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Tee Hee – This is how QE works

More on Unite:

In 2012 Ed Sabisky, then Unite’s executive finance director, came up with the idea for a new revenue stream.

Unite, the country’s second largest union, with 1.2 million members across the construction, manufacturing and transport sectors, had hundreds of millions of pounds sitting in bank accounts, earning low levels of interest.

Millions had been accumulated from workers who typically pay £8.80 to £16.25 a month for membership.

Sabisky, an American and former European finance director for General Motors, believed building a hotel was the perfect investment, and took the idea to McCluskey. His big idea was to host Indian weddings. It would be a valuable revenue stream for 30 to 40 years, Sabisky believed.

QE: low interest rates on money in banks – or government bonds – lead to people moving out along the risk curve into real investments in order to gain yield.

Note that the stimulatory effect upon the economy exists whether or not Unite pissed the money away, as it did.

QE works, see?

There’s also this series of joys:

But a month later, the union changed its mind. “Unite said that all workers employed on the project had to be trade union members, they had to be directly employed, and they had to be paid in accordance with national wage agreements,” said a hotel project source.

“Flanagans had their hands tied. They were instructed to abide by the Unite protocol. It meant they couldn’t go with the most cost-effective choice when it came to hiring tradespeople for the build.”

The change immediately pushed up costs. Some big-name construction firms were excluded. Many construction workers prefer to be self-employed, so they could not be contracted either.

Then Unite changed the original design of the hotel from three stars to four and added an additional floor. The union then insisted on British-only building materials where possible. “Flanagans weren’t allowed to buy Chinese steel, which would have been cheaper,” said the project source. “Everything had to be British. It was crazy.”

Use union labour and Buy British. Makes unions poorer, that does.

21 thoughts on “Tee Hee – This is how QE works”

  1. It also gives the government more money to spend than it would otherwise be able to borrow. If the BoE had launched QE6(?) last September Liz Truss would have been able to afford her tax cuts. It didn’t so she couldn’t. Ergo QE funds government spending directly, it is monetisation of the deficit.

    It has other effects as you detail, but they pale into insignificance compared to the ability it gives government to spend money that it hasn’t raised in taxes or had to borrow from actual lenders.

  2. Indeed so – which is exactly the point I was making a decade and more back, isn’t it? When QE is purely monetary policy it’s fine. When it becomes fiscal – monetisation of the fiscal deficit – then it ain’t fine. That distinction you keep claiming I didn’t make.

  3. QE: low interest rates on money in banks – or government bonds – lead to people moving out along the risk curve into real investments in order to gain yield.
    Note that the stimulatory effect upon the economy exists whether or not Unite pissed the money away, as it did.
    QE works, see?

    There’s a presumption there that government can price risk better than the people actually taking the risks, isn’t there?
    So how did that work out, then?

  4. When QE is purely monetary policy it’s fine. When it becomes fiscal – monetisation of the fiscal deficit – then it ain’t fine. That distinction you keep claiming I didn’t make.”

    QE is always monetisation the deficit, by definition. They wouldn’t be doing it if they thought that they could borrow the money they want to spend without interest rates going through the roof.

    So if you support ‘QE as monetary policy’ then you are supporting ‘QE as monetisation of the deficit’. They are two sides of the same coin, indivisible. You cannot have one without the other.

    You seem to think they are separate, when they aren’t.

  5. This is the same argument, Jim, as we have over Tim’s beloved Carbon & Pigout Taxes. They’re all fine economics. Until you put them in the hands of government & the incentives government has. In which case the fine economics can go hang & government will follow its incentives.

  6. “They are two sides of the same coin, indivisible. You cannot have one without the other.”

    No.

    QE without monetisation of fiscal policy. BoE buys gilts off insurance and pensions funds. This lowers interest rates, causes move out along risk curve for yield. When we want interest rates to rise again, QT. The effects are upon money, interest rates, investment along the risk curve – nowt to do with govt financing (well, OK, small one in less interest being paid but that’s minor in comparison).

    BoE buys newly issued gilts which Treasury then spends the piss out of. Monetisation of fiscal policy.

    Now, if you want to say that politically it will always decay into the second, well, sure. Maybe it will, probably it will. It’s akin to what I’ve been saying is the problem with MMT. Imagine a world in which politics thinks there isn’t a shortage of money?

    Yet it is still possible to have QE as purely monetary policy in that theory.

  7. “QE without monetisation of fiscal policy. BoE buys gilts off insurance and pensions funds. This lowers interest rates, causes move out along risk curve for yield. ”

    And where did the insurance and pension funds buy their gilts from? Mars? No the government of course. Who know that the BoE have a large pot of money to spent on gilts. So they flood the market with gilts, safe in the knowledge that won’t drive up rates, because the BoE has their back. Suddenly they can borrow and spend what they like, to the limit of the BOEs QE chequebook. Monetisation of the deficit right there. Do you really think that the UK government could have been able to borrow all the money it spent during the GFC without driving yields up massively, or even (given the febrile times they were) creating a funding crisis where no-one would lend to them at all?

  8. “Yet it is still possible to have QE as purely monetary policy in that theory.”

    Its possible to have socialism that works, in theory.

  9. John Lewis is losing money and closing stores – so that is precisely how Socialism ‘works’.

    But anyway. It’s a cooperative, which is not the same as Socialism.

    Socialism cannot work because at its core nobody can own any more than another, and penalises those who incidentally or deliberately acquire more by confiscating their wealth (such as it is) and redistributing it.

    People then have a perverse incentive not to generate wealth, and an incentive to be poor; at least no less poor than others.

  10. “John Lewis does just fine”

    Waitrose is getting more useless by the day. The decay began when they began calling members of staff “partners”. HR in the ascendant, Operations in freefall.

    BiS: I like your “Pigout” taxes – do these apply to all-you-can-eat buffets?

  11. The rot must have set in a long time ago, Mr Bison, because according to Wpda

    “In 1920, Spedan started distributing Peter Jones preference shares to staff, who were referred to as Partners.”

  12. “And where did the insurance and pension funds buy their gilts from? Mars? No the government of course.”

    The issue being when they bought the gilts. Before or after QE began, or before or after fiscal policy got monetised?

    (There’s also the why, according to the when)

  13. Socialism has never really been given a fair trial because all the experiments have had socialists in charge.

  14. Plus of course the QE that happened in 2009-2016 is exactly the same functionally as the QE that happened during covid. If the latter was monetisation of the deficit (which I think even Tim agrees it was) then how exactly was the earlier QE any different? What marker is there to be able to say ‘This QE is monetary policy and this QE is monetisation of the deficit’?

  15. “The issue being when they bought the gilts. Before or after QE began, or before or after fiscal policy got monetised?”

    Not really, it would depend on what the pension fund does with the money it gets for selling its gilts to the BoE. If a fund has £100m worth of gilts, bought prior to QE being announced, and it sells them to the BoE QE program, then turns around and buys £100m more gilts straight from HMRC, then in effect the government has sold its gilts to the BoE. The pension fund was just a conduit.

  16. If gilts issuance increases as a result of the QE……at the beginning, arguably not. By then end, obviously, yes.

  17. “If gilts issuance increases as a result of the QE……at the beginning, arguably not. By then end, obviously, yes.”

    So I’m right – QE results in monetisation of the budget deficit. As soon as the BoE announces ‘£Xbn in QE’ the government knows it can issue £Xbn more gilts than it otherwise would have and still keep interest rates down, and know there won’t be a funding crisis. Which is exactly what happened in the aftermath of the GFC. UK gilt issuance was financing a deficit of £30-40bn up to 2007, which rose to £70bn in 2008 and doubled to £150bn in both 2009 and 2010, after £200bn of QE was announced in March 2009. Do you really think the UK government would have been able to run a cumulative budget deficit of over 50% of GDP in the 10 years post GFC if the BoE hadn’t bought £445bn of gilts over the same period?

  18. @The Meissen Bison – “The decay began when they began calling members of staff “partners”.”

    That’s since 1920. You must be older than I thought if you remember what it was like before that.

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