QE3 : The Board Members’ Memo

“If you are looking for intent AND stupidity, look at governments” World Citizen on Mishtalk.

I call this this post QE3 because it turns out to be my third one on this topic.

“End of (His)story” was the first. Not that I realised. I was just poking fun at all the defunct economics (1) implict in an (ex) ECB board member’s speech.

It took Big Bro Google to tell me what I had really been talking about: QE. Topical yet again as in “What the hell…”  , the Mishtalk inspired post that got me engaged with Count Draghila et al.

So that was my QE2. And as if to illustrate John Kay’s obliquity my second QE post generated unprecedented traffic to my blog.

So I do ask myself : How could I have missed this QE-as-a-topic opportunity before? After all everyone knows Central Banks are at the centre of money? And this is a money blog! Is this a conceptual version of  “Stupid German Money”  on my part?

My defence could be that as a researcher I got bored with the QE story long ago. I put it under “stupid” more or less from the word go. Stupid as in “purposefully ignorant”. Or as in “unbelievable but true”.

Just for the record: I will never forgive Obama for missing a historic opportunity to reform the money system.

To continue with my self-defence: I live in the real economy. Meaning: yes savings rates have collapsed but much more importantly, borrowing rates have not. Not for little one-man-with-a-bucket-builder me, anyway.

Whilst pre-crisis I got inundated with offers to borrow 110% for an overvalued property at barely above base rate, I now struggle to get 60% for a cautiously valued property at 6% above base rate or more. The crisis was the end of my business model: buy a ruin, rebuild and rent or sell.

So I did not need a PhD in finance or economics to work out that QE wasn’t gonna work for any job- or value-creating business. Nor did I need more than basic numeracy skills to see that the ensuing asset inflation wasn’t trickling down to my tenants but flowing up into my pocket.

So there.

And whilst I am at it I might as well add insult to injury and shout that I am rather tired of savers complaining too much. Compared to my tenants who go to work every day, don’t seem to have any extravagant spending habits and typically have degrees if not PhD’s but nonetheless mostly live with negative cash flows, those still managing to live in the black and accumulate surpluses should be grateful.

I have lost money in gold and Neil Woodford’s fund but I have only marginal sympathy for myself. If you take risk, you take risk. And if you are ready to take risk maybe you should not shove it into someone else’s intray  but spend more time and thought on your own research? Or, even better, take the risk by buying something real in the real world?  Like buy some land and plant trees perhaps? (2).

If you lose your money in the money market it’s just below-the-belt-cheap to come crying to Daddy. And bailing out private banks with public money is the ultimate injury. Pretending it’s because they are too big to fail is to shovel insult on top.

So there. I have had a good rant.

Meanwhile Big Bro Google has fed me another installment of the current wave of outrage at Count Draghila: The Big Bank Board Members’ Memorandum of Concern has arrived. Here is a quick read edit:

… (For some time now) …the ECB itself has seen less … of a threat … of a deflationary spiral. … This weakens its logic in aiming for a higher inflation rate. The ECB’s monetary policy is therefore based on a wrong diagnosis … (and represents) a clear departure from a policy focused on price stability. The … argument that the ECB would be violating its mandate … is simply inaccurate.

(Also) continued securities purchases by the ECB will hardly yield any positive effects on growth. … Negative side effects from very low or negative central bank interest rates … extend from the banking system, through insurance companies and pension funds, to the entire financial sector … (and) include a “zombification” of the economy … contributing to weaker productivity growth, and re-distribution effects in favour of owners of real assets (with the implied) … search for yield boost(ing) artificially the price of assets to a level that ultimately threatens to result in an abrupt market correction or even in a deep crisis.

In extending and further strengthening forward guidance, the ECB … is impeding the exit from such policy.”

Herve Hannoun, former first deputy governor of the Bank of France – Otmar Issing, former member of the ECB’s Executive Board – Klaus Liebscher, former governor of the Austrian central bank – Helmut Schlesinger, former president of Germany’s Bundesbank – Juergen Stark, former member of the ECB’s Executive Board – Nout Wellink, former governor of the Dutch central bank.

Debtors vs Creditors EU ECB

Is it a sign of these stagnant times that the “sound money” creditors’ critique of QE sounds a lot like what non-mainstreamers have been saying all along? Is circumstance shoving the miser money Austrians into the same changing room with Hayekians,  goldbugs,  (post Keynesian) heteros and Marxists , screaming at the no exit sign that the Keynesians are welding the door shut forever? With sovereign Tina presiding over this  farcical repeat of the ancient tragedy of debtors versus creditors?

Let’s recap: Whatever justification there may have been for QE to start with, by now it zombifies financials, freezes productives, overheats assets and gushes the gains up into old moneybags. And no end in sight to this unnatural hell. Other than maybe the next market crash. Or discontent voters installing dictatorial system wreckers.

Meanwhile TINA‘s Keynesian bodyguards have been roaring back at “the dinosaurs” that “…The true risk to the eurozone economy is overly tight, not loose, monetary policy (and that) … the attack on the European Central Bank’s renewed stimulus by six former central bankers is extraordinary. …  Only one thing can match the stature of the complainants and that is the hollowness of their complaint. Their memorandum reveals them as the Bourbons of central banking: they have learnt nothing and forgotten nothing.”

But neither has the FT. Learnt much. Is it just me or has would be money reformer Martin Wolf  been demoted to an occasional book reviewer?

TINA mostly remains sovereign across the pink pages. Like instead of reflecting on the economics of the de-facto MMT maneuvers by Trumpian politicians,  Camilla Cavendish stoops to waving  the old money tree when she worries how  “… a high-spending Conservative party (will) differentiate itself from high-spending Labour under Jeremy Corbyn?” and applauds ex Tory Rory Stewart’s admonition of Borisian incontinence: “Prudence should be our national strength.”  (Like: “We don’t do “money” at Harvard!”)

Meanwhile The Economist has added its praetorian voice of mainstream moderation to express the hope that Isabel Schnabel will calm the shrill notes of the “black zero” hawks.

ECB QE GErman reaction Economist 5 10 1920191008_151038.jpg

Bloomberg’s Andreas Kluth also worries that Christine Lagarde will have a “German problem” explaining to the black zero Weidmanners  why they should back monetary – and fiscal – stimulus. Indeed. Good luck with that Berlin speech in honour of Schauble.

And that’s not to mention rumors that the ECB might go the MMT way, possibly even “looking at some form of “people’s QE” – putting printed money directly in people’s pockets.” OMG!  Now that really would be a worry, says moneyweeks’s Matthew Lynn, not least because it would primarily benefit Germany: “The winner takes it all”.

I shouldn’t worry. The black zero hawks won’t have it. Sadly Drexit looks more likely than Germans waking up the realities of “Schuldgeld“.

Any plans for central banks to employ “alternative powerful policy tools” (see below) are unlikely to be approved by the FT or The Economist, either. Don’t expect from mainstream Keynesians anything but tired TINA . No critical self-reflections,  conceptual deviations or leaps into the un-modelled.

Nor from the creditors’s choir any notes on reconsidering therapy for one’s obsessive attachment to “sound” money and black balances. After all, one might have to revise core convictions about inflation and money.

More comfy to wail at negative interest rates. All in the name of old age savings, of course. Here is just one more installment of indignation  from the FT’s Merryn Somerset Webb of the FT:

ECB QE FT 5 10 19 M Somerset

And on bloomberg you can watch Allianz’s El-Erian tell JP Morgan’s Bob Michele why you should not have near zero or negative rates.

So yes. Those “unnatural” negative rates. And once down there you got no options left.

However, apparently I am not the only one who thinks that differential, or dual, interest rates may point to an exit from this one?

Eric Lonergan, for one, argues why “… dual interest rates are the logical next step in the arsenal of central banks” and takes issue with Larry Summers “oddly” ignoring this option.

Just to be hyper-contrarian I shall mention  Tuure Parkkinen’s   extra heterodox  101 root bug macro  which positively advocates the facilitation of negative interest rates !?

And at the opposite end of respectability Kenneth Rogoff  “…wonder(s)  whether Keynes might have re-evaluated his (critical) position (on Silivio Gesell), and perhaps even restated his analysis of monetary and fiscal policy at the zero bound, had he been aware of the dual currency proposal of Robert Eisler (1932), which in recent times has been taken up by Buiter (2009) and by Agarwal and Kimball (2015). The idea of one country having two different currencies with an exchange rate between them may seem implausible, but the basics are not difficult to explain.”

None of the above seems to offer limited allowance citizens’ savings accounts provided by the central bank? Not to mention limited allowance CB lending to entrepreneurial citizens at off-market rates?

To find an exit, orthodox economists would have to take off their equilibrium shades and have  a fresh look in the mirror. Unlikely, not least because their are few jobs for dissidents.

Much of this weekend’s research has led me back to old yields from heterodox pastures I was grazing ten years ago. The take-away then was this: The most important means of production under capitalism are the means of producing money.

As to the fact that most money is not produced by central but private banks we apparently still live in a world where 80% of the UK population, and 84% (!) of MP’s do not know this. One can only speculate on the percentage of either who would refuse to believe it even if confronted with mountains of evidence.

Not surprising perhaps, given that prior to the Fed hinting and the BoE officially confirming this fact (and other CB’s feeling obliged to follow suit) anyone whispering it was typically stigmatized as stupid, subversive, or insane by mainstream dogma, let alone banks.

So why did central banks suddenly decide to risk the revolutionary wrath of the masses with this piece of enlightenment?

Probably because central bankers could see the poisoned buck being pointed at them by both politicians and private bankers. So best to remind everyone that, actually, they are not really in control of the production of new money. All they can really do is a bit of largely ineffectual smoke signalling?

For those willing and able to reconsider their own cognitive biases a collection of relevant readings below.  None of them are about defending real existing QE. Then or now.

Rather they are about the wider historical and theoretical context in general and about the particular alternative of People’s QE, “helicopter money” and basic income.

For a very comprehensive paper referencing all of the issues raised below and more go straight to Richard A.Werner’s “A lost century in economics: Three theories of banking and the conclusive evidence”

My research starts from his conclusion that “…economics seems to have made no progress in the 20th century concerning a pivotal issue, namely the role of banks …”, or, as I put it earlier, the control of the means of the production of money.

Annie Lowrey Give People Money

Currently I am puzzled debates do not seem to link peoples’ QE with UBI?

But for now let’s stick with QE and restart with Positive Money’s summary: 

“A decade ago, the ECB’s monetary policy made a significant contribution to overcoming the severe recession and consolidating growth thereafter. However … the longer the ultra-low or negative interest rate policy and liquidity flooding of markets continue, the greater the potential for a setback. …

(These) policies are making the rich richer and doing little for anyone else. … (They) have pushed up the value of those assets, delivering a knock-on boost to property prices. The idea is that because the people who own assets will feel wealthier, they’ll be encouraged to spend more. This is a just one particular form of the “trickle-down effect”. But it doesn’t work. …

And yet the Bank of England has alternative powerful policy tools with the potential to support a stronger and fairer economy. Instead of pumping money into financial markets, it could be spent via the government into infrastructure, green technology, or as a direct boost to household finances….”

And money reformer Joseph Huber “concludes that … monetary financing … in lieu of conventional … QE … would immediately benefit real investment and purchasing power.”

More mainstream a new book was recently launched by Frances Coppola.

Frances Coppola The case for Peoples' QE

No relation to Francis. Still, John Authers can’t resist “the Smell of Monetary Napalm in the Morning” and recommends Coppola’s The Case for People’s Quantitative Easing.

“Why?” (Because it) … is well and clearly written (and) gives a clear narrative explaining the evolution of …QE. … It also goes through the largely disappointing history of the last decade and makes a clear prescription for the future.”

Mathew D. Rose suggests that “… the absurdity is …” not the idea of helicopter money but “… that, after ten years of failure, current central bank policies are still being taken seriously.”

And “… the Resolution Foundation hosted a debate to launch (the) book, … a great panel consisting of Jagjit Chadha, Director of NIESR; Fran Boait, Executive Director of Positive Money; and James Smith, Research Director of the Resolution Foundation, debat(ing) … with immense verve, ably moderated by Torsten Bell, Chief Executive of the Resolution Foundation.

Elsewhere Lucrezia Reichlin, Adair Turner and Michael Woodford “… recount a policy debate on helicopter money that was held at LBS in April 2013.”

Global Investment Strategist Patrick Schotanus has “… highlight(ed) some of the more recent interpretations … of ‘helicopter money’ (and) consider(ed) the conditions for its effectiveness …

Kevin Dowd has collated arguments Against Helicopter Money and the Spectator’s Ross Clark thinks that if “QE had ended up in the pockets of ordinary people , surely it would have created inflationary pressures (?)”

Pertinant to the last point tandfonline present a “… a survey among Dutch households … (to) examine whether respondents would spend the money received via such a (helicopter type) transfer. Our results show that respondents expect to spend about 30% of the transfer and that helicopter money would hardly affect inflation expectations.”

And  Josh Ryan-Collins and Frank van Lerven address “(h)istorical examples of fiscal-monetary policy coordination (that) have been largely neglected, along with alternative theoretical views, such as post-Keynesian perspectives that emphasise uncertainty … (and) develop a new typology of forms of fiscal-monetary coordination that includes both direct and less direct forms of monetary financing …”

So there is lots  to try and get one’s head around.

Meanwhile I remain puzzled why debates do not mix helicopter QE with Basic Income ideas and why dual or differential savings rates remain off limits? Never mind the abolition of mono (fiat) currency regimes and the replacement of income tax by universal transaction tax?

I guess it’s all a bit much for the professionalised PhDs in their conceptual silos?

But what about open minded free thinkers?

So there.

notes and references

(1) Defunct as in yet another turning of Keynes’admonition: “Economists, who usually believe themselves to be exempt from any cognitive biases, are usually the slaves of some defunct economics”

(2) Trees as in maybe helping to save the planet ,  as a possible real investment  and as a reference to short versus long term investment under present versus differential interest rate conditions


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