Err, yes, as we’ve been saying all along

First, the PQE financing mechanism cannot be inflationary. All the financing mechanism does is buy bonds issued by a National Investment Bank. In effect this is little different from QE: it would be splitting hairs to pretend otherwise. And as the authors noted say, this does not cause inflation. But since PQE is cheaper than bonds ti remains worthwhile.

So, secondly, it is instead the fiscal impact of the PQE that matters i.e. the fact that it will be used to fund real investment in real assets creating real jobs for real people in every constituency in the UK that is its significance and which makes it different from QE, which simply creates financial asset bubbles.

Printing money to spend into the real economy is inflationary.

That’s rather what we’ve all been saying all along, isn’t it?

35 thoughts on “Err, yes, as we’ve been saying all along”

  1. Tim –I am not an economist so I wonder if you could clarify something for me.

    Murphy’s PQE bollocks is just a plan for the state to print money and throw it around. The money gets into circulation and price rises (and malinvestment and all the other lovely stuff) flow like water.

    QE is the state buying up financial instruments from commercial (or more like corporate socialist) institutions –banks etc. This has not been massively inflationary because the banks have been keeping this money in their coffers as a “reserve” against future 2007/8 type capers. Then the bonds etc mature and the state gets the “money” back.

    Does the state get interest on this money above the zero -1% level the rest of us have? If so does where do the banks get the interest from if they haven’t been re-lending the money? If they have been re-lending, does that not undermine the idea of them building their reserves in case of 2007s to come? If, in another rapid-onset crisis their loans of QE money are defaulted on by the borrowers that leaves the banks no stronger than in 2007 surely? The state would be fuelling a credit increase if not a boom by buying bank debt instruments which monies the bank then lend to others would it not?

    Lastly–where does the state get the cash to purchase this debt? Is it from real money extorted from tax payers? Or is it funny money created by fiat? Which is no different to what the Axis of Socialist Retrograde Evil is proposing except that the banks are presently stopping most of the cash from getting into circulation and causing inflation.

  2. “Murphy’s PQE bollocks is just a plan for the state to print money and throw it around. The money gets into circulation and price rises (and malinvestment and all the other lovely stuff) flow like water.”

    Yes.

    “QE is the state buying up financial instruments from commercial (or more like corporate socialist) institutions –banks etc. This has not been massively inflationary because the banks have been keeping this money in their coffers as a “reserve” against future 2007/8 type capers. Then the bonds etc mature and the state gets the “money” back.”

    Not so much. The aim is to raise gilts prices/lower the interest paid on them. This makes investors (not banks!) look to riskier projects for that interest and yield they crave. This brings down long term interest rates and thus, hopefully, increases investment.

    “Does the state get interest on this money above the zero -1% level the rest of us have? If so does where do the banks get the interest from if they haven’t been re-lending the money? If they have been re-lending, does that not undermine the idea of them building their reserves in case of 2007s to come? If, in another rapid-onset crisis their loans of QE money are defaulted on by the borrowers that leaves the banks no stronger than in 2007 surely? The state would be fuelling a credit increase if not a boom by buying bank debt instruments which monies the bank then lend to others would it not?”

    Not really applicable.

    “Or is it funny money created by fiat?”

    Yes.

  3. I’d be interested in knowing what interest rates Richie envisages being set alongside his PQE. Are we looking at even more artificially low ones, as in kosher QE? If so, isn’t PQE being paid for by the destruction of savings?
    I’m reminded of something said on another thread. That government debt & money are really two faces of the same thing. If QE depresses the yield of gillts to encourage money to go to riskier investments, then it must reduce the value of savings. Which seems to make sense, as the value of savings is not the nominal amount of pounds saved but the income they produce..

  4. And another question:
    As savings are intended to be spent at sometime in the future, one could refer to them a deferred spending. if one is getting less of a return on them now, then one must have less to spend in the future. So isn’t QE spending tomorrow’s money now.? And if so, what’s the difference between this & debt?

  5. I wonder if some of the PQE would be put into researching genetically modified trees in order to help with climate change and other issues. For example, research could produce an even better magical money tree, one that would be genetically engineered to have even better resistance to inflation and other fiscal pests whilst at the same time extracting more carbon from the atmosphere helping to reduce the greenhouse effect.

  6. “creating real jobs”

    Uhh . . . no, not really. Franklin Roosevelt tried this silliness – government make-work jobs – 80 years ago, during his Great Depression.

    It is taking a bucket of water from the deep end of the pool and poring it in the shallow end. h/t Dr. Walter Williams

  7. This idiot is to economics what Trofim Lysenko was to plant genetics. Result? Dust bowls, famines, shit and destruction. But he KNEW he was right…

  8. Salamander
    That would be Green Quantitative Easing, which was what Ritchie was banging on about before he decided to hitch his wagon to Corbyn.
    Why not suggest it on Ritchie’s blog?

  9. Which is no different to what the Axis of Socialist Retrograde Evil is proposing except that the banks are presently stopping most of the cash from getting into circulation and causing inflation.

    Sorry–that is Axis of Retrograde Socialist Evil.

    Splitters.

  10. Gamecock>

    That’s not a terribly good analogy.

    https://en.wikipedia.org/wiki/Flash_lock

    “Boats moving downstream would wait above the lock until the paddles were removed, which would allow a “flash” of water to pass through, carrying the boats with it.”

    The same total flow of water, distributed in different ways over time, can have different effects.

  11. Can’t see that’s what gamecock’s saying at all.
    It’s closer to those fountains in ancient times, supplied by having slaves with buckets run up steps to pour them in a tank, provide a head of water. Then they ran down to the fountain pool to fill them & start again. And whips were involved.
    From the front side, looked very pretty. Unless you knew all the grief going on out of sight.
    Now that’s an analogy.

  12. it is instead the fiscal impact of the PQE that matters i.e. the fact that it will be used to fund real investment

    since when did “i.e.” mean “has nothing much to do with”?

  13. “Printing money to spend into the real economy is inflationary”.

    Hmm. If this is what PQE actually proposed I might agree. But it isn’t. There is no “printing money” going on as far as I can see.

    What PQE seems to be is two things:

    1) Financing of a public works programme through bond issuance by a National Investment Bank, which would be a UK equivalent of KfW, I guess

    2) Bank of England purchases of bonds issued by the National Investment Bank.

    RM is arguing that it is point 1, not point 2, that is potentially inflationary.

    Fully subscribed bond issues are neutral from a money supply point of view, assuming that all the money received is spent. So any inflationary effect would be due to velocity increase. That’s what RM describes here: “the fact that it will be used to fund real investment in real assets creating real jobs for real people”. We might expect such an increase in real activity to increase the velocity of money and therefore potentially be inflationary.

    However, we might also expect such a velocity increase to be offset by the Bank of England, probably through interest rate rises, if it showed signs of threatening the inflation target on the upside. This is where Part 2 comes in.

    Part 2 in theory would make it more difficult for the Bank of England to tighten policy in response to the inflationary effect of Part 1. But the argument really is whether the Bank of England would retain the right to decide when was an appropriate time to buy NIB bonds, or whether it would be told to do so by the Treasury. If the former, then all Part 2 does is give the Bank of England an additional class of assets to buy as part of a QE programme. If the latter, then Part 2 limits the range of options open to the Bank to control rising inflation.

    RM has now suggested that in practice the Bank of England would only buy the bonds if monetary conditions justified it – in which case it would simply be buying NIB bonds as part of a QE programme rather as the Fed buys agency MBS. I doubt if anyone would seriously object to this.

  14. So, to clarify:

    – if the “public works” programme funded by NIB bond issuance did not result in a sufficiently large output increase, we would expect it to be inflationary (MV=PQ and all that)

    – if the Bank of England were nevertheless compelled to monetise NIB bonds, it might find it difficult to offset any inflationary effect.

    It’s all quite simple really.

  15. I seriously object to this.

    First up, I don’t want people making guesses that the NIB would be like KfW. Second up, that guess turns out to be wrong, as KfW makes loans, and RM has stated that the NIB will not lend any money to anyone. Thirdly, terms like investment and infrastructure are being conflated in the descriptions of PQE when they have distinct meanings . . . . . . . nth-ly, under the PQE model proposed by RM, the BoE will do exactly what the National Infrastructure Board tells it to do. Nth+1-ly, PQE will not get the roads repaired, even though the recent S&P analysis of infrastructure spending with +ve multipliers showed that road congestion is the leading reason why the UK would benefit more than other countries from more infrastructure spending.

  16. One of the biggest problems is that this PQE stuff is getting redefined on a minute-by-minute basis as the Fat Controller gets assailed with factual objections. Just how much spare capacity is there in the UK economy? Does anyone have the slightest idea?

    Given that there does not appear to be a massive army of under-employed engineers, project managers and labourers hanging around, how will this infrastructure get built?

    The latest answer seems to be that the money will be spent on training. Well that’s going to give an instantaneous boost to GDP isn’t it! The moron seems to want to give a JCB to every unemployed person in the country, with a licence to go around digging holes, destroying river banks and drainage systems and just about everything else, as long as its not on the hallowed greenbelt. It’s time to expose the charlatan for what he is rather than deal with him as if his ideas make any sense whatsoever.

  17. ” The moron seems to want to give a JCB to every unemployed person in the country, with a licence to go around digging holes, destroying river banks and drainage systems”

    You go within a 100 yards of a watercourse with an excavator and the Environment Agency will have your guts for garters. No-one is allowed to dig in and around rivers these days, even if they are in desperate need of dredging, the environment doncha’ know!

  18. Frances>

    You can continue chasing your tail, trying to make sense of Ritchie’s conflicting utterances, or you can simply accept that he is really talking about how when we stop ‘the jooz’ stealing the fruit of the magic money tree, we’ll all be rich and happy and kittens – and Occam’s razor says that the simple proposition which explains everything is far more likely to be true than the complicated answer which sees you dashing backwards and forwards trying to shore it up as it springs one leak after another.

    You can argue whether Ritchie’s ‘jooz’ are actually Jewish people, or whether he’s using some other target for the same old nonsense, but it’s painfully naive for you to continue to argue that he’s not rehashing Hitlerite strategies while he’s saying things like this:

    Why hasn’t it been done?
    Because, to be blunt, an elite do not want it
    QE has suited then very well, making them very much richer at cost to everyone else

  19. Hitler. He was the managing director of the National Scheme for Deposits and Savings if I remember my Ritchiehistory correctly, right?

  20. Andrew Carey

    When a National Infrastructure Bank issues bonds, it is borrowing money.

    RM thinks that if the Bank of England bought bonds issued by a NIB, they could then be cancelled on the grounds that they would never be repaid.

    We can argue the toss about the latter, but the former is incontrovertible. A National Investment Bank would borrow money in order to finance public works programmes. Subsequent cancellation of that debt wouldn’t mean it never existed.

    I’m not aware that RM – or anyone else for that matter – has proposed a coherent PQE model. And since no coherent plan has been produced, I am free to make whatever guesses I wish. As are you, of course.

  21. Frances Coppola

    The NIB will borrow money. I made no claim otherwise.

    The guessing I referred to is when we think about the mechanics of the NIB delivering infrastructure projects. You think it could be like the KfW, a body which among other things makes loans. I think that’s a bad guess as RM has stated that the NIB will not make any loans.

    I liked the humour in “it’s all quite simple really”

  22. A NIB will sell bonds, and receive money in exchange.
    The BoE then buys these bonds? Are they buying the bonds which were just issued, or new ones?

    If they are buying the issued bonds, isn’t this the government receiving money through one branch and then giving it back with the other?

  23. Bloke in Costa Rica

    Frances, Godwin’s Law has nothing to say about whether the invocation of Hitler or the Nazis is apposite or not. It’s not quite the argument-ender that everyone thinks it is.

    There should be a meta-Godwin’s Law: “any reference to Hitler or the Nazis will immediately invoke a reference to Godwin’s Law, even if the original referrer’s mention of them was germane”.

    Murphy and Corbyn might not be Nazis qua Nazis, but their ghastly totalitarianism is drawn from the same well.

  24. @Ms Coppola
    How does increasing the velocity of money create inflation? It is the same quantity of money moving faster.

  25. DBC Reed

    MV = PQ

    where M = quantity of money (for this purpose I use M4 not M0)
    V = velocity of money
    P = price level
    Q == output

    The same amount of money moving faster can raise P just as easily as a larger amount of money moving at the same speed.

    If you think about it, hyperinflation should really be called hypervelocity. It really doesn’t matter how much money there is in circulation, what matters is that everyone is dumping it as fast as they possibly can.

  26. Andrew Carey

    RM says the NIB will not make any loans? It’s going to give away the money? I must have missed that. Can you point me to the post where he said that?

    I guessed that a NIB would be like KfW because I assumed it would be a bank, and where I come from the primary job of banks is lending. If this thing isn’t going to lend, and its “borrowing” is only a ruse to deceive the EU, then it isn’t a bank.

  27. Frances>

    I don’t know what you think Godwin’s law says, but you might like to read your own source. Godwin said that any discussion which continues long enough will devolve into a heated state where someone will eventually say ‘that’s like what the Nazis did’ or some such about something that’s nothing like what the Nazis did: it’s a spurious comparison.

    In this case, there is not a debate getting so heated over time that people are slinging insults around – after all we’re conversing perfectly politely, and it hasn’t gone on long.

    There are no spurious comparisons being made here, just the observation that in fact Ritchie’s bollocks is indistinguishable from outright, old-fashioned Nazism. It’s founded on precisely the same antisemitic conspiracy theories, and given his head, it would end in the same place too.

  28. @Ms Coppola,
    Although always loth to tangle with the redoubtable Ms Coppola, I cannot see how increased velocity of money is inflationary (although I can see how inflation can increase velocity which in the generation following the Radcliffe Commission was seen as a beneficial way of achieving Keynesian goals).
    Taking a case where all transactions are for identifiable discrete goods , where the velocity is 1.0 (as it is of Euros in the current Chiemsee scheme/experiment in the Tyrol) and the goods sold number sold number 400 what is inflationary about an increase of velocity to the chiemgauer’s 5.4) and goods sold increasing to 800 with no increase in the quantity of money?
    The Gesellian system of demurrage which the Chiemgauer reproduces (in the same geographical area) is generally described as non-inflationary.
    (Please take it easy: I have not recovered from my last online disagreement with you.Some reference to the Chiemsee scheme might help as I am suspicious of the Physics envy of economic formulae.)

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