WHAT IS QUANTITATIVE EASING
ANYWAY?
IS IT ANY GOOD?
Positive Money, Sheffield
31 October 2016
Mike Black
WHAT IS QUANTITATIVE EASING?
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What was ‘tight’ and needed ‘easing’?
Basics of UK money system
Simplified summary
My understanding
Questions at end; brief interruptions OK
These slides will go on Wiki
AGENDA
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How does the ‘money’ in bank a/c’s operate?
What is Quantitative Easing (QE)?
What was it supposed to do?
Why is it criticised?
What could be done instead?
Positive Money video
WHAT IS MONEY?
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Cash – coins and banknotes
Cash c. 3% of today’s money
Not discussing cash tonight
Most transactions via bank accounts
Bank account money c. 97% of today’s money
Also bank-only ‘reserve account’ money
WHAT IS BANK ACCOUNT MONEY?
• How much credit you’ve got with your bank
• IOU from your bank
• ‘Account’ of how much the bank owes you
(or you owe the bank)
• Can’t touch/weigh/hold (unless convert to cash)
WHAT IS BANK ACCOUNT MONEY?
• Hardly ‘money’ – it’s not cash
• But accepted for payment (e.g. by debit card,
cheque) inc. for tax – so is ‘money’
• Other societies – concha shells, cigarettes, etc
• Also strange – IOUs from High St banks
WHAT IS BANK ACCOUNT MONEY?
Co-op
↕↔↕↔↕
A B C
HSBC Santander
↕↔↕↔↕ ↕↔↕↔↕
H I J S T U
Individuals & organisations
WHAT IS BANK ACCOUNT MONEY?
• Total ‘money supply’, c. £2tr
• Why have banks written £2 trillion of IOUs?
• Because people have borrowed from banks
c. £2tr in mortgages, loans, company loans, etc.
– and promised to repay later with interest
WHAT IS RESERVE ACCOUNT MONEY?
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Special ‘money’ used only between banks
Bank has account at the BoE (‘reserve a/c’)
It’s an IOU from BoE to the bank
Reserve Account is an account of how much the
BoE owes the bank
• No physical existence, just a figure
• Total = ‘narrow money’, previously c. £20bn
WHAT IS RESERVE ACCOUNT MONEY?
BANK OF ENGLAND
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↑
↑
↓ ←→ ↓ ←→ ↓
Co-op HSBC Santander
↕↔↕↔↕ ↕↔↕↔↕ ↕↔↕↔↕
Individuals & organisations
BANK ACCOUNTS vs RESERVE ACCOUNTS
• Two different games being played:
• We try to keep bank a/c in credit
but can get overdraft and pay charges
• Banks must keep reserve a/c in credit,
or they’ve lost the game
– unless other banks will lend to them
(or BoE as last resort)
THE UK MONEY SYSTEM
• All money (except cash) is IOUs
• A massive inter-dependent
superstructure of debt
• Every time risks collapsing,
propped up with bits of bluetak
and sellotape, till next crisis
THE UK MONEY SYSTEM
• Positive Money’s vision:
Bank a/c’s hold positive money issued by BoE
TO REPLACE:
Money you’re owed by a limited liability co.
(bank) who you’ve got to hope will stay solvent
or (FSCS) the taxpayer hopes will stay solvent
THE UK MONEY SYSTEM
• “Of all the many ways of organising banking, the
worst is the one we have today.”
- Mervyn King, Governor BoE, 2010
HOW DOES BANK A/C MONEY OPERATE?
John ‘has’ £100 in HSBC a/c
Ellen ‘has’ £100 in HSBC a/c
I.e. HSBC owes each £100.
John pays Ellen £20 with an HSBC cheque
HSBC amends its accounts
so HSBC now owes John £80 and Ellen £120
HOW DOES BANK A/C MONEY OPERATE?
John ‘has’ £100 in HSBC a/c
Lucy ‘has’ £100 in Lloyds a/c
John pays Lucy £20 by cheque
HSBC now owes John £80
Lloyds now owes Lucy £120
and HSBC pays £20 ‘reserve a/c money’ to Lloyds
HOW DOES RESERVE A/C MONEY OPERATE?
HSBC has £100,000 in reserve a/c at BoE
Lloyds has £100,000 in reserve a/c at BoE
I.e. BoE owes each of them £100,000.
HSBC transfers £20 reserve a/c money to Lloyds
BoE amends its records so now:
BoE owes HSBC £99,980 and Lloyds £100,020
THAT TRANSACTION IN FULL
John pays Lucy £20 by cheque.
Their bank a/c’s:
HSBC owes John:
Lloyds owes Lucy:
£100  £80
£100  £120
The banks’ reserve accounts:
BoE owes HSBC:
BoE owes Lloyds:
£100,000£99,980
£100,000£100,020
THE UK MONEY SYSTEM BEFORE 2007
BANK OF ENGLAND
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↓ ←→ ↓ ←→ ↓
~ £20 billion
Co-op HSBC Santander
↕↔↕↔↕ ↕↔↕↔↕ ↕↔↕↔↕ ~ £1,600 billion
Individuals & organisations
Purple = Reserve a/c money (IOUs from BoE)
Blues = Bank a/c money (IOUs from banks)
THE UK MONEY SYSTEM
• Up to 2007,
total reserve a/c money << total bank a/c money
• Daily inter-bank transactions roughly balance
• If run out, borrow from other banks
• 2007: banks feared lending to other banks
• E.g. Northern Rock granted v. many mortgages
• Ran out of reserve a/c money
THE UK MONEY SYSTEM
B A N K OF E N G L A N D
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↓ ←→ ↓ ←→ ↓
 ↓
Co-op HSBC Santander Northern Rock
↕↔↕↔↕ ↕↔↕↔↕ ↕↔↕↔↕  ↓↔↓↔↓
Individuals and organisations
Purple = Reserve account money (IOUs from BoE)
~ £20 bn
Blues = Bank account money (IOUs from banks) ~ £1,600 bn
WHAT IS QUANTITATIVE EASING?
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To ease the tightness of reserve a/c money
By increasing the quantity of reserve a/c money
I.e. Increase IOUs from BoE to banks
BoE buys from banks and gives IOUs in return
(i.e. create new reserve a/c money)
• BoE ‘creates money out of nothing’?
– just creates IOU to pay for purchase
WHAT IS QUANTITATIVE EASING?
• What does BoE buy?
– mostly UK government gilts
• Who does it buy them from?
– various organisations via their banks
WHAT IS A GILT?
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Gilt = UK Gov’t Bond (usually fixed interest)
cf. National Savings & Investments
Lend money to Gov’t; get IOU & interest rate
Terms e.g. 5 years, 10 years, 30 years
Funds National Debt
Re-issued when mature & growth by PSBR
WHAT IS A GILT?
• E.g. The UK Treasury will pay 2% p.a. interest
on £10,000 it has borrowed until 2026,
then repay the £10,000.
• ‘Yield’ = 2% when issued
• Can be traded (unlike NS&I)
• Price ↑  ‘Yield’ ↓; Price ↓  ‘Yield’ ↑
WHAT IS A GILT?
The UK Treasury will pay 2% p.a. interest
on £10,000 it has borrowed until 2026,
then repay the £10,000.
• Ideal investment for Pension Funds and
Insurance Co’s
HOW DOES BoE PURCHASE GILTS IN QE?
• ‘Reverse Auction’
• I.e. BoE invites offers from people willing to sell
and buys those offered for lowest prices
• Can’t give seller BoE IOUs (reserve a/c money)
because only banks have reserve a/c’s,
so pays via seller’s bank
HOW DOES BoE PURCHASE GILTS IN QE?
BANK OF ENGLAND
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↓
Reserve a/c money
↑
SELLER’S BANK
↓
Bank a/c money
Gilt
↖ SELLER
• New reserve a/c money has been created
• The ‘quantity’ has been ‘eased’!
HOW DOES BoE PURCHASE GILTS IN QE?
• So now:
BoE (owned by Gov’t) owns IOUs from Gov’t,
paid for by BoE IOUs given to banks
+ bank IOUs given to sellers
– all to solve the latest banking crisis!!
HOW MUCH QE HAS THE UK HAD?
• £375 billion between 2009 and 2012
• Further £70 billion recently started
of which £60 billion in gilts
& £10 billion in company bonds
• Now reached £435 billion
HOW MUCH MONEY HAS QE CREATED?
• £435 bn reserve a/c money (bankers’ money)
• £435 bn bank a/c money (money supply)
• May have helped ameliorate recession
WHAT WAS QE SUPPOSED TO DO?
1. Increase (ease) quantity of reserve a/c money
 banks lend to each other again
2. Reduce gilts available
 move investment into e.g. companies
 boost economy
WHAT WAS QE SUPPOSED TO DO?
3. Reduce gilts available
 raise price of gilts
 lower yields
 move investment into e.g. companies
 boost economy
WHAT WAS QE SUPPOSED TO DO?
4. Lower yields (interest)
 drive down other interest rates
 encourage borrowing and spending
 boost economy
5. Raise price of gilts
 raise other asset prices (property, shares)
 make people richer and spend more
 boost economy
WHY IS QE CRITICISED?
1. “Increase (ease) quantity of reserve a/c money
 banks lend to each other again”
 Original crisis measure – no longer a problem
2. “Reduce gilts available
 move investment into e.g. companies
 boost economy”
 Pension funds rely on gilts, too few available
WHY IS QE CRITICISED?
2. “Reduce gilts available
 move investment into boosting economy”
3. “Reduce gilts available
 Raise price of gilts  lower yields
 move investment into boosting economy”
 Money moved not into productive investments
but into asset bubbles e.g. existing shares,
existing housing
WHY IS QE CRITICISED?
4. “Lower yields (interest)
 drive down other interest rates
 encourage borrowing and spending
 boost economy”
 Interest rates are not discouraging borrowing
 Reduced returns on savings  savers &
pensioners worse off  spend less not more
WHY IS QE CRITICISED?
5. “Raise price of gilts
 raise other asset prices (property, shares)
 make people richer and spend more
 boost economy”
 Assets owned mainly by the rich, who spend
less proportionately than the poor – they didn’t
sell the assets and spend the money
 Housing dearer to buy/rent  less to spend
WHY IS QE CRITICISED?
5. “Raise price of gilts
 raise other asset prices (property, shares)
 make people richer and spend more
 boost economy”
 BoE Report: Top 5% of households average
£128,000 better off
 S&P Report: “exacerbated wealth inequality
between rich and poor”
WHY IS QE CRITICISED?
Theresa May: “While monetary policy - with
super low interest rates and quantitative easing provided the necessary emergency medicine after
the financial crash, we have to acknowledge there
have been some bad side effects. People with
assets have got richer. People without them have
suffered. People with mortgages have found their
debts cheaper. People with savings have found
themselves poorer. A change has got to come.”
WHY IS QE CRITICISED?
• New £70 bn QE includes £10 bn company bonds
 Questions over some companies chosen by BoE
e.g. some based overseas, some accused of tax
dodging, a tobacco company, etc
 E.g. Possible concerns?: Apple, AT&T, BAE, BAT,
BMW, Daily Mail, Daimler, Deutsche Telekom,
Electricite de France, IBM, McDonald’s, Nestle,
Pepsico, Sky, Tate & Lyle, Wal-Mart
SHOW THIS VIDEO AT THIS POINT:
http://positivemoney.org/2016/08/create-money-for-people-videofran/
WHAT COULD BE DONE INSTEAD?
• ‘Strategic QE’
• ‘People’s QE’
• ‘Helicopter Drops’
• ‘Sovereign Money Creation’
Analysed in Positive Money booklet
A Guide to Public Money Creation
http://positivemoney.org/wp-content/uploads/2016/04/Public-Money-Creation-2.pdf
‘STRATEGIC QE’ (NEF)
• BoE buys bonds from national Investment Bank
(instead of buying gilts from financial markets) eg:
- Public Investment Bank, lends for infrastructure
- Housing Investment Bank, lends for new housing
- Green Investment Bank, lends for green projects
• Boosts real economy & national assets
‘PEOPLE’S QE’ (Murphy, Corbyn)
• BoE buys bonds from public bodies
e.g. Local Authorities, NHS, Public Bank
• They spend on infrastructure investment
e.g. housing, hospitals
• Boosts real economy & national assets
‘HELICOPTER DROPS’ (Friedman, Bernanke)
• BoE buys gilts from Gov’t (not from markets)
(or via banks, to obey Lisbon treaty)
• Gov’t distributes money to citizens
via tax cuts or citizens’ dividend
• Boosts real economy, more equitably
• (Risk: People could spend on imports)
‘SOVEREIGN MONEY CREATION’ (Pos. Money)
• BoE buys ‘permanent zero-interest bonds’ from
Gov’t (i.e. creates money to give to Gov’t)
• Gov’t decides use of money
e.g. infrastructure, housing, reduce taxes
• BoE MPC decides amount to create
• Boosts real economy, under political control
• Part-way towards full Positive Money reform
SHOW THIS VIDEO AT THIS POINT:
http://positivemoney.org/videos/introduction/waste-375-billionfailure-quantitative-easing-video/
COMMENTS, QUESTIONS, DISCUSSION