Cooking the Books: QE didn’t work (2021)

The Cooking the Books column from the September 2021 issue of the Socialist Standard

Quantitative Easing (QE) was originally introduced by the Bank of England in 2009 with the aim of stimulating a revival of the economy after the Crash of 2008. The Bank bought government bonds, so increasing cash in the hands of the sellers. Depending on who they were, the idea was that they would either invest the money in their business or deposit it in their bank which would then have more money to lend.

It hasn’t worked like that, as a recent House of Lords report confirmed:

‘We conclude, on balance, that the evidence shows quantitative easing has had limited impact on growth and aggregate demand over the last decade. To stimulate economic growth and aggregate demand, quantitative easing is reliant on a series of transmission mechanisms that operate primarily in and through financial markets. There is limited evidence to suggest that these increase bank lending or investment, or boost consumer spending by wealthy asset holders’ (parliament.uk, paragraph 50 – bit.ly/3lOqDcG).

The Report did make the lesser claim that if QE didn’t make things better at least it stopped them getting worse, by helping to prevent ‘a reoccurrence of the Great Depression’ of the 1930s. This is pure speculation as there is no way of proving it since that might not have happened anyway, whereas that QE didn’t stimulate the economy is self-evident.

However, QE benefited some people:

‘the mechanisms through which quantitative easing effectively stabilised the financial system following the global financial crisis have benefited wealthy asset holders disproportionately by artificially inflating asset prices. On balance, we conclude that the evidence shows that quantitative easing has exacerbated wealth inequalities’ (paragraph 68).

By ‘asset prices’ their lordships did not mean the prices of the physical assets used in production such as plant and machinery but the prices of bonds and shares.

This is also the opinion of Catherine Mann, who has just been appointed to the committee that fixes the Bank Rate. She told the Houses of Commons Treasury Select Committee that financial markets:

‘have pocketed much of the recent stimulus (taking QE to £895 billion and rates to a record low of 0.1 percent) and left the real economy a few coins in loose change. Financial markets have absorbed monetary stimulus in “higher asset prices and greater financial stability risks … rather than transmitting [it] to the real economy” since QE became the Bank’s active policy, she said’ (Times, 27 July).

If she is suggesting that ‘wealthy asset holders’ deliberately refused to invest in producing more real wealth then she has got the wrong end of the stick. The reason the extra, cheap money made available by the Bank of England hasn’t found its way into productive investment is because it couldn’t all be invested at a sufficient profit. That is why it has been used instead on stock market gambling and speculation. As long as it is not profitable to invest the extra money, this situation won’t change. The capitalist economy is driven by business investment with a view to profit, not by abundant money or low interest rates.

Even if the government had spent the money directly into the real economy that would not have stimulated a revival but would have caused stagflation as in the 1970s. QE must have seemed a good idea as it avoided that, but it hasn’t worked as intended and has had the effect of enriching ‘wealthy asset holders’. That’s how it is. Governments can’t make capitalism work the way they want. They propose, but capitalism disposes.

Letter: Inflation and Quantitative Easing (2010)

Letter to the Editors from the March 2010 issue of the Socialist Standard

Inflation and Quantitative Easing

Dear Editors

I have read many of your economics publications and note that your explanation of inflation may be summarised as – the excess issue of an inconvertible paper currency. Now, I thought that this is exactly what is being done (21st century style) with quantitative easing. However, in the Socialist Standard January 2010 in the article ‘Financial Alchemy’ you appear to be saying that this is not happening and that quantitative easing will not result in inflation. Please could you clarify this point for me and for other readers.

Graham Wildridge

(by email)

Reply: 

We do indeed argue that the cause of inflation is the excess issue of an inconvertible paper currency,  that is, currency that is freely printed and not convertible into an underlying commodity like gold. Currency can be said to be issued in excess when it is above and beyond the amount needed to carry out production and trade, injecting purchasing power into the economy that is not related to real wealth  generation. This effectively means a bloating of monetary demand in the economy not sufficiently matched by increased production, which then serves to pull up prices as a whole. Wherever currency has been issued in excess this way, prices have risen and this has been far and away the main reason why the price level now is well over thirty times what it was before the start of the Second World War. The amount of currency in issue has risen far faster than has been warranted by increases in  production and trade, with the amount of currency in circulation being £450m in 1938 whereas it is now around £54,000m and still rising.

Quantitative easing (QE) is an interesting phenomenon in that when it was first mooted no-one seemed to be clear on what, precisely, would be involved. Our view has been that if it exacerbates the ongoing excess note issue then it would be inflationary. The way QE has worked in practice, with the Bank of England setting up a separate Asset Purchase Facility (APF), means this does not seem to have happened. Notes and coins are still increasing at the same sort of annual rate they have been the last few years, and there has been no noticeable change to this. What has happened instead is more unusual.

In practice, a massive loan has been granted by the central bank. This has been loaned by the Bank of England to the Asset Purchase Facility and it has been used to buy financial assets. The vast majority of the APF’s purchases appear to have been government gilts with a smaller amount of corporate bonds being bought – in buying these up, their prices have risen, their interest payments (yields) have fallen for investors and so in turn equities have become a more attractive investment (which is what has largely fuelled the recent stock-market recovery).

The effect of all this on the overall price level has been minimal at most though, as it has been a process concentrated specifically on these types of financial assets. In some ways it is a massive,  debt-fuelled version of what used to be called ‘open-market operations’ by the central bank.

As Charles Bean, the Deputy Governor for Monetary Policy at the Bank of England has stated with regard to QE and its effect on financial assets: ‘not only does the price of gilts rise as a consequence of the Asset Purchase Facility’s initial purchases, but also the prices of a whole spectrum of other assets… Also the rise in asset prices increases wealth and improves balance sheets. In this way, Quantitative Easing helps to work around the blockage created by a banking system that is still undergoing a process of balance sheet repair.’ It can be added that when the prices of gilts rise and  their yields fall, this helps to keep interest rates low too as there is a close connection between  government gilt yields and the interest rates charged by the commercial banks.

To make all this happen the initial loan to the APF has been generated by a metaphoric flick of an electronic switch in the only way this can ever occur – through the actions of the central bank itself, the lender of last resort. As we have explained previously private banks are completely unable to expand their balance sheets with a stroke of the pen or flick of a switch, only the central bank can initially do this, just as it can inflate the currency it issues.

The key point is that this loan by the Bank of England to the APF, effectively a massive IOU or series of IOUs, has to be paid back. When the APF sells these assets back into the markets it will have precisely the opposite effect to when it was buying them up, draining away the temporary additional purchasing power that had been created and pumped into the financial system.

So, all in all, this is a central bank financial stimulus aimed at lowering interest rates, increasing economic activity and pushing up the price of financial assets. But it has to be temporary because if the Treasury is not to create another big financial black hole for itself it will at some point have to sell back the assets it has bought through the APF (ideally at the prices it bought them at, or higher), as otherwise it will just have lumbered itself with tens of billions of pounds worth of gilts it had issued earlier to finance its own government debt! So while it is a transitory financial alchemy of a sort, with any profits that accrue from this buying and selling process going to HM Treasury, so the Treasury also has to indemnify any losses incurred.

QE is not inflationary in the traditional sense in that while it can fuel asset price bubbles in certain sectors of the economy it does not cause general price rises and is only temporary. Currency inflation causes more general price rises across the economy as the excess currency circulates throughout it, and of course can – and indeed will – continue for decades if not deliberately halted.– Editors.

Proper Gander: Where the wealth went (2022)

The Proper Gander TV column from the March 2022 issue of the Socialist Standard

Since the financial crisis and through austerity, Brexit and then the pandemic, we’ve had to get used to the effects of the economy at its most volatile. Reminding us of the depressing years from 2008 onwards is BBC Two’s documentary The Decade The Rich Won, which would more accurately be titled ‘Another Decade The Rich Won’. This two-part programme has an all-star cast of politicians, economists and government advisers who tell us how they navigated the last decade’s fiscal turbulence. Instead of a narrator, captions in block capitals flash up on the screen to pull the story along, accompanied by urgent-sounding ominous music.

The documentary begins with the government’s ‘bailouts’ of hundreds of billions of pounds to banks such as the Royal Bank of Scotland. Without this intervention, we would have faced ‘financial armageddon’, according to then-Governor of the Bank of England Mervyn King, and with this intervention, the wealthiest got even wealthier. It’s explained that this is because the bailout funds stayed with the banks, rather than flowing through and boosting the economy. So, an alternative strategy was tried: quantitative easing. This tactic (credited to King and then-Chancellor of the Exchequer Alistair Darling) is when the Bank of England ‘creates money’ to buy government bonds from financial institutions, which then have more funds to lend out to people and businesses. Between 2009 and November 2020 the impossible-to-visualise amount of £895 billion went through the UK’s quantitative easing plan, with more paid out by other countries’ central banks. The effect of this was an increase in the value of assets, and consequently, according to hedge fund head honcho Paul Marshall, the ‘owners of assets have all made out like bandits’. Marshall isn’t the only city bigshot interviewed for the programme who knows exactly how capitalism works, and in whose interests. Private equity supremo Guy Hands says it’s obvious that wealth attracts more wealth, regardless of what the government recognises. If they and the other economists featured didn’t already know this when quantitative easing was used in 2009, then they would have learned it when the same pattern recurred when the strategy was used after Brexit and again when the pandemic hit.

The super-rich haven’t only benefited from bank bailouts and quantitative easing, but also from shrewd management of their tax affairs. The tax havens where the elite stash their cash were revealed in the Panama and Paradise Papers, leaked to German reporters Bastian Obermayer and Frederik Obermaier. Alongside these revelations, companies such as Vodafone, Amazon and Starbucks were outed as paying little or no tax to the UK government, which at that time was implementing its austerity measures. Then-Prime Minister Theresa May wagged her finger and said to these corporations ‘I’m putting you on warning. This can’t go on any more’, although nothing was done because her reduced-majority government became distracted by Brexit, according to ex-minister and senior aide Gavin Barwell. A more fundamental reason (not given in the documentary) is that governments see high profitability as good for the economy, and therefore are reluctant to impose a heavy tax burden on corporations which would reduce the amount of profit they make.

While the richest grew and held on to their massive amounts of money, millions of people were struggling because of job losses, insecure ‘gig economy’ contracts, rising house prices, shrinking wages and cuts to government funding of services. The widening inequalities of wealth led to the normalisation of food banks and global protests. The programme features some of the campaigners with UK Uncut (a direct-action group targeting corporate tax dodgers) and also the Occupy movement. When asked what the movement achieved, Tina Rothery, one of its members says ‘so much… Occupy pulled the conversation back… to real humans’, although she also admits they didn’t offer solutions beyond this. Another way people reacted to the establishment letting them down was by voting for Britain to leave the European Union. Brexit created more financial instability, responded to with more quantitative easing which again boosted the elite’s coffers.

Some of the interviewees who represent the status quo are more candid than might be expected because they’ve since retired or left their previous careers. For example, Mervyn King (now a life peer) says it’s ‘deeply unfair’ that banks get bailed out when in financial trouble, but other businesses wouldn’t. Ex-Deputy Prime Minister Nick Clegg, who looks like he’s still recovering from his spell in government, tells us there was no debate about further cuts to public spending, as the coalition agreed they would be necessary, despite his talk of ‘difficult decisions’. The Chancellors of the Exchequer (Alistair Darling, George Osborne and Philip Hammond) all seem to be sticking strongest to the decisions made during their tenures. In contrast, Gary Stevenson, a Citibank trader between 2008 and 2014, has shifted his views because of his experiences during those years. As an ‘interest rate trader’, he discovered he could make a fortune by betting on the economy getting worse and as a result became Citibank’s most profitable trader in his area. Realising that economic crises have led to increases in the value of the capitalist class’s stocks and assets, Stevenson felt guilty and left his job. He now works as an economist campaigning against inequality, although the documentary doesn’t mention his proposal to remedy this by placing a time limit on property ownership, thereby forcing the elite to sell their assets, which no government would agree to.

The Decade The Rich Won shows that the way the economy works has enabled the capitalist class to prosper through the turmoil of recent years. The wealth owned by UK billionaires has risen by 310 percent since 2010, little of which has trickled down to those of us scraping by on low incomes. The documentary is worth watching not only because it’s a grim reminder of how capitalism functions but also because it reveals the views of those in prominent positions. Their openness now makes the spin we heard last decade – ‘we’re all in this together’, ‘stronger economy, fairer society’, ‘aspiration nation’, ‘strong and stable leadership’, ‘a country that works for everyone’ – sound even more hollow.

Mike Foster

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’.

The Philosophy of Money (2010)

Book Review from the March 2010 issue of the Socialist Standard

Money by Eric Lonergan. Acumen, 2009

This is an unusual book, written by a hedge fund manager. It verges between conventional orthodoxy and the highly unorthodox. In many respects it is as much a book about philosophy, thinking and perception as it is about economics, and not unlike recent works by George Soros in that respect.

Lonergan has read Marx, Hayek and many of the key financial analysts of the contemporary era, from Markowitz to Shiller. He has provided a synthesis of their views about markets and money, underpinned by his philosophical readings from his earlier academic studies. These at times border on the insightful but ultimately disappoint.

His discussion of inflation is an obvious case in point. As early as the first chapter he writes:

‘Many people believe that their money is stored in a safe at the bank, if they think about it at all. Ignorantly, we think of a deposit with a bank as money; indeed, in most of economics deposits are referred to as “money”, and are categorized as such in official statistics, which is misleading. Deposits are not money: they are loans we make to banks’ (pp.11-12).

This is quite true and one of the reasons ‘credit creation’ ideas still peddled by some economists are erroneous, along with theories which try to explain rising prices with reference to the expansion of bank deposits. However, he also says:

‘…the solution to a banking panic is effortless and disconcerting: a central bank merely needs to say that it will create as much money as is needed, and provide this to the banks, and everyone should calm down’(p.12).

Later, he writes of ‘an irrational fear of inflation’ (p.133), but these fears are not necessarily irrational. This magazine has chronicled for decades how an excess issue of inconvertible paper currency (beyond that needed for production and trade) leads to an artificial bloating of monetary demand known as inflation. This has been a consistent phenomenon since the late 1930s/early 1940s and in some periods, such as at times in the 1970s, has been quite significant.

At present, the extent to which a tactic like ‘quantitative easing’ can lead to cost price bubbles and can lead to an excess note issue will be the extent to which underlying inflationary pressures will re-emerge with a vengeance within the capitalist economy. Lonergan clearly missed the relevant chapters in Marx’s Capital where the inflationary process – and the explanation for it – is discussed, or has at least failed to apply it to the contemporary situation. It would certainly help explain to him why inflation is a monetary phenomenon created by governments through central banks which cannot, of itself, solve any of the other economic problems endemic to capitalism.

DAP

Cooking the Books: Financial alchemy (2010)

The Cooking the Books column from the January 2010 issue of the Socialist Standard

When the Bank of England introduced "quantitative easing" last year is was popularly described as the government having recourse to the printing press. This was not meant to be taken literally – the Bank of England did not arrange for more notes to be printed – as it was done electronically. Nor, as Charles Bean, a deputy governor of the Bank of England explained in a speech to the London Society of Chartered Accountants on 13 October (see here), was it the same process that leads to more currency (notes and coins) getting into circulation (through banks being put in a position to have to convert some of their reserves with the Bank of England into cash).

Bean described it as "a programme of large scale asset purchases financed by the issuance of extra reserves". A new fund called the Asset Purchase Facility was set up to which the Bank of England has so far lent £200 billion. This did not come out of the Bank's existing assets but was literally created out of nothing:

"Technically what happens is the following. The Asset Purchase Facility buys assets funded by a loan from the Bank. In turn, the Bank funds that loan through additional reserve creation. If that sounds like financial alchemy, consider how the money flows through the system. When the Asset Purchase Facility buys a gilt from a pension fund, say, it can be thought of as paying with a cheque drawn on the Bank of England. The pension fund will then bank the cheque with its own commercial bank, so the latter now has a claim on the Bank of England – that is what reserves are. In reality, these payments are not made by cheque, but rather are carried out electronically. But the principle is the same, though one key difference is that we pay the Bank Rate to the commercial bank on its claim on us, as well as charging the Bank Rate on the loan we make to the Asset Purchase Facility."

So, what is involved is a circulating IOU from the Bank which can be used to buy financial assets and which, from an accounting point of view, takes the form of a notional increase in the reserves which the commercial banks keep with the Bank of England, except that it is the Bank not the commercial banks that has increased these reserves.

Will this cause inflation? After all, what the Asset Purchase Facility spends does represent an increase in purchasing power. However, the immediate aim is not to cause a rise in the general price level but a rise only in the price of government bonds and stocks and shares:

"If the Asset Purchase Facility buys gilts from pension funds or asset managers, they will then have to look for another home for their money. As it is not very rewarding just to hold it on deposit, they are likely to look to put their money into other assets, including equities and corporate bonds. Thus not only does the price of gilts rise as a consequence of the Asset Purchase Facility's initial purchases, but also the prices of a whole spectrum of other assets".

This limited aim seems to have been achieved as prices of bonds and shares on the stock exchange have risen, helping to repair some black holes on financial company balance sheets. But there is supposed to be a wider aim: to "boost spending and activity" as Bean put it. Which hasn't been achieved. Bean, in fact, honestly admitted that if and when economic activity revives there will be no way of telling whether or not this was due to quantitative easing "for the simple reason that we can never know with precision what would have happened in its absence".

The intention is that, as the real economy recovers, the process will be reversed. The Asset Purchase Facility will sell the bonds it purchased and repay its loan from the Bank of England. The Bank will then liquidate the corresponding commercial banks' reserves with it. If this happens there will be no general inflationary effect as the extra purchasing power pumped into financial markets will be taken out again. But this could be years away. In the meantime the extra purchasing power will continue to go towards financing a stock exchange revival, even perhaps a speculative bubble – while the real economy goes its own way, recovering in due course for real economic reasons not through financial alchemy.

Helicopter Ben and the money supply (2009)

From the March 2009 issue of the Socialist Standard

Governments now call it “quantitative easing”. It used to be simply called inflating the currency. And it’s now official policy.

In the 1930s Keynes suggested burying banknotes and then paying people to dig them up. Ben Bernanke, current chairman of the US Federal Reserve, is said to have come up with a modern version:

“The most radical option is to send the newly-minted money directly to the US Government. It could then be handed out to citizens via tax relief. This form of monetary expansion would be equivalent to printing money and dropping it from helicopters for people to pick up – a graphically extreme proposal that earned the Fed chairman, Ben Bernanke, his nickname of Helicopter Ben” (Times, 18 December).

The present crisis is confirming some of the truths of Marxian economics. First, that banks cannot “create credit” out of nothing. Second, that the rise in the general price level, popularly but inaccurately called “inflation”, is caused by the government’s bank, the central bank, issuing more currency than the economy requires for its various transactions such as buying things, settling debts and paying taxes.

Inflation, which up to now politicians have been telling us is the main economic problem to avoid, is now being seen as one supposed way out of the deepening depression. After years of propaganda blaming inflation on wage increases, they now want the general price level to rise, and know how to bring this about – not by raising wages of course but by the government over-issuing the currency by printing more and more of it.

Seven years ago, when he was still only a governor of the New York Federal Reserve Bank, Bernanke explained how, by overissuing a paper currency that was not convertible on demand into a pre-fixed amount of gold, governments could create “positive inflation”:

“[U]nder a fiat (that is, paper) money system, a government (in practice, the central bank in cooperation with other agencies) should always be able to generate increased nominal spending and inflation, even when the short-term nominal interest rate is at zero. ( . . .) US dollars have value only to the extent that they are strictly limited in supply. But the US government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of US dollars in circulation, or even by credibly threatening to do so, the US government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation." (Talk “Deflation : Making Sure It Doesn’t Happen Here”, 21 November 2002 at (http://www.federalreserve.gov/boarddocs/speeches/)

What Bernanke describes here is simply inflating the currency, even though it’s now being called “quantitative easing”. Marx had already explained this 150 years ago in his A Critique of Political Economy, where he discussed what would happen if a government overissued what Bernanke calls “fiat money”:

“Let us assume that £14 million is the amount of gold required for the circulation of commodities and that the State throws 210 million notes each called £1 into circulation: these 210 million would then stand for total of gold worth £14 million. The effect would be the same as if the notes issued by the State were to represent a metal whose value was one-fifteenth that of gold or that each note was intended to represent one-fifteenth of the previous weight of gold. This would have changed nothing but the nomenclature of the standard of prices, which is of course purely conventional, quite irrespective of whether it is brought about directly by a change in the monetary standard or indirectly by an increase in the number of paper notes issued in accordance with a new lower standard. As the name pound-sterling would now indicate one-fifteenth of the previous quantity of gold, all commodity-prices would be fifteen times higher and 210 million pound notes would now be indeed just as necessary as 14 million had previously been. The decrease in the quantity of gold which each individual token of value represented would be proportional to the increased aggregate value of these tokens. The rise in prices would be merely a reaction of the process of circulation, which forcibly placed the token of value on a par with the quantity of gold which they are supposed to replace in the sphere of circulation.”

This artificial bloating of monetary demand is what inflation, strictly speaking, means. Governments now want to consciously use this process to exert an upward pressure on the general price level to try to stop it falling as it would otherwise tend to in a deep recession. It might be thought, in view of all the publicity put out by supermarkets and chain stores about how they have all slashed prices more than their rivals, that falling prices would be a good thing. But this is not how the government sees it. They think that this would make the current depression worse, as they want to encourage people to spend whereas, with falling prices, people might postpone spending in the hope of prices falling even further.

Inflating the currency to try to stop money prices from falling is now the official policy of both the government and the Bank of England. That this is what is happening is being openly admitted. For instance, the financial journalist, Anatole Kaletsky, wrote in the Times (18 December) that “today the threat is deflation, not inflation” so that “central banks are right to flood the world economy with newly printed money – so long as they know when to stop”, conceding that “a central bank that prints money to finance large-scale government spending is, in theory, moving into territory occupied by Zimbabwe and Weimar Germany”.

In a previous article (15 December) he had attempted a more sophisticated analysis, introducing the concepts of “monetary base” and “money multiplier”. He gave the definition of the first as:

“banknotes issued by the Bank of England plus coins from the Royal Mint plus private bankers’ deposits at the Bank of England and therefore available at any time for conversion into banknotes with literally zero risk”.

This is rather more than the currency as it includes deposits from banks at the Bank of England, which do not circulate and so do not have an effect on the general price level. Nevertheless, the currency makes up over half of this “base money”.

According to Kaletsky, this figure is currently around £100 billion. He then introduces what he calls “broad money” defined as “all private sector bank and building society deposits, money market funds and so on”. Reverting to the language of before the credit crunch when it was thought that banks would never have any problem to lend money, Kaletsky refers to this “broad money” as being “created by private banks”. This is highly misleading in that what the banks lend out has not been “created” by them but is the result of them acquiring other people’s money in one way or another. It reflects what banks do, which is to recycle the purchasing power of those who don’t want to use it immediately. He does, however, admit that “the moment there is an iota of doubt, bank deposits cease to be true money, as demonstrated by the queues outside Northern Rock last year”.

Whether it is “true” money or not (and Marxists would say that it is not) the figure for “broad money” is some £1,900 billion. So, in Britain, the “money multiplier” is 19. Kaletsky notes that in other countries it is much less. In Japan it is 11, in the Eurozone 7.5 and in the US 5.3. He says that this means that Britain can safely afford to issue more “base money” and suggests a doubling to a further £100 billion, so reducing the “money multiplier” to about 10.

If all of this additional “base money” were to be in the form of notes and coin this would amount to a massive inflation of the currency, bringing it way above what the economy needs for its transactions (especially as, in a depression, the number of these will fall). Kaletsky envisages this to a certain extent as he mentions the Bank of England buying government bonds or even providing money directly to the government to spend, both of which would involve printing more currency .

In fact. facilitating the buying of government bonds with new money has been the way that successive governments have, intentionally or not, inflated the currency in Britain since 1940 and why the general price level has risen continuously since then. Kaletsky explained in his 18 December article how this worked in the US. The Federal Reserve Bank, as the central bank, will buy government bonds and

“will pay for them simply by making electronic transfers into the bank accounts of the people or institutions selling. For every $1 million worth of assets bought, the Fed will transfer $1 million of new money into private bank accounts. This ‘money’ will come literally out of nowhere. It will simply be an electronic blip on the Fed's computer. Because electronic deposits at the Fed are the ultimate form of legal tender in the US system, the result will be that the US economy has $1 million more money.”

When these banks draw on the extra amount in their accounts extra currency is brought into circulation which, if it more than is required by the economy (as it has been), leads to the rise in general price level popularly called inflation.

Kaletsky had already explained in a previous article (11 December) where the money to try to spend a way out of the depression was likely to come from:

“For the next year or two, the money for the British fiscal stimulus will come from the Bank of England's printing works in Dedham. In the case of the far bigger job-creation schemes and industry bailouts planned by Barack Obama, the money will come from the Washington and Fort Worth facilities of the US Bureau of Engraving and Printing, an institution rejoicing in the most succinctly descriptive internet address I have encountered: www.moneyfactory.gov.”

Burying bank notes and digging them up again. Dropping them from helicopters for people to pick up. In fact even using printed coloured pieces of paper to have access to what you need. These are crackpot ideas compared with the simple socialist proposition to produce things for use not for sale at a profit, so ending the need to use money at all.

Adam Buick