Winner of the New Statesman SPERI Prize in Political Economy 2016

Sunday, 16 August 2015

People's QE and Corbyn’s QE

Politicians can be adept at co-opting attractive sounding terms to their own cause, even when they distort their meaning while doing so. Osborne announced what was in reality a partial but large increase in the minimum wage, but he called it a ‘living wage’. This was especially devious, as calculations of the actual living wage take into account the tax credits that Osborne was at the same time cutting.

Is Labour leadership contender Jeremy Corbyn’s ‘Peoples QE’ an example of the same thing? It is certainly true that the way that some macroeconomists, including myself, have used the term is different from Corbyn’s idea. For us Peoples QE is just another term for helicopter money. Helicopter money was a term first used by that well known radical Milton Friedman. It involves the central bank creating money, and distributing it directly to the people by some means. It is a sure fire way [1] for the central bank to boost demand: what economists sometimes call a money financed fiscal stimulus.

The idea has been recently revived, most prominently in the UK by Adair Turner, because of the failure of conventional monetary policy (changing interest rates) to bring a quick end to the Great Recession, which in turn is because governments were undertaking fiscal austerity (a bond financed fiscal contraction) rather than fiscal stimulus. In contrast central banks in Japan, the US and UK, and now the Eurozone, have been creating money to buy financial assets (mainly government debt), which is called Quantitative Easing (QE). Hence the term People’s QE for helicopter money: instead of the central bank creating money to buy assets, it creates money and gives it to the people.

The genesis of Corbyn’s QE seems rather different. Corbyn adviser Richard Murphy had previously suggested what he called a Green Infrastructure QE, which is that a “new [QE] programme should buy the new debt that will be issued in the form of bonds by the Green Investment Bank to fund sustainable energy, local authorities to pay for new houses, NHS trusts to build new hospitals and education authorities to build schools.” This in turn is related to two ideas: first a near universal view among macroeconomists that public sector investment in infrastructure should be rising not falling when interest rates are low and labour is cheap, and second that a National Investment Bank (NIB) might be useful in helping to encourage private sector investment. (See, for example, the recommendations of the LSE growth commission.)

The main difference between helicopter money and Corbyn’s QE therefore seems to be where the money created by the central bank goes: to individuals in the form of a cheque from the central bank, or to financing investment projects. I think that is wrong, and to see why we need to ask an obvious question: what is this policy innovation designed to achieve. I think it is here that confusion has arisen.

As I noted above, the idea behind helicopter money is to provide a tool for the central bank to use when interest rate changes are no longer possible or effective. With an independent central bank, that means that they, not the government, get to decide when helicopter money happens. In contrast, if your goal is to increase either public or private investment (or both) for a prolonged period, then its timing and amount should be something the government decides. While QE is hopefully going to be something that is unusual and rare, the goal of an investment bank is generally thought to be more long term, and not something that only happens in severe recessions.

For that reason, Corbyn’s QE looks like one of those ideas that is superficially attractive because it seems to kill two birds with one stone, but on reflection turns out to be a bad idea. If we want to keep an independent central bank we do not want the government putting the bank under pressure to do QE because the government wants more investment, and if that does not happen we do not want the central bank deciding whether extra investment happens. Indeed some of those who dislike the idea of helicopter money have already been using Corbyn’s QE to say ‘I told you helicopter money was a slippery slope that would lead to the end of central bank independence’.

However I think it is unfair and unproductive to leave it there. Suppose that a NIB is created, not on the back of QE but using more conventional forms of finance. (If the government wants to encourage it, just directly subsidise that finance with conventional borrowing. Don’t be put off doing so by deficit fetishism.) Suppose we also like the concept of helicopter money - not for now, but for the next time interest rates hit their lower bound and the central bank wants more stimulus. In those circumstances, it might well make sense for helicopter money to be used not only to send cheques to individuals, but also to bring forward investment financed by the NIB, or public sector investment financed directly by the state. If those investment projects could get off the ground quickly, and crucially would not have happened for some time otherwise, then what I have elsewhere described as ‘democratic helicopter money’ would make sense. [2] This is because investment that also boosts the supply side is likely to be a far more effective form of stimulus than cheques posted to individuals.

So one day, this form of Corbyn’s QE could happen. But we need to get the idea of helicopter money, and the need for public investment and a National Investment Bank, accepted in their own right first. Putting the two ideas together right now is misconceived, and is in danger of discrediting two potentially good ideas.

[1] Unless you believe in complete Ricardian Equivalence

[2] When I put forward the idea of ‘democratic helicopter money’ here to Tim Harford, Tim responded that he thought it was probably the most radical and politically infeasible idea of those he had canvassed. If Corbyn wins, I will have pleasure in reminding him of that!  

47 comments:

  1. Thanks for this. It is useful, and what I hoped you would write.

    What you don't seem to make clear enough for my tastes is that Corbyn seems to want to use helicopter not to boost demand, but to fund nice things that would otherwise not be paid for. His version seems independent of any demand shortfall at all.

    That is, of course, a major objection to helicopter money tout court. Unscrupulous politicians will use it whenever they want to pay for stuff.

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    1. “Corbyn seems to want to use helicopter not to boost demand..” If that’s what he wants, he’s off his rocker. The unique or important characteristic of “print and spend” is precisely that it DOES RAISE demand. That point was clearly recognised in the submission to Vickers by Richard Werner and co-authors. See bottom of p.10 to top p.12 here:

      http://b.3cdn.net/nefoundation/3a4f0c195967cb202b_p2m6beqpy.pdf

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    2. Unscrupulous politicians wasting tax payers money is one of those zombie lies that leads to deficit fetishism. Spinning Hugo is serving the ancient forces of greed and fear by spreading lies.

      What about unscrupulous banks? They took the money central banks were printing to keep inflation up and invested in building houses in the desert nobody wanted. They gave us an epic housing bubble and financial crisis.

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    3. Ralph

      Quite

      https://d3n8a8pro7vhmx.cloudfront.net/jeremyforlabour/pages/70/attachments/original/1437556345/TheEconomyIn2020_JeremyCorbyn-220715.pdf?1437556345

      pp5-6 is the bit you want

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    4. 16 August 2015 at 03:23 "What you don't seem to make clear enough for my tastes is that Corbyn seems to..."
      16 August 2015 at 06:59 “Corbyn seems to want to use helicopter not to boost demand..” If that’s what he wants, he’s off his rocker.

      Is this straw-man double-act actually based on anything but your own "seem-to" suppositions?

      The crucial point is that "free money" is absolutely available at the zero-interest bound.
      The question then is how best to utilise it, no?
      Infrastructure, particularly the parts where the private sector cannot see a clear Return on Investment (eg risks outweigh potential returns) seems particularly appropriate. Lack of Green Investment would seem a good example of Tragedy of the Common.
      Or do you still consider that leaving it to the Private Sector will just happen to best serve the needs of society via Individual Optimisation?

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  2. The big problem with helicopter money is that people know the economy is in trouble at that point and pay off debt rather than spend (is that a form of Ricardian Equivalence?)

    Both US and Australian governments sent out cheques post GFC (my son in Melbourne received a cheque for $1300, which he slapped into his credit card debt). And commentary I have seen since suggests the macro effects were underwhelming in both countries.

    It's surely far more important for a government to have ready-to-go projects in the pipeline to soak up unemployment than the scattergun approach of helicopter money.

    In the Great Depression my father was sent into such a project, planting trees in State Forests, and the country prospered for decades as those trees matured.

    Careful planning, regardless of lasses-faire myths, can result in better outcomes that Shumpeter's creative destruction.


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    1. The empirical evidence is that Ricardian equivalence is nonsense. Or as Joseph Stiglitz put it "Ricardian equivalence is taught in every graduate school in the country. It is also pure nonsense."

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    2. https://originofspecious.wordpress.com/2015/08/10/infinite-debt-future-generations-and-hilberts-hotel/
      Please read this.
      Notes and coins are govt debts. They may be non interest bearing, but they are still govt IOUs.
      The government can pay off "debt" by "printing money" if that is what you mean by it - but you don't get rid of the liabilities, just change their form. Replacing Bonds with Reserves that may or may not be interest bearing depending on if interest on reserves is paid.
      The government "debt" is never paid off.

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    3. Milton Friedman discussed that issue; he said that people will end up spending a portion of their helicopter money; they just do not act as if the Rickardian equivalence exists.

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  3. Come on Simon, you know that central bank independence is a mirage. We are having this debate purely because fiscal activism is out of fashion whilst monetary activism is en vogue.

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    1. Agreed, Danny. It's as much a mirage as the 'chinese walls' within large banking firms between the retail and investment parts. I fail to understand why academics and politicians think we are stupid enough to believe in them when all the evidence points in the opposite direction.

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    2. Fiscal policy is being blocked politically. That's different from being "out of fashion.' Monetary policy is doable. That's different from "en vogue."

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    3. Who are the politicians blocking fiscal policy (in any of its variety) at the central bank if it is independent?

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    4. I agree with Danny. It is something quite settled in political and constitutional theory that there cannot be a public institution fully independent or, to better say, dependent only by technical variables. In this case, the question should be: who do we want to control the monetary and exchange rate policy? The government, according to the processes of constitutional and public law? Or the underlying political powers, which would then carry on their agenda under the cover of a technocratic control?

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  4. Corbyn adviser Richard Murphy had previously suggested what he called a Green Infrastructure QE, which is that a “new [QE] programme should buy the new debt that will be issued in the form of bonds by the Green Investment Bank to fund sustainable energy, local authorities to pay for new houses, NHS trusts to build new hospitals and education authorities to build schools.”

    Murphy should definitely talk to Jeffrey Sachs. He has been pushing something similar now for a long time and must have some pretty well-thought out views. What do you think is the difference between Sachs and Murphy? I know Sachs opposes large injections of liquidity into the system and sees this as part of the cause of the original problem; and supports demand expansion achieved via targeted investment in renewable energy. I am not sure whether this would be done via an investment bank.

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  5. Simon:

    People may not realize it, but Corbyn's QE is alive and well and has been used very effectively for the last several years in the US. Isn't the Fed buying MBS (albeit in the secondary market) to support housing markets a form of people's QE? As Corbyn's advisors and others have pointed out, the problem with QE using sovereign bonds is that it uses a form of wealth trickle-down to achieve it's goals, but lower mortgage rates were a much more effective means of getting purchasing power into the hands of a broad mass of people as wel as reducing the financing costs of new homes.

    Now one can argue that this form of QE in the US only served to further distort an already distorted housing market - but the principle remains the same. The government can essentially write credit default insurance on a pre-defined list of projects in exchange for a guarantee fee which is actuarially based (which is what GNMA does for FHA loans) and then the developers can raise funds in the capital markets. These then become eligibile for BOE purchases, just like FNMA/FHLMC/GNMA securities are.

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  6. "If we want to keep an independent central bank "
    This is the crux of the issue. Many of us on the Left do not want an independent central bank, which is effectively arguing for autocracy.

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    1. But it was of course the left who made a massive song an dance about the Independence of the Bank of England and have been doing so for the past 20 years. It was also the left (Attlee) who Nationalised the Bank in the first place.
      The Bank is part of the government and answers directly to it. The real problem is that McDonnell's plans would create inflation and the Bank of England Act 1998 says that the government should have an inflation target. Richard Murphy openly admits that his policy would create "modest amounts of inflation".

      So we have a supposed hard left Labour shadow chancellor basically complaining about a Nationalised institution and arguing that the previous longstanding policy of the Labour government that ran for 20 years that the Bank should work within paramaters set out by Act of Parliament rather than Number 11 micromanaging everything is nonsense. Why? So they can print free money and create inflation. Watching the Labour front bench doing mental somersaults trying to justify this is hilarious. The Bank of England is not an autocracy it is a government bureaucracy... all the monetary committee does in effect is question the Chancellor and vice versa and attempt to meet the inflation targets he sets. Even this small level of accountability is too much for McDonnell. Really the policy makes no sense at all it is actually just chrematophobia.

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  7. I agree with SW-L. Corbyn and Murphy are just lumping together two ideas that for the uninitiated seem to mesh nicely. In fact they don't mesh.

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  8. "This was especially devious, as calculations of the actual living wage take into account the tax credits that Osborne was at the same time cutting."
    Isn't that the fault of the living wage people? They should have put the living wage as what is needed to live without any money from elsewhere.

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  9. I'm not sure if I agree completely. This is all speculation about the politics which is more tricky than the economics. Some speculate that it would be easier to beat back deficit fetishism than get QE for the people or at least would be just as difficult.

    QE for the people is a way to get around deficit fetishism and around the ineffective way QE has been done. They might not be able to create an NIB if deficit fetishism still holds. (The prospects may be different in the UK and US.)

    One solution might be to do "all of the above." After the next bubble pops and the next recession hits, the central bank faces the ZLB again.

    It could do QE for the people *and* partnership with the government to set up a prototype NIB funded via QE. Once the economy is at full employment with rising wages, the NIB could switch to conventional funding and longer-term plans.

    The central bank could also set longer term interest rates outright, instead of purchasing certain amounts each month; it could raise the inflation target or switch to an NGDP path level target.

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    1. Some economists like Thomas Palley are predicting further stagnation rather than another popping bubble and severe recession at the ZLB happening anytime soon. QE for the government would be a good way to combat stagnation and bypass the deficit fetishists.

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  10. What I don't understand is: if central banks are already creating money and buying up all kinds of financial assets, they are already intervening in a large way, benefitting certain clases of people (mostly richer people owning the financial assets being bought and being pushed up in price). Wouldn't it be more fair and transparent to use these mechanisms for the benefit of the broader public instead (investment spending for example)? Why is that so bad?

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    1. Because QE is one of those irregular verbs;

      I prudently inject necessary liquidity
      YOU meddle in central bank independence
      THEY will turn our country into Greece ...

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  11. "While QE is hopefully going to be something that is unusual and rare, the goal of an investment bank is generally thought to be more long term, and not something that only happens in severe recessions."

    What happened after the financial crisis, though, was that Obama did a large stimulus as did all of the other advanced economies. With QE for the government, it wouldn't impact the budget and deprive the deficit fetishists and austerians the target of a "bloated" budget shortfall.

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  12. This might seem incredibly self interested for a student, but with Corbyn's plans to end tuition fees, would it be feasible to use QE / helicopter money in order to finance a government buyout and haircut of student debt? This would be in order to a) buy the votes of young people and their families that will be voting in 2020, not just parents with children who have not attended university yet and b) to increase demand by putting more money in to the hands of people who will by that time be wage earners in the 20s-30s. An interesting aspect of this would be that the stimulus effect would be a long term, rather than short term one, so might not have a big impact immediately but on the flipside the inflationary impact of it wouldn't be as great as it's not like the government would be immediately putting £50k in to the hands of ex-students, it would simply entail letting students off paying any remaining student fees, and maybe refunding some of their previous payments.

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    1. Financing a student haircut sounds like a reaction to the sixties!

      In fact the student debt syndrome (past a problem in my view) is a wonderful example of the damage that good economic theory can do. I can't count the number of articles I've seen in the Economist and similar arguing that students should take on debt as a rational investment to increase their future income. None of the authors of those articles, I will bet, had to confront a rising house market with two years' salary-woth of debt already round their necks.

      Meanwhile, Treasury types argued that grants and subsidised fees were too expensive and should be replaced by loans. A graduate tax would be much too slow to bring resources into the Treasury.

      Now we have the worst of both worlds: heavily indebted students but no savings in public expenditure because of the various protections established to persuade students to take on the debt. The only beneficiaries are students from families rich enough not to benefit from grants, who can - if they wish - afford to take on the subsidised debt knowing their families can pay it off if necessary.

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    2. Our students are not indebted. The government is. Student tuition fees are paid for by a graduate tax, not loan repayments. We know it's a tax because it looks like a tax. It just isn't called a tax.
      If it were a loan then students would have to repay it in full. But they don't. It gets written off after 30 years.
      If it were a loan the repayments would be proportional to both the interest rate and the amount outstanding. Again neither is true.
      If it is a tax it is paid in proportion to your income. And YES this is true.
      So it is a tax.
      The only reason it isn't called a tax is because if it were called a tax then students could avoid paying it if they lived or moved outside the UK.
      I wish I could get a mortgage with the same terms as a student loan. Pay nothing (or only what you can afford) for 30 years then the loan is written off and you get to keep the house (even if it costs £10m). Yippee!

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  13. In a sovereign currency system the central bank and government are consolidated, the central banks are independent because they can't be. A similar principle applies in the Eurozone. The ECB is lender of last resort and I don't care how many rules exist forbidding it, it is. I may as well make a rule forbidding gravity. bill40

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    1. Then how come the BoE has managed to resist pressure from politicians (since Gordon Brown gave the BoE independence) to implement excessive stimulus before elections under the EXISTING SYSTEM?

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  14. This whole article seems to be based on saying CorbynQE isn't really QE. Probably true but not really the point. Indeed, if virtually all economists agree that this is the right time to invest in the public sector - I certainly do - then why quibble about whether the investment is funded by loans from the government (deficit funding) or from the central bank (QE). Previous commenters have pointed out that central bank independence is almost entirely illusory anyway.

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  15. I fear an argument that starts with "If we want to keep an independent central bank" is going to have little effect on Corbyn's supporters, many of whom will say "so much the worse for an independent central bank".

    Yet surely the fundamental problem still arises in an even more severe form if we don't have an independent central bank. In this situation, the amount of QE will be driven even more directly by the government's long-term need to finance infrastructure projects, rather than by the economy's short-term need for stimulus, and this will lead to its systematic overuse.

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    1. Doesn't an "independent central bank" simply mean independent of any democratic influence by government, but not independent of the biggest banks?

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    2. Jonathan, there is an obvious solution to your problem. Systematic overuse would result in inflation. The central bank is tasked to control inflation. Thus it would either have to refuse to print money at some point to control inflation, or raise interest rates if it felt overuse was becoming a serious danger. Inflation rate and interest rates are the price signals (of money) that indicate when the policy has gone too far. We are nowhere near this point yet.

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  16. The UK economy is growing at an above-trend rate. The Bank is talking about tightening policy to avoid inflation rising. Unemployment is low, wages are rising. Murphy and Corbyn are fighting the last war.

    If this new money is to be put into projects which would not be funded otherwise because the likely returns are so low, isn't an NIB (however funded) quite simply a spectacular misallocation of resources?

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    1. "The Bank is talking about tightening policy to avoid inflation rising."
      If so, why? Inflation is below the 2% target last time I checked.
      And real wages have been cut a hell of a lot over the past 5 years.
      The BoE should worry about the housing bubble/land price inflation.

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  17. Just Do It!

    1. Set up the People's Investment Bank now. Limit the projects that it can finance to those project that are least speculative, for example social housing and renewable energy.

    2. Let the BoE know that it exists and they may use it to deposit QE funds.

    Problem solved. BoE maintains its independence and PIB can be used by the BoE as a QE alternative to buying gilts.

    If the PIB was set up now, the BoE may decide to use it the next time that the next trenche of the current gilts held matures (assuming the BoE wishes to maintain QE at £375B). I believe gilts held under current QE mature from time to time and involve sums in the tens of billions.

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    1. how is the liabilities of the PIB different to to the liabilities of the gilts

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    2. Quoting above- "Richard Murphy had previously suggested what he called a Green Infrastructure QE, which is that a “new [QE] programme should buy the new debt that will be issued in the form of bonds by the Green Investment Bank to fund sustainable energy, local authorities to pay for new houses..."

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    3. Dinero - because PIB spending would be balanced by assets and wouldn't therefore add to net Government expenditure while gilt liabilities will technically be repaid at some time in the future through taxation and therfore do add to current expenditure.

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  18. "As I noted above, the idea behind helicopter money is to provide a tool for the central bank to use when interest rate changes are no longer possible or effective. "
    Why not just use FISCAL POLICY rather than spraying money hopelessly in all directions. This seems completely arbitrary.
    Why on earth should it matter if the spending comes from the central bank or the treasury?

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  19. http://www.taxresearch.org.uk/Blog/2015/08/16/pqe-gilts-and-the-cost-of-borrowing/
    Murphy makes a good case here that central bank independence is nonsense.
    TBH, I think PQE is just MMT by the backdoor. I'm pretty sick of this sort of stuff.

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    1. My feeling is that this is all about framing. Deficits and "government spending" are *bad*. But QE is acceptable. So why not frame government spending as People's QE. It's tosh, of course. And leads to endless and rather pointless discussion about the minutiae.

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  20. I find it strange that Simon Wren-Lewis can write so many posts about "helicopter money" and yet fail to mention modern monetary theory (MMT) once. This worries me because when it comes to the question of QE, MMT and deficits there appear to be some profound questions that continue to go unanswered by the macroeconomics mainstream.

    The first is why do governments that issue their own currency need the bond market at all in order to fund their deficits? It seems increasingly anachronistic to me. I can see why they were necessary in the past; when money involved using pieces of shiny metal and governments couldn't create that out of thin air, they needed to borrow someone else's. I can see that companies are similarly constrained, and possibly even regional governments. But when you have fiat currencies the rules of the game are totally different. You can print the money you need when you need it and remove it from circulation when your budget is in surplus. Thus you can provide your own short-term financing.

    Secondly, by using the bond market are not states distorting their balance of trade? Is it a pure coincidence that the major economies that have run virtually permanent government deficits via the bond market for the last 30 years (UK and USA) have also had persistent current account deficits whereas as those that have internalised their debt have trade surpluses?

    Thirdly, borrowing from the bond market in effect artificially supports your currency at an artificially high level. Is that what a trading nation wants in a recession (or any other time)?

    Finally, on the question of central bank independence, the very term is an oxymoron. Central banks (with the possible exception of the US Fed) are owned by the state and have their remits set by the state. Where is the independence in that? Moreover, why should they be allowed to be independent to the extent that they could operate as a shadow government with a monetary policy that is in total opposition to the fiscal policy being enact be the democratically elected real government? Surely monetary and fiscal policy should complement each other not act in opposition? That requires coordination.

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  21. "If the government wants to encourage it, just directly subsidise that finance with conventional borrowing."

    But isn't that exactly the problem? The media/Conservative rhetoric is that "borrowing = passing on debt to our children" so large scale investment in housing or infrastructure via conventional means will be adding to our "debt mountain."

    I am disappointed that not one of the Labour leadership candidates have attempted to address this charge, except Corbyn, who has jumped on QE rather than investing for growth. A non-partisan Infrastructure Commission has been called for in the construction industry. While this has its pitfalls it is these kind of sensible policy apporaches that appear missing from this entire debate.

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  22. So QE for infrastructure would be harder to use counter-cyclically, since infrastructure projects are often slow to start and wasteful to abandon. Could an innovative monetary policy regime instead have a permanent QE for infrastructure (say, with the Central Bank making a certain amount of money each year, and putting it into an infrastructure fund for the representative government to use as it wants), that's offset in normal times by higher interest rates to reduce inflationary pressure? By pushing interest rates typically further from zero, the ZLB problem would become rarer.

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  23. There's nothing funnier than people who bang on about the evils of "economic neoliberalism" backing a scheme straigh out of the Milton Friedman handbook of stupid economic ideas completely unaware that the policy is actually extreme monetarism!
    http://www.pearshapedcomedy.com/Endgame.html

    "But we need to get the idea of helicopter money, and the need for public investment and a National Investment Bank, accepted in their own right first. Putting the two ideas together right now is misconceived, and is in danger of discrediting two potentially good ideas."

    If Nationalising the Banks solved anything surely we could have sorted it all out when Gordon Brown nationalised a whole chunk of the banking industry when the sub-prime crisis first happened. A National Investment Bank isn't a stupid idea in theory but what would it invest in? And how would the money be paid back? If it's never paid back it's government spending.

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