elites and QE for the people (PQE), the two concepts are not akin.

Why is that?

PQE involves the central bank, which is one part of the consolidated government sector, the other being the treasury, using the currency-issuing capacity of the government to facilitate the purchase of real goods and services to build productive infrastructure or, alternatively, to provide direct transfers to citizens.

I think that PQE is an excellent strategy for any currency-issuing 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.

PQE is really just deficit spending without issuing debt whether it be on infrastructure or something else.

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

Under QE, the central banks bids up the price of government bonds in the secondary markets, which 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.

QE is 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.

Bank lending is never constrained by a lack of reserves.

Second, QE does not change the net financial asset position of the non-government sector. This is a crucial point. 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’. 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.

In deciding whether the ECB would contravene Article 123, the matter would be decided on understanding the intrinsic differences between a monetary operation and a fiscal operation, not whether the central bank was involved or not, or not whether it was acting independently or not.

The flawed structure of governmental institutions (treasuries and central banks) in the Eurozone mean that the distinction between these operations is even more important given the centrality of the ECB in the EMU and the absence of any federal treasury function.

It is clear that the proposal for the ECB to directly hand out euros to Eurozone citizens (a policy that has merit) would be a fiscal operation, which would normally, if the structures were sound, be done through a government agency, even though the central bank would be involved as the government’s bank.

The spending (direct transfers) would boost the bank deposits of the recipients (the citizens), which increases their net financial assets or net worth.

Their banks would then have more reserves and matching liabilities (the citizen deposits).

Under QE, the central bank buys a bond in exchange 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.

From the perspective of Modern Monetary Theory (MMT), a helicopter drop is equivalent to an increase in the fiscal deficit in the sense that new financial assets are created and the net worth of the non-government sector increases.

It occurs when the government uses its currency-issuing capacity (linking treasury spending to central bank operations) without matching its deficit spending with debt-issues to the non-government sector.

So the central bank adds some numbers to the treasury’s bank account to match its spending plans and in return may be given treasury bonds to an equivalent value.

Instead of selling debt to the private sector, the treasury simply sells it to the central bank, which then creates new funds in return.

This accounting smokescreen is, of course, unnecessary. The central bank doesn’t need the offsetting asset (government debt) given that it creates the currency ‘out of thin air’. So the swapping of public debt for account credits is just an accounting convention.

In the Eurozone case, the matter would become even more simple because there is no federal treasury although the meaning of the term ‘fiscal deficit’ becomes blurred.

The ECB would in effect be deficit spending if it started to hand out direct transfers to citizens. It wouldn’t be accounted for in that way, but in terms of meaning and intent, that is the nature of the helicopter transfer, because it injects new net financial assets into the non-government sector and directly stimulates aggregate spending.

That is why:

1. I would not start an organisation called QE for People and have as my main policy – helicopter drops (or OMF).

2. I think the Court of Justice of the European Union would see through the bluster and understand the difference between a monetary operation and a fiscal operation and declare the proposal as being consistent with the latter.

3. The whole design of the Eurozone is dysfunctional and explains why the bloc is in such a parlous state some 9 years after the GFC started to manifest.


The discussion also raises questions of who 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.

Clearly, proposing that the central bank take over fiscal operations because the Member State governments are constrained by ridiculous fiscal rules doesn’t appear to be a very progressive position to take.

It would be better to challenge the whole logic of the EMU than to give further fiscal capacities to the unelected ECB board.

That is enough for today!

(c) Copyright 2017 William Mitchell. All Rights Reserved.

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    22 Responses to The ECB should not become a fiscal agent

    1. Jerry Brown says:

      Very nice article and educational for me. I had not before considered that CB paying interest on excess reserves as a type of fiscal policy conducted by the Central Bank.

      I think I understand your points about PQE also (and much more obviously) being a type of fiscal policy. And I agree it is not the optimal way to run fiscal policy for democracies. And you say PQE would help the present situation in the Euro-zone, or at least it would be better than nothing. So is it fair to characterize your post today as saying yes PQE would help- but don’t get your hopes up that the powers that be would ever allow it to happen? I mean the distinctions between calling a program fiscal policy or monetary policy are interesting to economists. But they do not matter much to the people that would benefit from that program.

    2. Bill says “I don’t think it is a progressive position to argue that a group of unelected and unaccountable technocrats in the central bank should be in charge of economic policy.” What – so central banks shouldn’t have the power to adjust interest rates, QE, etc?

      There is a distinction to be made here between adjusting the TOTAL AMOUNT of stimulus (a job widely regarded as a job for technocrats) and in contrast, obviously political decisions, like what % of GDP goes to the public sector, and how that is split between education, health, etc, and it is not difficult to allocate those decisions to the two groups, technocrats and politicians: to repeat, we already do that.

      Re the point made by Frank van Lerven of Positive Money, namely that “the ECB would not actually be breaking any EU laws”, I agree with Bill that that statement is dodgy: it could be taken to imply technocrats should take decisions which ought to be taken by politicians. However, Positive Money’s policy has in fact always been as I advocate above, namely to have politicians take the obviously political decisions.

      [Bill edited out a link – prefer not to promote]

    3. Jason H says:

      Bill, I’m curious from an MMT perspective and the disastrous construct of the single currency union would it be better to raise interest rates and at least provide some fiscal stimulus that way via deposit holders increase in wealth? Or is it a zero sum game compared to all that extra money given back to the government from loans paying that higher interest rate back to the ECB?

    4. Postkey says:

      “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.”

      A big if?

      “There are other significant ‘anomalies’ that have challenged the old as well as the new mainstream approaches. While theories place great store by the role of interest rates as the pivotal variable that has significant causal force, empirically they seem far less powerful in explaining business cycles or developments in the economy than theory would have it. In empirical work, interest rate variables often lack explanatory power, significance or the ‘right’ sign. When a correlation between interest rates and economic growth is found, it is not more likely to be negative than positive. 6 Interest rates have also not been able to explain major asset price movements (on Japanese land prices, see Asako, 1991; on Japanese stock prices, see French and Poterba, 1991; on the US real estate market see Dokko et al., 1990), nor capital flows (Ueda, 1990; Werner, 1994) – phenomena that in theory should be explicable largely through the price of money (interest rates). Furthermore, in terms of timing, interest rates appear as likely to follow economic activity as to lead it.”

    5. GrkStav says:

      I’ve banging on this drum myself, for a while. PQE or Green QE or any other cutesy way of combing QE (which as you say is an asset-swap, creating no NFA) with various public-purpose enhancing deficit spending are ‘gimmicks’, only meant to work on the clueless who think of QE as ‘printing money’ or ‘flooding the economy with money’ or some such nonsense. It’s akin to offering to exchange $100 bills with sets of 5 $20 bills, assuming that people had not chosen to hold $100 bills on purpose, to begin with, and expecting that the greater convenience and ready acceptability of $20 bills at shops would induce their holders to spend more of their 5 $20 bills than they would of their $100 bills.

    6. Postkey says:

      ” . . . or a group of unelected and unaccountable technocrats in the central bank.”

      Very unaccountable?

      “Thus the founders of post-war Germany were wise to change the new central bank’s status by significantly curtailing its independence: the Bundesbank was made accountable and subordinated to Parliament, as one would expect in a democracy. It became probably the world’s most successful central bank. While the Brussels centralisers, when pushing the Maastricht Treaty (signed in 1992), portrayed the ECB as having been modelled on the successful Bundesbank (also situated in Frankfurt), the truth could not have been further from it. Instead, the ECB was made independent from and unaccountable to any democratic assembly, as well as to governments. The ECB had in fact been modelled on the disastrous Reichsbank. “

    7. Postkey says:


      Rightly or wrongly this what a U.K. ‘Friedmanite’ Monetarist {T. Congdon} has to say re QE.

      “Strange though it may sound, monetary expansion could occur even if bank lending to the private sector were contracting.” “What is the likely sequence of events? First, pension funds, insurance companies, hedge funds and so on try to get rid of their excess money by purchasing more securities. Let us, for the sake of argument, say that they want to acquire more equities. To a large extent they are buying from other pension funds, insurance companies and so on, and the efforts of all market participants taken together to disembarrass themselves of the excess money seem self-cancelling and unavailing. To the extent that buyers and sellers are in a closed circuit, they cannot get rid of it by transactions between themselves. However, there is a way out. They all have an excess supply of money and an excess demand for equities, which will put upward pressure on equity prices. If equity prices rise sharply, the ratio of their money holdings to total assets will drop back to the desired level. Indeed, on the face of it a doubling of the stock market would mean (more or less) that the £150 billion of extra cash could be added to portfolios and yet leave UK financial institutions’ money-to-total-assets ratio unchanged. Secondly, once the stock market starts to rise because of the process just described, companies find it easier to raise money by issuing new shares and bonds. At first, only strong companies have the credibility to embark on large-scale fund raising, but they can use their extra money to pay bills to weaker companies threatened with bankruptcy (and also perhaps to purchase land and subsidiaries from them). In short, although the cash injected into the economy by the Bank of England’s quantitative easing may in the first instance be held by pension funds, insurance companies and other financial institutions, it soon passes to profitable companies with strong balance sheets and then to marginal businesses with weak balance sheets, and so on. The cash strains throughout the economy are eliminated, asset prices recover, and demand, output and employment all revive.”

    8. Neil Wilson says:

      “There is a distinction to be made here between adjusting the TOTAL AMOUNT of stimulus (a job widely regarded as a job for technocrats”

      Not widely regarded anywhere outside the ‘elites should be in charge and everybody else should do as they are told’ club.

      There is a supply side shortage of Solomons. The philosopher kings do not exist. That’s why we have democracy.

      The central bank should have no authority to change price or quantity. It’s job is to clear the government’s cheques as determined by the democratic process, regulate the banks so they only lend for the productive purpose and put them through administration when they go bust.

      Everything else should be decided by politicians. The governor of the central bank should be an anonymous civil servant in the same way that the head of the social security department is anonymous. They are given their orders by parliament and they execute them within those terms of reference.

      The days of creditors first are coming to an end.

    9. Neil,

      When I said that the “total amount of stimulus” is “a job widely regarded as a job for technocrats”, what I meant is that in a country with an independent central bank (US, UK, EZ etc), the CB has the final word on the amount of stimulus. That’s because the CB can overrule what it sees as excessive or deficient fiscal stimulus by using interest rate adjustments, QE etc. Moreover, it is “widely accepted” that independent CBs are not a bad idea: witness the fact that the US, UK and EZ central banks are independent (not that I’m totally averse to pre-Gordon Brown non-independent CBs).

      The forex markets like independent CBs: they mark up the value of a currency when it shifts from non-independent to independent status. Plus most politicians in the West approve of independent CBs. So…politicians (like Gordon Brown) grant independence to CBs. In the US, Trump may cut into Fed independence of course, and that’s a good advert for cutting down in CB independence because we all know what a wise and sophisticated fellow Trump is, don’t we?

      But basically I am right to say that determining the total amount of stimulus is “widely regarded” as a job for technicians.

      This may be disastrous news for you, but technicians and experts (engineers, accountants, medics) take a million decisions a day in the UK, US, Australia and elsewhere, and all without any reference to politicians. I don’t expect the sky to fall in as a result.

    10. Simon Cohen says:


      I think that’s a dodgy analogy you are drawing by designating CB officials as ‘technocrats’ in the same sense as medics or engineers, for the following reason:

      A medic would be making decisions based on the reasonably objective knowledge of biological sciences at that moment of time which would be largely accepted as fact all over the world. Setting interest rates as a stimulus control is, in contrast, much disputed by economists outside the mainstream and cannot be separated from ‘ideological’ positions that lie behind it. Richard Werner, for example, has a very different view on the relationship between stimulus effects and interest rates, questioning the whole ‘causal’ relationship:

      “An often-repeated mantra of central bankers is that lower rates will stimulate the economy and higher rates will slow it. Currently, central bankers are once again deploying this claim, in order to justify a further reduction of interest rates to zero or even negative territory with the claim that this is necessary to stimulate the economy. So far, commentators and journalists have not challenged this central banker narrative, as it had been extensively propagated over the previous decades and is accepted as fact by most. This negative correlation between interest rates and economic growth, and also the idea that causation runs from interest rates to economic growth is so well established in everyone’s consciousness that we simply assume there is abundant empirical evidence to back it. Surely, the thousands of mathematicians and economists working for central banks (central banks are, after all, the largest employers of economists world-wide) will have crunched the numbers and produced hundreds of studies demonstrating this?

      The funny thing is: they haven’t. In fact, among the more than 10,000 research articles produced by the major central banks in the two decades prior to the 2008 crisis, none explored the correlation or causation between nominal interest rates and nominal GDP growth. Fortunately, this task is not very demanding, and once we conduct such an examination, we conclude that, in actual fact, there is no evidence to back these assertions whatsoever. ”

      I haven’t looked at Werner’s work in detail but it’s clearly an example of another alternative view. Not sure how Werner’s view tie in with MMT.

    11. Neil Wilson says:

      “But basically I am right to say that determining the total amount of stimulus is “widely regarded” as a job for technicians.”

      Central bankers haven’t got a clue. You’d be as well sacking the lot of them and rolling a dice.

      Your constant assumption that these people can determine anything has been roundly debunked by the last decade of messing around in a swamp of ineptitude.

      To equate central bankers with the actual scientists and engineers in the real world is a an insult to engineers and scientists everywhere.

      Central bankers are in the same category as homeopaths and chiropractors.

    12. Frank van Lerven says:

      Dear Bill,

      As I mentioned when I briefly met you in London, I am a fan and I enjoy reading your blogs. For the most part I agree with much of what you say in this blog.

      However, your article misrepresents my claims to expertise. You say that the MEP’s quoted me on a point of European Law. In fact, the words they cited came from a third-party opinion. The relevant quote from my paper, “Recovery in the Eurozone: Using Money Creation to Stimulate the Real Economy (no mention of QE for People etc.) reads:

      “Accordingly, Muellbauer (2014) argues that by independently transferring newly created money directly to Eurozone citizens, the ECB would not actually be breaking any EU laws”. [emphasis added]

      To be clear, my paper was not about debating the differences b/w monetary and fiscal policy, I was simply attempting to flush out some ways to get round Article 123.

      In addition, there are plenty of unconventional policy proposals that fall under the banner of “QE for People”. While these proposals have similarities, they do have important differences, with distinct implications for the economy – and the consolidated balance sheet of the private sector. I (and the Positive Money research team) have made a serious effort to try and highlight the different implications of each proposal for the consolidated balance sheet of the private sector. This is why I wrote the paper “A Guide to Public Money Creation: Outlining the alternatives to QE”, and described the balance sheet implications of each proposal in the appendix.

      I completely agree that QE is an asset swap, while Positive Money’s (2013) proposal “Sovereign Money Creation” or “OMF” as proposed by Lord Turner are different from QE in the sense that they increase the net financial assets held by the private sector (although I believe that Turner’s proposal does suggest using OMF to cancel public debt).

      However, Strategic QE, Green QE (as proposed by Victor Anderson & Molly Scott Cato) and to an extent ‘People’s QE’ as proposed by Corbyn actually equate to what you referred to as “asset swaps” – they do not increase the net amount of financial assets of the private sector. The central bank purchases bonds from an investment bank or a public intermediary of some sort. The public institution would purchase the bonds issued by businesses, or lend to those businesses directly.

      The private sector would need to borrow from the intermediary, so the private sector’s assets (in the form of deposits) would increase but so would its liabilities (the loan from the public intermediary). So clearly, throughout these transactions, the private sector’s balance of net financial assets would not have increased.

      The point is that there are a number of different proposals that fall under the banner of QE for People – which is definitely worth acknowledging.

      I understand why you don’t think that these proposals should be labeled under the QE family – but hopefully now you can understand that it is a little more complicated then the argument you have put forward suggests.

      I continue to look forward to your blogs.



      P.s. My favourite bit: “PQE is really just deficit spending without issuing debt whether it be on infrastructure or something else.”

    13. Marian Ruccius says:

      Neil Wilson: That is vile attack against chiropractors, who can be extraordinarily effective (after rolling a car at 120 km, only a chiropractor was able to help me). When have the central bankers effectively in a crisis?

    14. Simon Cohen says:


      Have to pick you up on the aspersions regarding homeopathy and chiropractors – that’s a prejudice and a banal application of ‘scientism.’

      Having experienced instant pain relief and the improvement of a long-standing back problem via a skilled chiropractor (where the doctor simply plied me with codeine for a few days) I would have to conclude that more than a placebo was going on there and there was a level of efficacy that Central Bankers rarely produce!

      By all means compare Central Bankers to reading auguries and cheap newspaper horoscopes but don’t vent blatant prejudices at the same time.

      If something works , it works ( homeopathy cleared up my eczema after years of plying allopathic steroid creams and I thought I was wasting my money at the time, so not predisposed to ‘believe’ in it).
      If the scientific proofs are lacking then if people are being genuinely helped ( as I have been) to dismiss it as ‘placebo’ or ‘mumbo jumbo’ is to exhibit a closed mind. In the case of Central Bankers, not only is scientific evidence lacking there is also no ‘colloquial ‘ evidence, which, in the case of homeopathy and chiropracters, certainly exists.

      Maybe you had some bad experiences with them? Some people have bad experiences with dentists but don’t condemn dentistry.

    15. Neil,

      The idea that central bankers are no better than rolling a dice is plain absurd: they did get some things right. They implemented interest rate cuts and QE which helped a bit in the recent recession. Meanwhile politicians failed abysmally to implement enough fiscal stimulus.

      But that’s largely irrelevant. The important point is that democratically elected politicians tend to delegate some decisions to central banks. What are you going to do about that? Overthrow democratically elected governments?

    16. bill says:

      Dear Frank van Lerven (at 2017/02/22 at 4:19 am)

      Thanks for the clarification. I have edited the text in line with your input.

      best wishes

    17. paul says:

      Central bankers are in the same category as homeopaths and chiropractors.

      Thanks to the placebo effect and their (not unconnected) attention to the patient’s concerns , these people can be far more effective than central bankers. People do not usually resort to them as an authoritative remedy, but because those avenues have not succeeded.
      Medicine is a practice, not a science, though it keeps trying to be.
      Ask any doctor, it is just impossible to keep up with the gusher of marginally contradictory research and do the day job.
      I’m one of the few of my generation that still has his appendix and his tonsils.
      Such is fashion, in most walks of life.

    18. Patrick says:


      Somewhat democratically elected politicians delegate everyday and technical decisions to civil servants everyday. What makes a central banker so special?

      You say it is “widely accepted” that independent CBs are not a bad idea. Indeed it is and so is neo-liberalism. So is the idea in China that Mao was only 20% wrong.

    19. Neil Wilson says:

      “The important point is that democratically elected politicians tend to delegate some decisions to central banks. What are you going to do about that? Overthrow democratically elected governments?”

      The important point is that governments delegate *execution* to competent civil servants.

      Not quacks reading runes at the central bank. The public purse should be in the control of elected politicians who decide what to requisition and what not to. The job of the central bank is to process the cheques. That’s it.

      The rest of the non-sequitur I’ll ignore.

    20. Neil Wilson says:

      “There is a significant lack of evidence in the literature to fulfill Hill’s criteria of causation as regards chiropractic subluxation. No supportive evidence is found for the chiropractic subluxation being associated with any disease process or of creating suboptimal health conditions requiring intervention. Regardless of popular appeal this leaves the subluxation construct in the realm of unsupported speculation. This lack of supportive evidence suggests the subluxation construct has no valid clinical applicability. ”

      “without the subluxation, the whole rationale for chiropractic collapses, leaving chiropractors no justifiable place in modern medical care except as competitors of physical therapists in providing treatment of certain musculoskeletal conditions.”

      It’s up there with traditional chinese medicine and reiki healing.

      Stick to physiotherapists

    21. Nigel Hargreaves says:

      Neil Wilson,

      Normally I greatly like your input. But your allusion to homeopaths and chiropractors is completely inappropriate, as reflected by others in this blog.

      Are you an expert on homeopathy and chiropractic? I don\’t know anything about the latter, but I do about the former having taken the trouble to learn about it. My conclusion was that it is unlikely to be effective, but I would still never dismiss it as I am nowhere near an expert. That said a very good homeopath friend of mine is coming up with an interesting theory that the titration process imprints a memory of the original toxic material on the molecular arrangement of the resultant \”medicament\” which is, in fact, pure water. I don\’t buy it, but I still would not suggest that either homeopaths or chiropractors are charlatans or snake oil salesmen. (Also with apologies to snake oil salesmen).

      Even the mainstream medical profession is very far from blameless. The National Institute for Health and Clinical Excellence recently advised doctors against prescribing a certain anti-inflammatory based on research that was published in the Lancet. I took the trouble to download the report from its back-catalogue and went through their data. I found they had basically manipulated the results of several studies involving a reasonable sample of around half a million patients, using metadata techniques, in order to arrive at the conclusion they wanted and, in fact, other anti-inflammatory preparations were exactly the same according to the data, there being a risk but very small indeed – almost within the limits of experimental accuracy. It\’s all to do with headline grabbing in order to get funding for more research. Like grabbing votes by saying \”we are going to eliminate the fiscal deficit\”. As a result of my investigation my doctor continues to prescribe the medication for me.

      Sorry about that Bill. Great blog which I very much enjoyed, and the interaction with Frank van Lerven was useful, a person I also follow.

    22. Matt B says:

      Homeopaths say the bottle of water in my fridge will get you more drunk than the six-pack of beer, because they’re kept together.

      Central bankers say lowering interest rates and QE is the most effective way to recover from a recession, because banks will lend more money.

      Both statements are absolute bunk.

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