I’ve tweeted more about quantitative easing than I really thought to be decent of late. However the questions still keep coming, so here is another QE thread, on the use of QE funds and (especially) the link to the Green New Deal.....
The question I have been asked is does it matter what QE money is spent on, and the honest answer is ‘it’s complicated’. But, maybe not so so complicated if it’s understand that QE came in three stages, each of which is quite different.
Stage 1 QE lasted from 2009 until 2016, when the last round of this stage took place in the UK. The aim at this stage was simple. As always, new money was created by the Bank of England, and mainly government bonds (gilts) were bought. That’s what QE does, in essence.
Stage 1 QE had the aim of removing gilts from the market. The idea was that money would go as a result go into riskier assets, and new investment. It didn’t. It went into speculation. But interest rates were kept low. And banks got new money, and that protected them from failure.
In Stage 1 QE the government also in effect got funds to cover its deficit. But to be clear, QE did not fund the government’s spending in this period. That was never the intention, and never what happened. Stage 1 (and 2) QE moped up the debt that spending had already created.
That QE only mops up debt is not surprising. As modern monetary theory makes clear, all government spending starts with money creation. And then the overdraft this, in effect, creates is cleared by tax receipts or debt. But the debt never comes first. So it never funds the spend.
Stage 2 QE emerged in 2020. Unlike Stage 1 the aim was not to redirect where the City put their money. The aim was to make sure that financial markets were not going to be overwhelmed by having to buy the large number of new gilts that would otherwise be on sale. It’s worked.
Stage 2 QE has other aims as well. Keeping interest rates low was still necessary. And protecting banks from stress in financial turmoil remained a priority, and key in March 2020. But primarily this was a debt funding exercise. And the spend still came first.
I’m not sure I can stress this enough: Stages 1 and 2 QE do not fund government spending. The government can do that any time it wants. It has its own bank. But because it thinks it has to clear its overdraft with the Bank of England it has to issue debt.
The only reason for Stages 1 and 2 QE is debt management, and not to fund spending. Stage 1 QE aimed to make government debt less attractive by lowering interest rates, to supposedly force money elsewhere. Stage 2 provides a buyer for the debt the market may not want right now.
It is only what I call Stage 3 QE that might change the use of QE money. I developed this idea in 2010. It was called Green Quantitative Easing back then. Jeremy Corbyn called it People’s QE. John McDonnell,was scared of it. It’s quite different to Stage 1 & 2 QE.
In Stage 3 QE a government owned investment bank seeks to secure funding to transform an economy. The aim is to deliver a Green New Deal, and everything that goes with it. I stress this could be done by conventional government spending. Plus Stage 2 QE. But Stage 3 QE is better.
Stage 3 is about much more than QE though. It recognises that vast amounts of saving is wasted right now. The stock market and land speculation are just Ponzi schemes that don’t deliver added value new jobs. Cash sits uselessly in bank accounts. Savings need to work.
Stage 3 QE works alongside a transformation of savings. State subsidies to savings - that drive the Ponzi scheme arrangements we have - need to change. So pensions funds, to get tax relief, must save 25% of their new contributions in investments that create new green employment.
The Stage 3 QE job creating investments in green jobs can be in the private sector, of course. They need not be in the UK. After all, this is a global issue. But the point is the only real useful long term investments we have now are in the green economy - so it needs to happen.
Stage 3 QE also requires that ISA savings be changed. £70bn a year goes into ISAs. Some is reinvestment, but it’s still a massive sum. And all that money needs to go into guaranteed green savings bonds issued by a National Investment Bank where it could fund the Green New Deal.
Do what I have said to reform tax on savings and all the money required to fund a Green New Deal may be found. We may not need Stage 3 QE for this purpose at all. But what if the need for reform is bigger than the capacity of savings to fund? Then Stage 3 QE can kick in.
To make Stage 3 QE work the National Investment Bank issues bonds and then the Bak of England acquires them in the usual QE way — effectively making money available for green investment. Now, for the first time, QE might be linked to an actual spend.
The link between the spend by the National Investment Bank and QE is always going to be at a distance though. The Bank of England is still playing its role of mopping up debt in this Stage 3 approach to QE. It does not control the spend. It does not manage it. It just buys debt.
It’s really important to say this. QE, whether in Stages 1, 2 or 3, never gives the Bank of England control of spending. That always stays wholly under the control of the government in Stages 1 and 2, and the government owned National Investment Bank in Stage 3.
In conclusion, QE does not fund or direct spending. It is a way of managing debt. That’s it. But we do need ways of managing debt right now. And QE - which meets international requirements and lets the Bank of England indirectly fund the government - is critical right now.

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More from @RichardJMurphy

27 Nov
I have been asked by a number of people, from MPs onwards, to prepare answers to the types of questions being commonly asked about the economy in the Covid era. I can’t see why these things shouldn’t be shared. This thread provides some suggestions.
Should we raise taxes to pay for Covid 19?

Right now, definitely not. We’re facing an economic downturn in 2021. Almost nothing can prevent it. And increasing taxes will take more tax out of the economy, and make the town turn worse. So definitely don’t raise taxes now.
Does that mean we don’t need any tax changes?

No, it doesn’t, but overall taxes mustn’t increase. Tax the wealthy more then, and reduce tax for the poorest. That increases overall spending power in the economy because those least well off spend all their income. But that’s it.
Read 17 tweets
23 Nov
There is an obsession that the national debt must be repaid. Assuming it is properly calculated (and I have real doubt about that) it’s coming on for £2,100 billion. Knowing what makes this up is really important. Then we can decide if we really want to repay it. Stay with me….
Around £200bn of the national debt is made up of National Savings & Investments. That's things like Premium Bonds and the really safe savings accounts older people tend to appreciate. So why do we want to force these people into riskier savings accounts? I don't think we do.
Around £400bn of the national debt is owned by foreign gov'ts. That's cool: they want to fund us. They do that because they want to hold our currency. That's because that helps them trade with the UK. Would we want to force them to take their money back in that case? I doubt it.
Read 9 tweets
22 Nov
There’s massive misunderstanding about what QE is and what it does. So please forgive a long thread on one of the most important tools used in modern economics, which if used properly might provide real hope for a better future.
Outside Japan QE was unknown until 2009. Since then the UK has done £845 billion of it. This is a big deal as a consequence. But as about half of that has happened this year it’s appropriate to suggest that there have been two stage of QE, so far. And I suggest we need a third.
Stage 1 QE started in 2009 and was last used in 2016. It created £445bn of new money. That was used to buy £435bn of government bonds, or gilts, and £10bn of corporate bonds, which we can ignore. There were three goals to first stage QE.
Read 68 tweets
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Rarely has the UK faced an existential crisis like the one it does at this moment. The relationships between its member nations are uncertain. We face meltdown with the EU, even if we get a deal. And the special relationship with the US is anything but that. This is unprecedented
What has now happened in this mess? The architects of it, secure in the knowledge that the damage they sought to create has been delivered and their consulting futures are secure, have walked out of government. Is that by chance? No. It’s deliberate distraction.
The Brexiteers aim has always been apparent. It has been to maximise the chance of disruption. That’s because they believe financial capitalism works best in such conditions. And they are right. Moments of chaos are times when hedge funds have greatest chance of making money.
Read 13 tweets
5 Nov
The government is going to do £450bn of quantitative easing (QE) this year. That should more than cover its total borrowing fir the year, meaning the actual sum owed to third parties will fall, and so will real national debt as well as a result. 1/-
Saying this, I know that much of the new money created by the Bank of England to fund QE ends up back on central bank reserve accounts held by U.K. High Street banks and building societies with the Bank of England. And that interest is paid on their balances 2/-
The interest paid in those balances is 0.1%. That rate is controlled by the Bank of England, and will not be changing for a long time to come. In effect then the government is paying banks and building societies 0.1% to make them hold new money that cancels the national debt 3/-
Read 9 tweets
29 Oct
In the summer of 2015 Jeremy Corbyn used a pile of my ideas to help him become Labour leader. By spring 2016 his team were telling me they were sitting out Brexit as it was just a Tory fight. 1/
At that moment I knew this was a man who played politics, and not political leadership, and I walked away from any association. I did not regret it. Whatever he said, or was said for him, he was always posturing 2/
Politics is about tough decisions. About finding the way to real answers. There is a lot Labour is still getting very wrong, on Covid, the economy, electoral reform and more. But Corbyn was never the answer on any of those issues either 3/
Read 6 tweets

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