Rehab Anyone? Ann Pettifor on going cold turkey as Lords poke into QE

committees.parliament.uk 16/7/2021 Bank of England must spell out the risks of quantitative easing, says Lords report  The Economic Affairs Committee publishes its report ‘Quantitative easing: a dangerous addiction?’, which urges the Bank of England to explain in more detail why it believes rising inflation will be a short-term phenomenon, and why continuing with its quantitative easing programme until the end of 2021 is the right course of action.


Report: Quantitative easing: a dangerous addiction? (PDF)

The Economic Affairs Committee launched this inquiry for several reasons:

  • the quantitative easing programme has not been subject to sufficient scrutiny, including in Parliament, given its size, longevity and economic importance.
  • to examine the extent to which quantitative easing has achieved its stated objectives, along with its effects on the real economy, growth and inflation.
  • to examine the most significant risks to the public finances that might result from quantitative easing, given that the Bank of England now holds a substantial portion of the debt issued by the Government.
  • to find out the Bank of England’s plans for quantitative easing in the future.

theguardian.com 16/7/2021 Bank of England ‘addicted’ to creating money, say peers BoE must be more transparent and justify use of quantitative easing, says Lords report by Larry Elliott


bbc.co.uk 16/7/2021 Is the Bank really hooked on quantitative easing? Faisal Islam

… “But the Lords’ report argues that during Covid, the Bank went further. It was “widely perceived” to have bought up the debts exactly as required by Government, matching the size and speed of borrowing to fund huge spending bills, it said. That risks undermining the Bank’s independence from government and its fight against inflation.” …


prospectmagazine.co.uk July 16, 2021 Quantitative Easing: how the world got hooked on magicked-up money –  Going cold turkey would finish off a dysfunctional global financial system that’s now hopelessly addicted to emergency infusions. The only solution is surgery on the system itself   By Ann Pettifor

” … We seem condemned to volatile commodity prices, wild capital flows, worsening imbalances in trade, taxation and income, and—before long—the next sovereign debt crisis. And then there’s inequality. During lockdown, the total wealth of billionaires rose by $5 trillion to $13 trillion in 12 months, the most dramatic surge ever registered on the annual Forbes billionaire list.

Where do such riches come from? Compared to before the pandemic, there’s less real economic activity: we are collectively poorer. And yet within a year of the great panic of March 2020, many asset prices were surging. …

How is this mismatch between financial markets and underlying reality possible? Because just like in the aftermath of the Great Recession, the civil servants in our central banks spotted the dreadful potential of unchecked panic, and rode to the rescue of private speculators by flushing the system with made-up money through a process we’ve come to know as quantitative easing. …

So what’s really new here? The difference between OMOs and QE is in the scale and the wider array of assets involved. Whereas OMOs typically purchase short-term government debt, QE programmes snap up government debt of all maturities, including long-term bonds. In the US, the EU and UK, central banks also extended the definition of eligible collateral to include riskier corporate bonds, and began buying them up too.

As to the scale, already by 2009 the Bank of England had purchased bonds to the value of £200bn. By August 2016, after the Brexit vote, purchases rose to £445bn. During the market’s grave March 2020 wobble, purchases rose to £645bn. By November 2020, the bank had acquired assets of £895bn. This stock of purchases is now equivalent to about half the annual flow of UK national income.

Moreover, with QE, the old two-way traffic of OMOs seems to have become a one-way street. While central bankers are acquiring bonds, they are not, as yet, selling them back into the market. The fear is that doing so would flood it, slashing bond prices and forcing up their yields—making it harder for borrowers, not least governments, to service their debts

Even hints of bond disposals can provoke market tantrums. In Japan, the establishment is so reluctant (or impotent) to change the system that QE appears to have morphed from a temporary programme into a permanent feature of the economy. There’s no reason to assume this couldn’t happen here. Perhaps it already has. …

To the extent that mainstream economists think about money at all, they are divided on it. Some, like Bank of England economists, do understand that money originates as a social construct; that credit—or, in the words still written on every banknote, a “promise to pay”—is based on trust, and ultimately underpinned by regulation and the institutions of the state. …

Importantly, commercial bank money rests upon the same social foundations. When banks make loans, they have always acted as “magic money trees,” creating new deposits in the accounts of those who borrow from them—in effect new money. But the stability of this commercial system of money creation depends on trust in the promise to pay, or repay—without that faith, banks wouldn’t have the confidence to lend, savers wouldn’t dare entrust their funds with the bank, and right across the economy, activity would dry up because nobody could be sure they would be paid for anything.

This all-important trust is achieved, first, through the legal enforceability of “promise to pay” contracts, and then, more specifically in the banking context, through licensing, regulation and, ultimately, the backing of a central bank. The health of the economy is also crucial—in a depression many debtors will go bust, defaulting on loans and shaking faith in the banking system. Again, it falls on the public authorities to manage this, whether by running a stable economy or through strictures regarding the amount of money a bank needs to set aside as protection against non-repayment.

The Bank of England understands all this, but in doing so stands out from the economics crowd. Most orthodox economists rely instead, whether consciously or unconsciously, on the antiquated commodity-exchange theory of money. Traditionally based on gold, this way of thinking treats money not as credit but as a system of exchange based on an underlying commodity: one that is scarce, and so—supposedly—stable in price.

This is why, from the conservative point of view, QE—the creation of more fiat money—is so alarming. The great difficulty for this camp, however, is that it is precisely their worldview that has created the system that cannot any longer get by without central bank infusions. …

From loose money to loose morals? The Devil is portrayed cutting up Fortune while Honour is flogged—in front of a monument to the City’s recent destruction amid the South Sea Bubble of 1720. © Bridgeman Images

Despite the worrying direction of travel, cryptocurrencies do not—yet—represent a systemic threat. The vast “shadow banking” system, which has grown out of the same flawed monetary thinking, is another matter. Comprising pension funds, hedge funds, insurance companies and other investment vehicles, it now manages a $200 trillion stock of assets, dwarfing that $2 trillion cryptocurrency valuation, and also vastly exceeding the annual income (or GDP) of the world as a whole, estimated at $86 trillion. Being in the shadows, then, no longer means being on the margins.

Central bankers have permitted and sometimes encouraged this sector to expand beyond the regulatory frameworks of governments. But the real roots are deeper, lying in the great structural shift of pension privatisation. Between 1981 and 2014, 30 countries fully or partially privatised their public mandatory pensions. Coupled with cross-border capital mobility, the move to private retirement savings steadily generated vast cash pools for institutional investors.

Today one asset management firm, BlackRock, manages in excess of $8 trillion of the world’s savings. …

… These repurchase deals are struck in the “repo” markets which form the heart of the shadow banking system. Note that this whole system avoids reliance on the social construct of credit, upheld by trust and enforced by law, which traditional banks had to work within. Instead, the system is one of deregulated exchange in which cash is simply one more commodity—no more regulated than any other. Securities are swapped for cash over alarmingly short periods: through economic history, such churning trades have often been a sign of speculative frenzy overpowering sober judgment. Moreover, operators in the system have the legal right to re-use a security to leverage additional borrowing. This is akin to raising money by re-mortgaging the same property several times over. Like the banks, they are effectively creating money (or shadow money, if you like), but they are doing so without any obligation to comply with the old rules and regulations that commercial banks have to follow.

So we have power without responsibility, but—worse—we have parasitical power. Because, as Daniela Gabor of the University of the West of England has explained, even this “shadow money relies on sovereign structures of authority and credit worthiness.” Why? Because private financiers rely heavily on government bonds as the safest collateral for their repo trades. It is estimated that two out of three euros borrowed through shadow banks are underpinned by the collateral of sovereign bonds issued within the Eurozone. Any decline in the value of government bonds as a consequence of shadow banking activity will influence the government’s cost of borrowing, and—ultimately—fiscal decisions.

Worst of all, the shadow money that comes out of these institutions is now so systemically important to the economy that when it threatens to dry up, as it does from time to time, it cannot safely be ignored. Which brings us back to quantitative easing—the remedy that central bankers reach for in the face of this recurrent threat.

The reason why emergency injections of money are increasingly needed is that the shadow banking system is structurally prone to volatility and debt crises. The borrower’s promise to repurchase an asset at a higher price is relatively easy to uphold when the value of that asset remains stable. But the value of assets can rise or fall suddenly, which in this system can set in train self-amplifying feedback loops—with catastrophic consequences. …

The only way to call time on QE, if that is what we truly want, is to deconstruct and then reconstruct, regulate and stabilise the whole financial system, so that the extraordinary privilege of credit creation is always balanced by a responsibility not to take undue risks. And if footloose capital responds by skipping across borders and away from oversight, then we may also need to look at controls on that front too. Only then will the world stand any chance of kicking the QE habit, address those dangerous imbalances and finally escape this grim shadowland of money.”

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