5. So what is Quantitative Easing (QE)?
Before describing the process, whilst MMT sees QE through a different lens, proponents of MMT are not generally in favour of it.
As mentioned above, before 1971, the quantity of pounds the government could put into circulation was limited. This was because, following the Second World War, sterling, and many other currencies, were established with a fixed rate of exchange against the US$, which was itself limited by the gold reserves held by the USA, using a fixed price of $36 for an ounce of gold.
That framework was finally dismantled in 1971 and so the UK and others went their own way meaning that, without a hard value limit, the number of £s in circulation are now limited “softly” by what the UK economy can use productively and by BoE policy.
Last century, during the world wars and the financial crisis of the early 1930s, the government needed to spend, or otherwise inject, huge extra sums into the economy and financial systems, to keep everything and everyone going. This century, during the financial crash in 2008 and the Covid 19 pandemic, the government has had to do the same thing.
As already described, when the government spends it is effectively putting more new money into the economy but, if there’s nothing substantial to spend on, and the economy needs a large injection of new money at short notice, what it does is to tell the BoE to again create new money but use it to buy back some of the bonds previously issued by the government.
This process of the BoE buying government debt is “QE” with the main difference over creating money by spending being that, when spending, the money goes into the economy as a whole, eg to the NHS, Green Home incentives or furlough payments, whereas with QE the money goes to the financial markets to keep the financial system going with the hope that some will trickle down to the rest of us.
So, on paper, the total amount of government borrowing doesn’t actually change when this happens. It’s just that now, rather than all the bonds being held by (and money owed to) corporations, financial institutions and pension funds, some are now owned by (and the money owed to) the BoE.
Most economists and politicians see this as the BoE directly funding government expenditure with new money, sparking memories of Germany and Zimbabwe “printing money” last century without limit, with resulting huge rates of inflation and devaluation against other currencies.
They fear that unlimited printing of money will send the UK down the same road. However, they ignore the fact that those economies were already deeply in crisis before the excess printing took place with other countries able to take advantage in reparations, trade and finance. The risks of international trade are always present, regardless of how you look at the domestic economy, making it more important to ensure that the domestic economy is kept healthy and, as we do at the moment, keeping borrowing in foreign currencies low.
Those who fear QE also fail to acknowledge that today the creation (printing) of money actually takes place every time the government spends, way in advance of any QE.
Looking at QE from a different angle, with the BoE being wholly owned by the government, when it buys government debt it has effectively cancelled it; the government has paid itself back.
To put some scale to this, during 2020/21 the government spent hundreds of billions on Covid 19, increasing its debt, but then the BoE bought about 90% of this via QE. Around that time the government’s total debt was a little over £2tn (£2,000bn), a seemingly scary sum, representing a year’s worth of the country’s GDP, but then £900bn (45%) of this was owned by (owed to) the BoE, so perhaps not so scary.
Returning to fears of QE creating inflation, it’s worth pointing out that the current QE balance still includes the sums pumped into the financial systems a dozen years ago following the financial crash, yet inflation has remained at, or below, the BoE’s 2% target. Also, as mentioned, QE puts money back into the markets, not our pockets, and so inflation is more likely to occur, as it has, in increased prices of stocks and shares and property. This is one of the reasons why QE is not favoured by supporters of MMT, as most of the money never gets to where it’s needed, the real economy, going instead to stagnate with high-wealth corporations and individuals and so being more difficult to claw back.
A dozen years ago the coalition government got panicky about all of this and said it needed to reduce the debt created after the financial crash of 2008 and so started 10 years of austerity, drawing back cash previously injected into the economy and cutting public spending. The trouble is that, as most of the original money injected into the economy had been spent and wasn’t sitting around in our savings accounts, clawing it back led to unnecessary hardship on most individuals and businesses. Let’s hope the current government does not take the austerity route to deal with the Covid “debt”.
So, what about the next emergency? Will the government of the day see the common sense of doing what’s necessary? Again, if the current government saw climate change as an emergency, and recognised the true power of the pound, we’d already know the answer to this.
5. So what is Quantitative Easing (QE)?