Monday, 20 September 2021

Robert Skidelsky's strange ideas on QE.

He penned an article recently entitled “Where has all the money gone?” and makes the bizarre claim in his first para that “ question is almost never discussed: Why have central banks’ massive doses of bond purchases in Europe and the United States since 2009 had so little effect on the general price level?”

Well I've seen that question discussed at least once a week for the ten years or so since QE started! How about you? And if you and/or Skidelsky HAVEN'T seen that question discussed, then I don't know what planet you and he live on...:-) I discussed that question on this blog just over ten years ago!

Google “QE” and “asset swap” (which is all that QE amounts to) and you'll find about SEVEN THOUSAND articles and similar making that point.

Second, Skidelsky (like most allegedly “professional” economists) appears to be unaware that far from it necessarily being desirable to reverse QE, there's a good case for continuing it till the ENTIRE GOVERNMENT DEBT is QE'd. Reason is that, as Milton Friedman and MMTers claim, the best rate of interest on government liabilities is zero percent. If that's correct, then the entire stock of government debt might as well be turned into zero interest yielding cash!!

Next, Skikelsky tackles the question as to EXACTLY WHY QE has not boosted demand all that much. Well I suggest the answer to that has been obvious for a long time to anyone who has got past the first chapter of an economics text book. It's that QE consists of the central bank creating new money and buying up bonds, mainly government bonds, thus that process involves giving savers a slightly different asset to the asset they currently hold! That process is hardly likely to result in a splurge of consumer spending and for the blindingly obvious reason that savings are by definition assets which the owner has no intention of spending. Doh!!

But that's too simple for Skidelsky. Instead he invokes an arcane reason put by Keynes namely that that during recessions money flows to what Keynes called “financial circulation” rather than “industrial circulation”. As Skidelsky puts it, “During a sharp economic downturn, he (Keynes) argued, money is not necessarily hoarded, but flows from “industrial” to “financial” circulation. Money in industrial circulation supports the normal processes of producing output, but in financial circulation it is used for “the business of holding and exchanging existing titles to wealth, including stock exchange and money market transactions.”

But wait..... That idea of Keynes's has NOTHING specifically to do with QE!! It's simply what might be called a “general all purpose” idea as to what happens in recessions!!

But Skidelsky's article then goes from bad to worse. He says “But the antidote is staring us in the face. First, governments must abandon the fiction that central banks create money independently from government. Second, they must themselves spend the money created at their behest. For example, governments should not hoard the furlough funds that are set to be withdrawn as economic activity picks up, but instead use them to create public-sector jobs.”

Re the “fiction that central banks create money independently from government”, central banks actually do that when they create new money and do QE in the form of buying up COMMERCIAL as opposed to government bonds!!

Of course it is true (as Skidelsky has himself pointed out elsewhere) that the large majority of bonds “QE'd” have been GOVERNMENT bonds. But it is wholly untrue to say central banks can't create money independently of government.

Next in the above quote comes Skidelsky's claim that when governments cut a particular form of spending (furlough spending in this case), that the relevant money is likely to be hoarded by government. Well that's not true.

Governments, as far as they can, first decide whether to go for a deficit and also decide how large that deficit should be, or they may decide that a “no deficit” scenario is best for the time being, i.e. they may decide to “balance the books” for a while.

Whichever of those options government goes for, it will then try to stick to that option (surprise surprise). And that means that if a particular form of spending is cut (e.g. furlough) government will AUTOMATICALLY raise some other form of spending or cut taxes. If it doesn't, it won't ipso facto stick to its own deficit target!!!

Conclusion. Skidelsky's claim that recessions should be solved mainly by FISCAL means is certainly correct, or to be more accurate, I'd suggest (along with most MMTers) that ABOVE the zero bound the first resort should be to cut interest rates, with fiscal means then being employed at or near the zero bound. But most of the rest of Skidelsky's article, shall we say, leaves room for improvement.

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