Ann Pettifor objects to QE.

 
That’s in a Prospect Magazine article entitled “Quantitative easing: how the world got hooked on magicked-up money.”

As the title implies, she seems to think there is something inherently wrong with QE. Well we all know QE has problems, but few people deny it has a finite stimulatory effect. What were governments and central bank supposed to do in reaction to the 2007/8 bank crises and Covid? Implement no stimulus at all?

Also, interest rate adjustments are a well established method of imparting stimulus or doing the opposite, that is damping down an economy which is overheating. And QE is simply a method of forcing down interest rates to their lowest possible level once traditional methods of interest rate cuts have lost traction. Thus interest rate cuts when interest rates were higher, i.e. before the 2007/8 bank crisis, have much the same effect as QE, e.g. encouraging asset price speculation. So if Ann  Pettifor is going to be consistent, she needs to explain what’s wrong with the latter TRADITIONAL interest rate cuts.

But ironically, both MMTers and Positive Money, both of whom Ann Pettifor disapproves of have actually set out detailed reasons as to why interest rate adjustments come a poor second to fiscal adjustments. And therein lies a problem for AP: if she goes along with MMT and Positive Money there then she’s in danger of contradicting herself.  

Second, she doesn’t mention the fact that there is a good argument for taking QE much further and “QEing” the ENTIRE national debt. Reason for that, as argued by Milton Friedman and MMTers, there are no brilliant arguments for any sort of interest bearing government debt. That is, the only form of state liability (if you can call it a liability) ought to be zero interest yielding base money. As David Hume suggested around three hundred years ago, the ACTUAL REASON for government debt is that it enables politicians to ingratiate themselves with voters because voters clearly attribute increased taxes to politicians, whereas they tend not to attribute a rise in interest rates stemming from more government borrowing to politicians.  (See Hume’s work “Of Money”, passage starting “It is very tempting….”).
 
Third, she seems to think central bank issued money “e.g. £10 notes” are a “promise to pay”.  See her para starting “To the extent…”.  The reality is that (although £10 notes do say that the BoE “promises to pay the bearer £10”) you won’t actually get £10 worth of gold or anything else if you turn up at the BoE and demand to be “paid”.  You’ll actually be told to shove off.

Fourth, her concluding para starts, “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.”

Now why on Earth would stricter rules on credit creation mean less QE? If anything, those stricter rules would mean less lending which would have a demand REDUCING effect, which would mean that MORE stimulus (in the form of QE or in other forms) would be required!!

Moreover, governments have actually made some progress in tightening up on credit creation (surprise surprise) since the 2007/8 bank crisis in that banks for example are now required to hold more capital. Though clearly many argue that nowhere near enough progress has been made (including the chairman of the Vickers commission, Sir John Vickers).

As to the idea that those who are into credit creation should not take “undue risks”, that’s hopelessly vague, plus it sniffs very much like Nirvana for lawyers. That is, the possible complexities involved in defining what constitutes “undue risks” are limitless.

Far simpler is, when it comes to credit in the LENDING sense of the word, to simply to let any person or institution which wants to lend take any risk they like, long as THEY THEMSELVES carry the can if it goes wrong. Indeed, people and institutions are already free to take any risk they like in the form of setting up risky businesses and projects, or buying shares in near bankrupt corporations. (Incidentally AP does not distinguish between the two meanings of the word “credit”.)

In contrast, when it comes to credit in the “money” sense of the word, any form of money not 100% backed by central bank reserves should be openly and loudly declared to be of the latter nature: e.g. all publicity issued by that form of money issuer should make it very clear that there is no form of state rescue available if such money turns out to be worthless. Indeed under full reserve banking, the only form of money that the state guarantees is bank accounts which are 100% backed by reserves at the central bank, which is simplicity itself: no need for hoards of lawyers.

That warning should be enough to ensure that Bitcoin and other “dangerous money” enthusiasts remain relatively small in number and do not pose any systemic risk. Certainly the recent collapse in value of Bitcoin and the collapse of Titan did not cause systemic problems. But clearly the authorities need to keep an eye on risky forms of money to ensure they do not become so popular and/or devious as to actually pose systemic risks.

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P.S. (11th Aug 2021).  I forgot to say that her concluding paragraph is a farce. It starts “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.”

That of course sounds very reasonable – particularly to the “progressive” leftie intellectuals who edit the Prospect site and other leftie intellectuals. But it’s actually nonsense. Reason is that better bank regulation, which is no doubt desirable, will actually cut demand because FEWER bank loans will be made. Ergo some form of compensating INCREASE in demand will be needed, like  -  er   -  more QE! In other words if banks are “regulated” so as “not to take undue risks” (to use her words) then all else equal, MORE QE will be needed, not less!

Bit of a faux pas that. But never mind. Almost no one is interested in technical details: to attain fame and fortune much the most important thing you need to do is appear “progressive” and concerned with social and economic problems. That’ll fool almost everyone into thinking that everything you say pretty much has divine authority.

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