QE, negative rates and helicopters

The Bank of England chief economist, Andy Haldane, has often been ‘off message’ when it comes to an analysis of the global financial crash, the banking system and economic policy. Back in 2013, he argued that about the value of the financial sector to an economy. “In what sense is increased risk-taking by banks a value-added service for the economy at large?” He answers, “In short, it is not.”  And this is the chief economist of the Bank of England speaking.

Now he has stepped out of line with the prevailing view that the BoE should be hiking rates to follow any move by the Fed. Indeed he reckons the Bank of England should consider cutting rates to the bone and doing even more than applying quantitative easing (QE) ie printing money to increase the amount of credit in banks.

Why? Well, Haldane says that the crises in Greece and now China are not chance events or “lightning bolts from the blue. Rather, they are part of a connected sequence of financial disturbances that have hit the global economic and financial system over the past decade..” Indeed, “recent events form the latest leg of what might be called a three-part crisis trilogy. Part one of that trilogy was the ‘Anglo-Saxon’ crisis of 2008-09. Part two was the ‘euro-area’ crisis of 2011-12. And we may now be entering the early stages of part three of the trilogy, the ‘emerging market’ crisis of 2015 onwards.”

Haldane throws some doubt about the efficacy of QE in restoring the progress of the major capitalist economies since 2009. It may have worked for the UK, he says: “QE appears to have had a reasonably powerful and timely”. However, “existing empirical studies point to wide margins of error around QE ready-reckoners ..The key micro-economic point is that these uncertainties are inherently greater for QE than interest rates.”  In other words, we don’t really know if QE works; cutting interest rates works better.

That doubt was reinforced recently by  Stephen Williamson,vice-president of the Federal Reserve Bank of St Louis and the US top expert on monetary policy.  He has just issued a study in which he concludes : “There is no work, to my knowledge, that establishes a link from QE to the ultimate goals of the Fed – inflation and real economic activity. Indeed casual evidence suggests that QE has been ineffective.”

The problem is that interest rates are already close to zero and are going to stay there, ‘zero bound’, to use the jargon.

negative rate

So Haldane proposes that central banks needed to apply even more innovative techniques to support the weak global capitalist economy. “If global real interest rates are persistently lower, central banks may then need to think imaginatively about how to deal on a more durable basis with the technological constraint imposed by the zero lower bound on interest rates.”  Haldane proposes that perhaps governments should consider abolishing cash (notes and coins).  This would stop people putting money under mattresses.  Then central banks could adopt ‘negative’ interest rates.  In other words, people would be charged for holding deposits in banks.  With these measures, people would be forced to spend, invest or speculate, so boosting ‘demand’ in the ‘real economy’.  In a way, this would a ‘permanent QE’: “part of the monetary policy armoury during normal as well as crisis times – a monetary instrument for all seasons.”

One problem with all these ‘innovations’ is that ‘conventional QE’ has proved not only ineffective in boosting the ‘real economy’, it is also downright biased towards more inequality of wealth and income.  As Frances Coppola pointed out in a recent blog post: “In 2013, the Bank of England admitted that the principal beneficiaries were asset holders, particularly those in the top 5% of the income distribution.  By pushing up a range of asset prices, asset purchases have boosted the value of households’ financial wealth held outside pension funds, but holdings are heavily skewed with the top 5% of households holding 40% of these assets. Rich people, in other words.”

Would the plan of the economic advisers to Britain’s new Labour opposition leader, Jeremy Corbyn, be any better?  This is the idea of a People’s ‘Quantitative Easing’ (QE) programme.  Instead of the Bank of England buying government and corporate bonds and printing money to do so (the current QE), the Corbyn proposal is that the BoE would buy bonds and other assets directly from local councils, regional agencies etc so that they can invest the money in projects for more housing, schools and services. “People’s QE is fundamentally different. [It] does have the Bank of England print new money, which is identical to the process that is used by ordinary banks when they lend to business, but it gives that money to people like housing authorities, to local councils, to a green investment bank to build houses, to schools, to build hospitals.” says Richard Murphy, Corbyn’s adviser.

But, as others have pointed out, ‘People’s QE’ is really no more than what the European Central Bank is doing now in its QE programme, namely buying the bonds issued by the European Investment Bank which will invest money in long-term projects (as it sees fit) around Europe.  This will have limited and very slow effect.

Haldane, Corbyn and other QE exponents do not mention what has come to be called ‘helicopter money’.  This was the idea of former Federal Reserve chair, Ben Bernanke, when he raised the idea that his mentor, the right-wing pro-market economist Milton Friedman, proposed for dealing with recessions.  Central banks should just drop printed money from helicopters over the cities of America to boost directly the demand for goods and services, thus by-passing the banks. Bernanke never applied this idea when Fed Chair, but it is occasionally it is raised by various economists only to be put back in its box.  It just sounds too radical and wild.

Actually, it is not. As Keynesian Simon Wren-Lewis points out, helicopter money is really another form of government spending.  If the central banks prints cheques and/or puts a monthly sum into the bank accounts of everybody, in effect, it is boosting bank deposits of households and companies in just the same way as if the government cut taxes or handed out increased benefits.  The government would eventually have to foot the bill for the central bank largesse.  And again, ‘helicopter money’ would probably add to inequality of incomes and wealth as it would indiscriminately go to the rich as well as poor.  Indeed, as Wren-Lewis says, “If governments undertake fiscal stimulus in a recession such that helicopter money is no longer necessary”

All these schemes and ideas are really a (desperate) response to the failure of ‘unconventional’ monetary policy practised by central banks and governments, namely QE.  And they are a reaction to the unwillingness of neo-liberal governments to run budget deficits, Keynesian style, to stimulate economic activity.  Of course, as I have argued, fiscal stimulation would also be pretty ineffective as long as the dominant capitalist sector is unwilling to invest more despite tax cuts or ‘corporate welfare’ subsidies.  And that remains the case in most top capitalist economies.

9 Responses to “QE, negative rates and helicopters”

  1. Alberto Florentin Says:

    Instead of helicopters, one might suggest that the police relax its vigilance on counterfeit money production – informally of course. Why not let forgers help society, informally and so without making waves, politically speaking?

  2. paulc156 Says:

    You say ‘helicopter money’ into people’s accounts [As per Steve Keen’s debt jubilee proposal] would worsen inequality but how would it do so? If every adult gets £10,000 for example, it would reduce inequality.
    eg; A man who earns a million pounds a year receives only a one percent windfall. A man who earns ten thousand a year gets the equivalent of a 100% windfall. Therefore the differential between the two is reduced.
    In the year prior to the windfall, the high earner earned 100 times the salary of the low earner, subsequent to it he earned only 50.5 times the salary of the low earner.

    • Boffy Says:

      “A man who earns ten thousand a year gets the equivalent of a 100% windfall. Therefore the differential between the two is reduced.”

      Except the one who gets an income of £1 million a year, probably gets a large part of it from profits, interest, and rent, and as this destruction of the value of the money tokens causes inflation to rise, that would cause an equivalent rise in the nominal prices of commodities, with a consequent rise in the nominal value of profits, rents and interest, so the income of the recipients of these kinds of revenues would rise not just by the £10,000 paid into their account, but by 10%, as a consequence of the inflation.

      The worker, however, would quickly see the value of the £10,000 handed to them disappear for the same reason that the prices of commodities, rents, and the amount of interest they have to pay, would rise by 10%, whilst their wages would not immediately rise to compensate.

      As marx, pointed out long ago in his attack on the idea of the reformists that anything useful can be achieved by tax policy, or redistribution,

      “Any distribution whatever of the means of consumption is only a consequence of the distribution of the conditions of production themselves. The latter distribution, however, is a feature of the mode of production itself. The capitalist mode of production, for example, rests on the fact that the material conditions of production are in the hands of nonworkers in the form of property in capital and land, while the masses are only owners of the personal condition of production, of labor power. If the elements of production are so distributed, then the present-day distribution of the means of consumption results automatically. If the material conditions of production are the co-operative property of the workers themselves, then there likewise results a distribution of the means of consumption different from the present one. Vulgar socialism (and from it in turn a section of the democrats) has taken over from the bourgeois economists the consideration and treatment of distribution as independent of the mode of production and hence the presentation of socialism as turning principally on distribution. After the real relation has long been made clear, why retrogress again?”

  3. Boffy Says:

    “And they are a reaction to the unwillingness of neo-liberal governments to run budget deficits, Keynesian style, to stimulate economic activity. Of course, as I have argued, fiscal stimulation would also be pretty ineffective as long as the dominant capitalist sector is unwilling to invest more despite tax cuts or ‘corporate welfare’ subsidies. And that remains the case in most top capitalist economies.”

    But, the question here is why that investment is not forthcoming. Is it because the mass of profit to be made is not sufficient; is it that oligopolies do not see sufficient aggregate demand to justify additional investment to profitably increase supply; is it that the mass of profit to be had is high, and there is sufficient demand to warrant investment, but the immediate capital gains from financial speculation far outweigh the yield that might be obtained from productive investment?

    Marx points out that the decisive issue for capital accumulation is not the rate of profit, but the mass of profit, which is a function of the mass of capital.

    “In the first case the rate of profit = 10%, in the second = 20%. And yet more can be accumulated out of 100 than out of 20. And thus the river of capital rolls on (aside from its depreciation through increase of the productiveness), or its accumulation does, not in proportion to the rate of profit, but in proportion to the impetus it already possesses.” (Capital III, p 245)

    There is no evidence that there is any shortage in the mass of profits, or that the mass of profits is not growing still.

    Moreover, Marx points out that the other factor determining accumulation is not just the mass of profit, but the value of commodities to be bought by that surplus value, i.e. the commodities that comprise the constant capital, and that are purchased for consumption by the capitalists and landlords.

    “If a certain rate of profit is given, the mass of profit will always depend on the magnitude of the advanced capital. The accumulation, however, is then determined by that portion of this mass which is reconverted into capital. As for this portion, being equal to the profit minus the revenue consumed by the capitalists, it will depend not merely on the value of this mass, but also on the cheapness of the commodities which the capitalist can buy with it, commodities which pass partly into his consumption, his revenue, and partly into his constant capital.” (ibid)

    Given that increased productivity has reduced the value of these commodities, often significantly, this means the potential, and motive for such accumulation has been increased.

    In which case, we are left with the explanation that either the lack of productive investment is a result of either lack of confidence on the part of productive-capitalists that there is sufficient potential future demand to justify increased supply, or else there is every reason for such investment, but the immediate capital gains to be had from speculation far outweigh them, particularly as central banks for the last thirty years have backstopped all of these financial and property markets, making speculation in them a one-way bet.

    In which case, a measure of fiscal expansion, combined with an increase in interest rates to facilitate a bursting of speculative bubbles, ending the belief in financial markets that only move in one direction, would both act to provide a stimulus for aggregate demand, to justify additional supply, as well as providing the motivation for realised profits to be utilised for productive investment rather than speculation.

    • sartesian Says:

      “Marx points out that the decisive issue for capital accumulation is not the rate of profit, but the mass of profit, which is a function of the mass of capital.
      capital.

      ‘In the first case the rate of profit = 10%, in the second = 20%. And yet more can be accumulated out of 100 than out of 20. And thus the river of capital rolls on (aside from its depreciation through increase of the productiveness), or its accumulation does, not in proportion to the rate of profit, but in proportion to the impetus it already possesses.” (Capital III, p 245)’

      Marx points out that the tendency of the rate of profit to decline is the most important law for understanding the actual movement of capital. In this instance, Marx is iterating that larger and more efficient capitals will aggrandize a greater volume of the socially available surplus, not that the rate of profit is immaterial in determining the course of accumulation.

      “There is no evidence that there is any shortage in the mass of profits, or that the mass of profits is not growing still.”

      Really? Anyone look at the decline in earnings in the US say in railroads? In the petroleum industry? In the mining industry? Anyone ever here of Rio Tinto, Glencore, Andarko, the entire coal mining sector? How about maritime shipping? How about that? How about the steel industry? Rolling in profits you think? Or aluminum. That’s another good one.

      ‘Given that increased productivity has reduced the value of these commodities, often significantly, this means the potential, and motive for such accumulation has been increased.’

      Sure thing. Hey, I’ve got an idea, let’s look at real life? How about that? How about the 50% decline in oil prices? Remember how that was supposed to be an unmitigated plus for the capitalist economy. Well– it sure has helped auto sales in the US, along with the low interest rates. And it certainly has reduced a major input cost for transportation and industry, but exactly where do you see the transportation industry expanding, increasing its capital expenditures in any proportion the the “windfall” due to the decline in oil prices? Airlines are certainly enjoying the windfall: so… more planes, more flights? Not exactly. More seats per plane? Absolutely.

      Does anyone register any expansion in accumulation in the EU due to the supposed drop in input prices? What’s that line? Show me the money? OK show me the accelerating accumulation.

      “In which case, we are left with the explanation that either the lack of productive investment is a result of either lack of confidence on the part of productive-capitalists that there is sufficient potential future demand to justify increased supply, or else there is every reason for such investment, but the immediate capital gains to be had from speculation far outweigh them, particularly as central banks for the last thirty years have backstopped all of these financial and property markets, making speculation in them a one-way bet.

      In which case, a measure of fiscal expansion, combined with an increase in interest rates to facilitate a bursting of speculative bubbles, ending the belief in financial markets that only move in one direction, would both act to provide a stimulus for aggregate demand, to justify additional supply, as well as providing the motivation for realised profits to be utilised for productive investment rather than speculation.”

      And so El Boffy takes on his usual “Into the Woods” fairy tale Marxism only to bring us back to the well trod paths of bourgeois explanations for “lack of investment.” “Lack of confidence”…. or…”speculation.”

      Right: in Boffy’s con game, it’s all about confidence; in his speculations about long waves, summers, springs and inbetweens, speculation is the most important commodity. “We have nothing to fear, but fear itself………and speculators.”

      Gag and puke. Enough with that petty bourgeois horseshit.

  4. Bruce Wallace Says:

    Or as Marx might have called it “belatristic horsepiss”. (Grundriss)

  5. vallebaeza Says:

    Reblogged this on Econo Marx 21.

  6. SimonH Says:

    None of these economists have come across the obvious answer to our problem, make monopoly money legal tender!

  7. George (Γιώργος) Says:

    Professor,

    as James Kenneth Galbraith put it once, radical monetary policy is favoured by very conservative people, as means of dealing with the problems without addressing the root causes. But what about the case of an (otherwise ineffective) monetary policy being a moment of a larger radical movement? E.g. here in Greece there are marginal voices (not to be found in the mainstream Left or Right) that call for 1)repudiation of national debt 2)issuing national currency and giving money directly to the people’s bank accounts 3) nationalisation of the banking system and strategic sectors of the economy 4)democratization of the state (a new constitution) and economic recovery through a large programme of public investments financed with our own money.

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