The Great Quantitative Easing Myth

Quantitative Easing is routinely described by the mass media as printing money electronically; in reality, it isn’t quite that simple.

It is difficult to credit that Neil Armstong set foot on the Moon over 42 years ago, longer than most of the people on this planet have been alive.

There is a man in this country at the moment who is walking around minus his heart. Forty year old Matthew Green is waiting for a heart transplant; his heart was worn out, so the surgeons removed it and have given him a plastic one hooked up to a portable pump until a donor can be found.

One would have thought a civilisation that sent a man to the Moon nearly half a century ago and recently carried out something as seemingly miraculous as keeping a man alive with no heart would be able to solve something as ludicrously simple as running an economy. The fact that this is apparently not the case is obviously indicative of a lack of will rather than a lack of ability.

At the moment and for some time, the economies of most of the countries of the world have been suffering from a lack of money. True, the obscenely rich are still with us, and there are plenty of expensive cars on the roads, but the people at the very bottom – the underclass – and increasingly graduates, are not in good shape. There is also a lack of money for businesses. If there is a lack of money in the economy, why not print some? Sounds simple, doesn’t it, and it is, or would be, but for a couple of man-made problems.

In Europe, there is a little thing called the Maastricht Treaty to which Britain among others has signed up. This removes part of our sovereignty, such as the right of the British Government to create its own credit. That doesn’t apply in Japan though, where the modern phenomenon of Quantitative Easing was first tried. More recently, this has been imported to both Britain and America.

News reports often give a simplified version of this process; they say that instead of printing money with a printing press, the government creates it electronically. According to QUANTITATIVE EASING: LESSONS FROM HISTORY, by George Trefgarne, which was published by the Centre for Policy Studies in November 2009, the last Labour Government “printed” £170 billion by that process until the date of its publication. The author says there are signs this has had some success in reducing long term interest rates, but that there are also serious risks; it has had an impact on pension deficits and annuities, and is likely to be undermining the pound.

He points out too that there has been no primary legislation on QE, and the only secondary legislation has been a statutory instrument exempting it from the FSA’s authorisation regime. Then he reveals the truth about what the Government has actually done, the new money has not been printed and spent into circulation, rather that staggering sum has been spent on buying up government debt.

This sum, is bigger than the NHS budget, and is being held by “Bank of England Asset Purchase Fund Facility” - BEAPFF Ltd.

This entity is owned by the Bank of England and has two BoE employees as sole directors: Chief Economist Spencer Dale and Markets Director Paul Fisher.

QE in Britain coincided with a massive financial stimulus elsewhere, namely that instigated by the Federal Reserve. Under QE in Britain, the Government borrows via the Debt Management Office by selling gilts to investors, typically pension funds, which then sell those gilts or their existing gilts to the Bank of England; the credits are made electronically. In the US, it has been done by purchasing corporate bonds and other private assets.

This explains the phenomenon of the governments of Britain and America “printing” enormous quantities of money which never reaches the people who need it. And who might they be? Here is a very partial list:

libraries – that are closing

the homeless – who need accommodation

small businesses – that can’t get credit

medium sized and larger businesses including retailers - who have been going bust left, right and centre

budding entrepreneurs – people, including young people with ideas or even inventions they can’t bring to market

students – who are being saddled with enormous debt

the underclass – who are unemployable in a technologically advanced society and are trapped in a downward spiral between means-tested benefits and at times the criminal justice system

social services and the voluntary sector – everything from groups who assist people with disabilities to the elderly

and so on.

The Chairman of the Fed is back in the news; according to yesterday’s Daily Telegraph: “By the time QE2 ended two months ago, the Fed had ‘expanded its balance sheet’ by an astonishing $2,300bn since mid-2009.” That means it created new debt, and what has it to show for it?

According to George Trefgarne, QE was originally pioneered over 200 years ago in response to a banking crisis. In 1797, in the Restriction Period, a 2,000 brigade of Frenchmen undertook the last invasion of Britain, landing in Pembrokeshire. William Pitt the Younger was anxious to stop the public redeeming paper money for gold, which had been used to fight the war against France and to subsidise Britain’s Continental allies. Then there was a panic in 1825; the First World War was another period, the Stock Exchange was closed for several days and there was a series of capital controls to steer investment into the war effort. What Mr Trefgarne fails to appreciate is the difference between creating money and creating debt. The theory of QE is that the banks will be awash with cash and will then lend (ie sell at interest) to businesses, and that this will stimulate the economy; what they have been doing for the most part is sitting on it and earning free interest, after all, they got it for nothing – as Michael Burns told Press TV last month.

In these earlier eras, the money was spent into circulation debt-free, in 1914 for the war effort, as David Pidcock told us, and Professor Quigley before him. The Governments of Britain and America would be better advised either to spend this new money into circulation likewise, perhaps by new construction projects for wind, wave and solar energy that would reduce our dependence on oil, and create real jobs and ancillary industries into the bargain. It could also give it to needy individuals, groups and organisations, again debt-free. In a highly advanced economy where there is no shortage either of willing hands or goods and services, this need not be inflationary, and anyone who needs convincing otherwise should consult either The Absurdity Of The National Debt by the Duke of Bedford, The Money Trick by the Institute of Economic Democracy, or the halal version Banking Without Interest by Professor Siddiqi.

There is one other suggestion that should be mooted; the Internet generates real wealth for all of us. It enables us to communicate instantaneously with our friends, customers, MPs...which is the main reason sending a letter is now so expensive. To list all the other things your friendly desktop PC allows you to do would take hours if not days, but most of us now obtain much of our news from it - instead of physical newspapers - and this has led to some newspaper publishers erecting paywalls. The Internet increases the wealth of the community without an accompanying increase of money, therefore there is also created, in effect, a shortage of purchasing power. One thing the Federal Reserve, the Bank of England and other central banks could do is create money debt-free and either give it to or spend it into circulation with the major Internet companies such as Google, Facebook, Microsoft, the larger ISPs and even the larger websites like the Internet Archive and those of major news and other corporations. Part of this new money could then “trickle down” to the smaller creators of wealth including (of course!) Digital Journal, film companies, record labels, and even major and not so major recording artists.

There is now a great movement afoot to remove the power of credit creation from the banks, but until the simple but sound ideas expounded by this movement permeate the walls of 11 Downing Street and 1600 Pennsylvania Avenue, we will continue to see poverty amidst plenty and our governments lurching from crisis to crisis while the banksters wax fat on our misery.

[The above op-ed was first published August 28, 2011.]

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