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Ignorance, a sea of ignorance

All told though the consequence is that not only has no QE been repaid, but the chance it ever will be is remote, in the extreme. Because repaying it would mean that the deficits that have been funded by QE (because that is what it has done) would actually have to be paid for out of higher taxes or by all investment funds being directed to government bonds, and not to create new investment but just to reshape the Bank of England balance sheet. Both actions would have a profound impact on the economy: they would create a massively negative environment in which growth would become a distant memory, there would a shortage of government created money to underpin credit in the economy, and there would most likely be heavy deflation – exactly what QE was meant to prevent. No government of any persuasion is ever going to pursue such a policy: it would be economic suicide.

So let’s be clear about three things:

a) QE has not created inflation, try as people might to suggest it has

b) QE has delivered modest growth, but not universally

c) QE will forever remain on central bank balance sheets, never to be unwound.

The chance that Yvette Cooper is right that People’s Quantitative Easing would have to be repaid is so remote that no-one, anywhere, need ever worry about it. In fact, all they should worry about is that someone in such authority thinks it might be wise to even countenance such a thing. I am deeply baffled as to why she should. The harm from doing so would be enormous.

Sigh, both the BoE and the Fed have already told us how QE will be unwound.

They purchased gilts and Treasuries across a range of maturities. As such, some of the ones they bought have already matured. And so they, when that happened, went out into the markets and purchased more, so as to maintain the stock as some bonds matured. The way they will unwind it is simply to not replace bonds as they mature. They can do this at any level of granularity they like: replace 0% of bonds maturing, replace 99% of them, as circumstances dictate.

Given that governments very rarely do actually retire debt, rather than roll it over, as they don’t make market purchases to replace maturing debt the government will be selling new debt into the markets to replay those maturing at the BoE. And that money will then be cancelled.

There’s nothing secret about any of this. Bot organisations have said publicly that this is how QE will be reversed. So, what’s Ritchie blathering about then?

28 thoughts on “Ignorance, a sea of ignorance”

  1. ” QE has not created inflation, try as people might to suggest it has”

    Has he considered the possibility that without QE inflation could be negative?

    Or are negative numbers a neoliberal artifice which don’t exist in the real world he lives in?

  2. GlenDorran, I’m baffled how he can argue that unwinding QE would generate heavy deflation, but increasing QE has no inflationary effect.

    Actually, I’m not. It’s just pig ignorance and gross overconfidence.

  3. Murphy’s claim that reversing QE involves higher taxes is nonsense. QE consists of giving the private sector cash in exchange for their Gilts. Reversing that consists – wait for it – of selling Gilts back to the private sector. But since cash and Gilts are very similar in nature, both QE and reversing it don’t have much effect.

    As Martin Wolf put it, “Central-bank money can also be thought of as non-interest-bearing, irredeemable government debt. But 10-year Japanese Government Bonds yield less than 0.5 per cent. So the difference between the two forms of government “debt” is tiny…” See:

  4. Ok. This money will be cancelled. This is the key part that I dont think is out there in the media or in the public understanding. Peston hasn’t got to that bit yet.

  5. When the central Europeans were burning bank notes for warmth in 1922-3, was that an unwinding of QE? I think the KLF burned a million pounds once too. And Tim put up a nice article from the Royal Mint recently where Queen Elizabeth reversed the currency debasement of Henry the 8th.

  6. Again a complete failure to distinguish narrow from broad money. Banks have huge excess reserves, reversing QE will just return them to normal.

    I am probably missing something, but if BoE stopped paying interest on reserves wouldn’t banks want to sell reserves, boe accomdates with bond sales, job done?

  7. Conventional QE has created massive asset inflation of house prices and share values. If PQE causes inflation of wages instead that would be no bad thing.
    ( I am sorry to depart from my usual arts-graduate practice of supporting arguments with at least thee quotations or third- party evidence but I can’t be arsed because nobody on here bothers, or deconstructs the meanings of words like bank lending which as demonstrated (by the BoE) actually does n’t exist.As the Icelanders say: the banks are counterfeiting money but hey why worry in the UK?Just create money by issuing cheques unsupported by full reserves the way they banks do and the banks won’t mind!

  8. @DBC Reed: ” If PQE causes inflation of wages instead that would be no bad thing.”

    So why not print enough money to pay everyone £50k/year wages? According to you that’ll cause no problems at all, as apparently higher wages never flow through into higher prices for consumer goods.

  9. DBC

    A number of people have explained the banks’ “money creation” process to you on here several times, and sometimes in detail to help illustrate that no new net money exists at the end of each working day, and hence in effect it is liquidity being created, and yet still…

    “arts graduate” – yes sure, I get “no relevant training” bit and all that, but ordinarily in those situations, intelligent people (and which you obviously are) don’t continue to repeat the same errors – unless perhaps they have a political agenda, for example as Richard clearly does: ie, repeat the lie often enough and all that?

  10. Meanwhile Frances Coppola is still being very helpful and pointing him to supportive (?) papers.
    I think it’s very decent of him to maintain contact with his libeller, after being forced to extract a public apology from her.

  11. I think this comes from the SKY tv leaders debate where Corbyn stated Murphys idiotic money printing and spending it on infrastructure ideas, Cooper called him on it saying it has to be repaid.
    This is Murphy trying to keep his idea going.

  12. I would pay good money to watch a debate between Labour’s twin economic gurus, Richard Murphy and Russell Brand: two five year-olds earnestly discussing the nature of the monsters under their beds.

    Most fascinating of all would be if the two of them – for whom the phrase ‘not even wrong’ could have been invented – disagreed on some point. It would be like the famous Ypsilanti psychological experiment, where three men each believing themselves to be Jesus Christ were brought together in the same room.

    Remember, just such a Corbyn administration has been foretold:

  13. Apparently now the money isn’t for infrastructure, having been challenged that there is a shortage of skills to build all the infrastructure he’s saying it was always intended for more than that including training people not have the skills for a future spend. Funnily enough he says this right above a blog about using pqe to build houses for a million refugees.
    His responses remind me of something I read on cognitive dissonance recently.

  14. Since the bond part of PQE gets everybody in such a tizz , with maximum name calling and tears before bed-time perhaps a simpler solution is bank nationalisation or some variant such as Ellen Brown’s Public Banking based on the state owned bank of N.Dakota.? Just trying to be helpful! (Everybody except some economic flat earthers accepts the BoE was not in the grip of subversives when it said that 97% of money is created by the commercial banks So put the profits of this seignorage to public use, charge interest but use the proceeds to cut other taxes by ,in effect ,putting a tax on the creation of money. Don’t like it ? Why not?)
    NB Before Martin Wolf is totally misrepresented, I proffer more typical quotes “Strip private banks of their power to create money ” headline FT 24.iv.14; at conference 18.xi.14 “Why have we given our greatest social creation-money-over to private profit-seeking companies?”Just so you don’t run away with thinking that your account of money creation has any validity whatsoever.

  15. @Ms Coppola.
    “Banks do create money”, as you say. but nobody on here is going to believe you.
    It is what might be called the Great Randian Syndrome. The Great Randi was a magician who went out of his way to expose fake psychics. He discovered that a fake faith healer was miked up with an ear-piece down which his wife transmitted information from slips handed in by the audience beforehand. He would repeat the name on being told it by a suffering audience member and the wife would reel off the address and illness, to general consternation, when he appeared to know all about the case.The Great Randi exposed this cruel con early on ,(before he got round to Uri Geller), but the faith healer’s audience soon drifted back to him, the theory being that a certain type of quite well-off idiot cannot accept s/he’s been totally conned being so intelligent and all.

  16. A number of people have got the “money creation” process very wrong on here. Banks do create money.


    What do you mean by “create money”?

    To clarify: If you are referring to the “initial creation process”, for which the material outcome by the end of the banking day for the creating bank is “net nil”, in terms of the financial assets and liabilities created on their financial ledgers, then I do not believe that there is any misunderstanding whatsoever – just semantics, and which at the current time some might appear keen to use for political obfuscation or similar?

    However, – if not net nil (?), then, genuinely, I would be delighted to understand better exactly what you mean; would you have a sensible / readable reference or link at all for exactly what it is that you are describing?

  17. Frances

    perhaps you got me wrong.

    MV = PQ

    PQ, if you define it as GDP for simplicity has been pretty much static. I don’t think calling it 0.38% or whatever means it is really positive.

    Velocity cannot be measured – it is just imputed.

    So if M has decreased by 2% and the other side is static, something has happened on the velocity side. Does this not work out as lending?

    On the nother hand, we can conclude tyhwqt these figures are worthless.

    Maybe we can agree that banks have not been increasing the money supply, aghainst the arguments of DBCR.

  18. Diogenes,

    Banks certainly haven’t been increasing the money supply as far as I can see. My point was that the reason why M4 is falling is because M4 lending is falling. I agree that this implies velocity is rising. That suggests people are spending money they already have rather than borrowing more.

  19. PF,

    We do not include banks’ loan assets in the definition of “money”. We do, however, include their demand deposits. As lending involves the creation of both a loan asset and a demand deposit, therefore, lending must by definition involve the creation of money. The demand deposit created in the course of lending is money.

    I suspect you are confusing the double entry accounting for loan creation, which creates money, with the settlement accounting for deposit withdrawals, which does not. I am happy to walk you through the accounting if it would help.

  20. Frances

    We do not include banks’ loan assets in the definition of “money”. We do, however, include their demand deposits. As lending involves the creation of both a loan asset and a demand deposit, therefore, lending must by definition involve the creation of money. The demand deposit created in the course of lending is money.

    That’s great, and thanks for your confirmation. It actually highlights the point made, that this is one of definition. You talk in technical terms (as does the BoE) about “banks creating money”, in the one sided sense you describe above. Which is fine, as a technical tool, except that it might sometimes be different from a layman’s general perception or understanding when reading about “banks just creating money”?

    A layman might tend to understand that to mean that new money is being created, say in the magic money tree sense that it is free to be spent without any corresponding liability or obligation. And then, whether they genuinely believe that or not, it can get repeated for various agendas, be those political or otherwise – all the time whilst quoting impeccable sources.

    As I think you have usefully clarified, there is no “net” new money being created (in the meaning of financial assets less financial liabilities) – obviously ignoring notes and coins etc (and QE) – and which is pretty much the only point I and others have tried to make on various threads here recently?

    I suspect you are confusing the double entry accounting for loan creation, which creates money, with the settlement accounting for deposit withdrawals, which does not. I am happy to walk you through the accounting if it would help.

    Thank you for the very kind offer – but, honestly, I don’t think I am confusing anything in terms of the bigger picture accounting with all of this. The issue above is more one of definitions and how they are understood / used by different groups of people?

  21. The first question arising from Frances Coppola’s clear unequivocal statement on here “Banks do create money” was how would the totally conned willing victims continue to evade reality and live in their secure Matrix pods of thinking what they’re told ? And PF supplies the answer: it’s all a matter of “definitions”.In the linguistic Matrix it is possible to have two definitions of the same thing, disagreeing with each other.

    But,no its not .There is only one definition hence the related words definite and finite,(not indefinite and infinite).
    One of the problems with Economics is people with a scientific or technical background, have no idea that words can be deconstructed philosophically, Thickjobs Thatcher being a case in point. Bank lending is part of the language but it doesn’t actually happen, doesn’t exist.Although a lefty, I have to admit that Enoch Powell had the soundest grasp of Economics of British politicians,possibly because he was used to translating from one language to another, which as Saussure pointed out ,is the quickest way to discover gaps in a language: the French have no words for “home” and “shallow” for instance.

  22. DBC

    I am not sure I fully understand what you are trying to say there!

    FWIW, I do accept that it would have been smarter for me to take two seconds to check Frances’ use of the term for myself rather than ask her, I was simply being bone idle at the time – mea culpa..:)

    Bank lends me £10K.

    On my personal balance sheet, before I spend it, I now have a bank deposit or current account (Asset – Dr) of £10K and a bank loan or overdraft (Liability – Cr) of £10K. The bank obviously has the reverse entries on their balance sheet (ie the “loan” is an asset in their books).

    Frances says the loan creation part (before spending it) is where the bank just created £10K of money (ie, the “demand deposit”, or deposit or current account) – because the bank doesn’t define the “loan” element as money. No problem, I understand that definition.

    If a bank creates money, then logically there is “more” of it.

    But, ignoring the BoE definition, do I consider that I have “more” money, as a result of a new £10K current account offset by a new £10K loan?

    Not really, and which is why I have used the term (without any prior approval from Frances I fully accept!) of “net” new money in one or two discussions recently here on this? Ie deposits and current accounts net of any loans or other liability. Because financially there always is a contra entry of some description, albeit that there will sometimes be big differences in liquidity between the two, and on which, along with interest rate differentials etc, the bank earns its shilling.

    I was doing this (using the term “net” money) because of the language sometimes used – that the “banks just create money”, which was almost being used in the sense somehow of it being some kind of fraud or “why can’t we all just do this and create IOU’s” (I recall one such comment on here?)…

    Of course, actually we can all personally do this (IOU’s).

    For example, DBC, I personally could lend you £10K cash, which you would then be free to spend; you would also at the same time now owe me £10K. Again, no “net new money”.

    But did I just “create new money”? It’s pretty much the same transaction as above in any real world commercial sense? In that a) you have money to spend, and b) you are going to pay back the loan at some stage along with any agreed interest. If a bank does it, then yes, in terms of their definition.

    Of course, as others have pointed out, the useful bit about IOU’s is actually the wealth generation bit, ie what we “do” (ie our labour) in order that we can repay such loans or otherwise increase the value of our personal balance sheets. That’s the point where we actually do add some value.

    Hence, not sure if your comment was a crack at me – re “conned in a secure matrix pod”!? – or something different! If you meant me (ie being conned etc), I think you just missed the target! Though, given that Frances is crystal clear above, I suspect it’s more likely that I am simply missing the subtlety of what you meant?

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