It’s a weird world when Mark Carney seems to be the one person able and willing to act on the UK economy. But we are, very definitely, living in weird times and as a result it is his voice that is giving indication as to what may happen next.
What we know is twofold: the Bank of England is likely to cut its interest rate. Already at 0.5% and with 10 year government borrowing costs at less than 1% this is the clearest indication that even if we are not yet heading for negative interest rates in the UK we are certainly following the trend in that direction.
Second, we will almost certainly have more quantitative easing (QE) which must mean that he thinks that there is a shortage of liquidity in the banking system.
1) So the Bank of England actually is independent then, is it?
2) QE is not about bank liquidity. Never has been never will be.
Put these two factors together and it is obvious that Ritchie is ignorant of what he speaks.
QE is a backstop measure when a cut in interest rates does not work and means that the Bank of England does, itself, create the money that the economy needs to keep functioning.
Nope, it’s an attempt to lower long term interest rates.
That both measures were mentioned in the same speech clearly indicates that Mark Carney has little confidence that interest rate adjustment work: it is symbolic rather than effective.
Nope, QE is how the bank affects long term interest rates.
This puts us back in the position we were in in 2010. QE will pump money into the economy, but the reality is that the vast majority that will go into speculative activity, will support financial trading, will boost bankers’ bonuses, and will preserve the integrity of bank balance sheets, which is, however, an objective that could be much better achieved by the government taking direct stakes in their share capital instead using the same money.
No, it will lower long term interest rates. Safe assets become more expensive as the BoE buys them, yields fall (the same statement) and thus people move out along the risk curve in search of yield. Thus lowering those long term interest rates in the private sector of the economy.
That’s how it worked last time and that’s how it is supposed to work anyway.
This is why Colin Hines and I created the idea of what we then called Green Quantitative Easing in 2010, which is probably best explained here. Jeremy Corbyn did, of course, rename this as People’s QE but the essence did not change.
In this alternative form of QE the money created by the Bank of England is provided to a National Investment Bank to inject into the real economy. In other words, it funds new investment. In the short term that could be infrastructure repairs. It could also be investment support to businesses. That investment in business can either be in equity capital or by way of loans. In this way the risk that the money will be used to fund speculation and not to promote real economic activities is avoided: the banks as middlemen are cut out.
That’s not QE though, that’s straight printing of money to spend. The Magic Money Tree in fact.