Quantitative Easing for People: The UK Labour Frontrunner’s Controversial Proposal

Introduction by Mike Raddie (BSNews)

Economists, pundits and people we meet in the street are now talking ‘Corbynomics’, a phrase not even heard of until the Labour leadership campaign began earlier this year. But what are the economic ideas of Jeremy Corbyn and why has the corporate media pulled out all the stops to curtail the debate and limit the scope of an obviously long overdue conversation?

CIWWe all know the government could be helping the people of Britain, especially those struggling to make ends meet. We know the government could be spending money on hospitals, schools, public transport etc. The government could be investing in our future generations, providing real life chances for the ever-growing numbers of young unemployed. The government could be providing homes and security for the most vulnerable in our society. We all know this; intuitively, in our hearts, we understand that anything physically possible and socially desirable can be made financially possible. So why does David Cameron’s government continue with austerity policies which are obviously damaging to the economic prosperity of the UK, not to mention the well-being of so many of its citizens? There are three possible answers:

  1. Cameron’s cabinet members sincerely believe in neo-liberal ideology.
  2. Those in power (and the red Tories running against Corbyn in the Labour leadership contest) regard the general population as pawns in a grand chess game – unworthy, dependent and expendable.
  3. The bankers and financial elites who fund the government dictate where ‘their’ money is spent.

We may never really know if there is any truth to the last two answers (we here at BSN have our suspicions) but economic theories and ideologies can be put to the test and we should, therefore, be able to discern the validity of Cameron’s rationale for seemingly never-ending austerity:

‘Austerity is a form of voluntary deflation in which the economy adjusts through the reduction of wages, prices, and public spending to restore competitiveness, which is (supposedly) best acheived by cutting the state’s budget, debts and deficits. Doing so, its advocates believe, will inspire “business confidence”…’ ~ Mark Blyth, Austerity, The History of a Dangerous Idea, Oxford University Press

Pro-austerity advocates maintain that to inspire business confidence governments must make way and provide room for the private sector to expand, the contention being that every pound of increased government spending must correspond to one less pound of private spending. Jobs created by government stimulus are offset by jobs lost in the decline in private sector investment. As Blyth observes, there is just one slight problem with this economic theory: ‘it is completely and utterly wrong’ and usually produces the very outcomes governments say they are trying to avoid.

In fact, almost every example of government austerity in recent history has resulted in a worsening of conditions for the majority of the population. Cameron and his chancellor, George Osborne, obviously understand this and so I think we can rule out their sincere belief in neo-liberal ideology. Of course, that’s not to say they don’t employ sophisticated cognitive dissonance rationalizations to provide a measure of internal consistency and and enable them to cope with the logical contradictions between their policy and the reality around them.

One would hope that Cameron and Osborne fully understand the mechanics of modern money creation  – although a recent survey by Positive Money shows 90% of their fellow MPs do not. Succinctly, most of our money is created by private banks when they make loans. The Bank of England confirmed this is the case in quarterly bulletin last year:

“In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood: the principal way is through commercial banks making loans. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.” ~ Bank of England | Quarterly Bulletin 2014 Q1 | Volume 54 No 1

Osborne of all people should therefore understand the mathematical certainty arising from the insane way he permits the UK economy to operate – there is always more debt than money in existence. We cannot, as a nation, under the current system, ever be debt free! That may come as a shock to many of you but I have been working and researching money reform for over  a decade and all honest economists will admit this bizarre fact of modern life.

The truth is, if government took control of our money supply away from private financial interests all manner of desirable schemes could be undertaken. And so long as they were socially useful or increased the flow of goods and services we should never hear the oft asked question, ‘how will we pay for it?’ It’s our national credit – the government’s most creative asset!

Looking further forward, although not Corbyn policy as yet we could extend his sovereign money ideas to fund a citizens dividend or basic income which could replace the current costly (and sadistic) Department for Work and Pensions welfare provisions.

So how would a basic income work in practice? Imagine that in the UK every adult is given £1,500 per month; a basic income of £18,000 every year. What would people do? What would you do? The implications here are earth-shattering. The truth is you could do exactly what you wanted to! With the basic necessities of your life secured you would no longer be forced to enter the spirit-crushing rat race. You could step off the hamster wheel and take stock of life. You could slow down. De-stress.

But who would collect our rubbish, teach our children, or care for us if we became ill? Well, £18,000 per year is clearly not enough for everyone, so there would still be a demand for additional paid work. Perhaps some people would choose to work part-time and spend more of their free time with their friends and family. Those menial, low paid jobs would undoubtedly be difficult to fill but the law of supply and demand would simply mean that it would cost more to hire a cleaner – and rightly so. Also, when the basics of life are taken care of more people might choose to do volunteer work – this could be David Cameron’s ‘big society’ dream come true! Momentously then, this all means that for the first time in human history the dynamic of work would have drastically altered; the power of capital and labour would be reversed and it would involve no additions to an odious national debt, no increase in taxes and no more reliance on unelected and unaccountable private financial institutions.

There is a dire need for us to try a different path; to at least to discuss honestly the option – or risk our grandchildren being born into a life of debt servitude. Jeremy Corbyn is suggesting an alternative to government austerity; an alternative to borrowing from private banks what the government could create itself, debt and interest free. That must be worth listening to, but don’t take our word for it:

Ellen Brown, author of The Web of Debt and The Public Bank Solution offers her expert opinion on Corbynomics and what it might mean for the 99% of us UK residents still being punished for the financial crimes of the 1%…


By Ellen Brown (Web of Debt Blog)

corbyn_3394438bBritish MP Jeremy Corbyn has proposed a “People’s QE” that has critics crying hyperinflation and supporters saying it’s about time.

Dark horse candidate Jeremy Corbyn, who is currently leading in the polls for UK Labour Party leadership, has included in his platform “quantitative easing for people.” He said in a July 22nd presentation:

The ‘rebalancing’ I have talked about here today means rebalancing away from finance towards the high-growth, sustainable sectors of the future. How do we do this? One option would be for the Bank of England to be given a new mandate to upgrade our economy to invest in new large scale housing, energy, transport and digital projects: Quantitative easing for people instead of banks.

As his economic advisor Richard Murphy further explains it:

People’s quantitative easing is . . . a highly directed process where the debt that is . . . repurchased has been deliberately created and issued either by a green investment bank or by local authorities, health trusts and other such agencies for the specific purpose of funding new investment in the economy at the time when big business and financial markets are completely failing to deliver the scale of investment that is needed to get the UK working again and to restore our financial prosperity.

According to the Positive Money group:

Ideas in a similar vein have been advocated or at least suggested by notable economists including J M Keynes (1), Milton Friedman (2), Ben Bernanke (3), William Buiter (4) and Martin Wolf (5).  Most recently, Lord Adair Turner (6) has proposed similar ideas, highlighting that ‘there are no technical reasons to reject this option’.

Perhaps, but critics have found plenty to criticize. Peter Spence writes in the UK Telegraph:

A victory for Jeremy Corbyn in the next general election would put Britain on a collision course with Brussels and condemn the UK to “Zimbabwe-style ruin”, experts have warned.

. . . Tony Yates, a former Bank economist and now a professor at the University of Birmingham, said: “Down that road leads monetary policy ruin. . . . That’s what Zimbabwe was doing, where they ended up paying all their bills by printing new money.”

Spence also quoted Bank of England Governor Mark Carney, who said, “The reason why one doesn’t even start on this conversation is the removal of any discipline on fiscal policy that comes from that.”

The Bogus Hyperinflation Threat

Dire warnings of Zimbabwe-style hyperinflation have been leveled against quantitative easing (QE) ever since the Federal Reserve embarked on it in 2008. When the European Central Bank announced in January 2015 that it, too, would be engaging in QE – along with the US, the UK and Japan – alarmed commentators warned of currency wars, competitive beggar-thy-neighbor devaluations and hyperinflation. But QE has been going on since the late 1990s, and it hasn’t happened yet. As Bernard Hickey observed in the New Zealand Herald on August 30th:

The US Federal Reserve cut its Official Cash Rate to almost 0 per cent in 2008 and has left it there. It launched three rounds of so-called quantitative easing and has only just stopped printing money to buy Government bonds.

The Bank of Japan has been printing for years and only recently ramped that up to try to lift its economy out of decades of perma-recession. The European Central Bank has cut its deposit rate to minus 0.2 per cent to try to force savers to invest. That means savers have to pay the bank to mind their money. . . .

China has blown $310 billion propping up a stock market that has fallen at least 43 per cent from its peak. It pushed the Chinese yuan lower and spent another US$200b to stop further falls.

This week the People’s Bank of China cut its main lending rate to 4.6 per cent and loosened lending rules for banks.

Yet there is no sign of the threatened hyperinflation:

All this rate-cutting and money printing has made it attractive to buy stocks, property and bonds that produce a regular income greater than the near-zero interest rates. . . .

But, curiously, all this money printing and 0 per cent interest rates have yet to unleash the inflation dragon, at least for goods and services. Asset prices are pumped up and juicy, but goods manufactured in factories and in cloud services are firmly in deflationary mode.

Why? According to conventional economic theory, increasing the money in circulation has only one effect: when the quantity of money goes up, more money will be chasing fewer goods, driving prices up. Why hasn’t that happened with the massive rounds of QE now gone global?

A Flawed Theory

Conventional monetarist theory was endorsed until the Great Depression, when John Maynard Keynes and other economists noticed that massive bank failures had led to a substantial reduction in the money supply. Contradicting the classical theory, the shortage of money was affecting more than just prices. It appeared to be directly linked to a massive wave of unemployment, while resources sat idle. Produce was rotting on the ground while people were starving, because there was no money to pay workers to pick it or for consumers to buy it with.

Conventional theory then gave way to Keynesian theory. In a March 2015 article inThe International New York Times called “Keynes Versus the IMF,” economist Dr. Asad Zaman writes of this transition:

Keynesian theory is based on a very simple idea that conduct of the ordinary business of an economy requires a certain amount of money. If the amount of money is less than this amount, then businesses cannot function — they cannot buy inputs, pay labourers or rent shops. This was the fundamental cause of the Great Depression. The solution was simple: increase the supply of money. Keynes suggested that we could print money and bury it in coal mines to have unemployed workers dig it up. If money was available in sufficient quantities, businesses would revive and the unemployed labourers would find work. By now, there is nearly universal consensus on this idea. Even Milton Friedman, the leader of the Monetarist School of Economics and an arch-enemy of Keynesian ideas, agreed that the reduction in money supply was the cause of the Great Depression. Instead of burying it in mines, he suggested that money could be dropped from helicopters to solve the problem of unemployment.

And that is where we are now: despite repeated rounds of QE, there is still too little money chasing too many goods. The current form of QE is merely an asset swap: dollars for existing financial assets (federal securities or mortgage-backed securities). The rich are getting richer from bank bailouts and very low interest rates, but the money is not going into the real economy, which remains starved of the funds necessary to create the demand that would create jobs. To be effective for that purpose, a helicopter drop of money would need to fall directly into the wallets of consumers. Far from being “undisciplined fiscal policy,” getting some new money into the real economy is imperative for getting it moving again.

According to Social Credit theory, even creating more jobs won’t solve the problem of too little money in workers’ pockets to clear the shelves of the products they produce. Sellers set their prices to cover their costs, which include more than just workers’ salaries. Chief among these non-wage costs is the interest on money borrowed to pay for labor and materials before there is a product to sell. The vast majority of the money supply comes into circulation in the form of bank loans, as the Bank of England recently acknowledged. Banks create the principal but not the interest necessary to repay their loans, leaving a “debt overhang” that requires the creation of ever more debt in an attempt to close the gap. The gap can only be closed in a sustainable way with some sort of debt-free, interest-free money dropped directly into consumers’s wallets, ideally in the form of a national dividend paid by the Treasury.

As Keynes pointed out, price inflation will occur only when the economy reaches full productive capacity. Before that, increased demand prompts an increase in supply. More workers are hired to produce more goods and services, so that demand and supply rise together. And in today’s global markets, inflationary pressures have an outlet in the excess capacity of China and the increased use of robots, computers and machines. Global economies have a long way to go before reaching full productive capacity.

Running Afoul of the EU

A more challenging roadblock to Corbyn’s proposal may simply be that there are rules against it. Peter Spence writes:

Key parts of the Labour leadership frontrunner’s plans would fall foul of EU laws intended to avoid runaway inflation, and consign the UK to a three-year legal battle with the European Court of Justice (ECJ). . . .

Mr Corbyn’s proposals would clash with Article 123 of the Lisbon Treaty, which forbids central banks from printing money to finance government spending.

Perhaps; but the ECB has already embarked on a QE program involving the purchase of government securities. What are government securities but government debt used to finance government spending? The rule has already been bent. Why not bend it in a way that actually benefits the economy, the people, and the nation’s infrastructure? Corbyn’s proposal is needed, it will work, and it is an idea whose time has come.

Ellen Brown is an attorney, founder of the Public Banking Institute, and author of twelve books including the best-selling Web of Debt. Her latest book, The Public Bank Solution, explores successful public banking models historically and globally. Her 300+ blog articles are at EllenBrown.com. Listen to “It’s Our Money with Ellen Brown” on PRN.FM.

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