Cooking the Books: People’s QE (2015)

The Cooking the Books Column from the October 2015 issue of the Socialist Standard

In his successful bid to get elected Labour Leader Jeremy Corbyn advocated a ‘people’s’ instead of a ‘bankers’’ quantitative easing. This, apparently, as the way to end austerity. It is true that what has been called ‘quantitative easing’ has been aimed at benefiting capitalist firms, by lowering the rate of interest at which they can borrow.

In Britain its official name is the ‘Asset Purchase Facility’. Under it the Bank of England buys government bonds off banks, paying for them by increasing the reserves which the banks are required to hold with it. This has two effects. It helps liquidity within the banking system and allows banks to convert some of these reserves into circulating money. And it raises the price of government bonds, so lowering their ‘yield’, i.e. the ratio of the amount of interest (which is fixed) to their price. This is supposed to affect interest rates generally, so making it cheaper for capitalist firms to borrow to invest.

The term ‘quantitative easing’ is one academic economists coined to describe this policy. Over the years governments and their economic advisers have had recourse to various theories and practices to try to manage the way the capitalist economy works. When one fails, another is thought up. The current dominant theory is that the way to control capitalism is by manipulating interest rates. The idea is that in a boom the government should try to increase them to slow it down or even choke it off; in a slump it should aim to reduce them. However, when they are so low – close to zero or negative – as they are now, the way to do this, so the theory goes, is through pushing up bond prices by the government buying them and ‘easing’ its monetary policy and increasing the ‘quantity’ of money to pay for this.

Increasing the quantity of money by the government creating more electronically to buy bonds is the only thing that so-called ‘people’s QE’ has in common with conventional ‘bankers’ QE’. The big difference is that the bonds to be purchased will not be government bonds but bonds issued by a new State Investment Bank to raise money to invest in infrastructure and green projects. The aim would not be to influence interest rates and liquidity in the banking system but to finance economic activity.

But why doesn’t the government simply ‘print’ more money directly and hand it out to government departments to invest or spend? Good question. The answer is that this is not the way it needs to be done in modern capitalist countries with a sophisticated financial system. That’s only done in places like Venezuela and Zimbabwe. It would also be against EU rules, and ‘people’s QE’ is being offered as a way round them.

It’s not likely to be tried. It might be Corbyn’s preferred choice but is unlikely to be adopted by the Labour Party even with him as Leader. Labour has learned the hard way that, in an economy driven by business investment, the government has to be business-friendly or provoke an economic downturn. But suppose that the next Labour government did adopt it, what would happen?

While conventional QE has only caused a rise in the price of financial assets, people’s QE may well cause a rise in the general price level. Which in turn would make exports less competitive, and it would soon be back to the balance of payments crises of the 60s and the double-digit inflation of the 70s. And eventually a return to austerity.

The cruel truth is that no government can make capitalism work for the ‘people’.