Central Banks across the globe implemented large scale asset purchase programs, or Quantitate Easing (QE). Since most central banks are at the lower end of their interest rate policy, QE was installed aiming to increase money supply in other to create inflation. However with inflation rates still at very low levels and for some regions close to deflation, more is needed. Or something different?
The new UK Labour party leader Jeremy Corbyn recently vouched for a ‘People’s QE’: central banks which tie up with governments to spend it on tangible goods, such as housing or infrastructure projects. This is in line with Milton Friedman’s Helicopter Money: central bank will distribute abundantly money (or dropping from a helicopter) so that it will be spend on goods, drive demand higher and thus cause inflation.
Until now, Central Banks were buying financial assets. Mostly government debt, but also corporate debt and the Bank of Japan even ETFs of stock indices. People’s QE would direct money straightforward to the real economy so would tackle the lack of demand more directly. Qorbyn’s idea is aimed at investments in infrastructure. Also former IMF Chief Economist Olivier Blanchard said this could be an option. However, what these calls overlook is that the European Central Bank already is conducting this policy, in a certain way. The ECB buys assets from a number of institutions which aim to lend to development and/or investment projects. For example the European Investment Bank provides finance for ‘sound and sustainable investment projects’. The ECB’s policy drives interest rates for projects lower so that these are economic more viable.
The question is whether providing additional funds for institutions which facilitate investment projects would help the man in the street. Why is this necessary? One of the strongest forces driving inflation higher is wage pressure i.e. higher wages. This is currently lacking. Therefore the working middle class is not able to increase spending significantly which would in turn drive demand higher and lead to higher investments. Especially in the United States were household consumption is over 70% of GDP, higher income is a strong force in driving demand and thus inflation higher.
How can central banks address this issue? That is, more directly than driving interest rates as low as possible to spur lending? As the saying goes, you can lead a horse to water, but you can’t make it drink. The same may probably be true for money: you can have it, but spending it, is something different. Companies are hoarding cash, why don’t they put into investments? Lack of trust in the future could be an important reason.
An additional ‘problem’ with People’s QE is that central bank policy may become politicized. Who is going to decide which (type of) projects should be considered? The independence of central banks is an important cornerstone in monetary policy (although accountability to the public should exist). When the public sees a certain political color at the central bank in conducting its policy, part of the public may lose confidence. A lack of confidence in monetary decision making may have an unforeseeable effect on the economy. For example, inflation expectations will be no longer ‘firmly anchored’ when a part of the public sees the central bank as a ‘socialistic big spender’.
But most importantly, it is simply not the task of central banks to conduct fiscal and economic policy. Those who are responsible for these policies should step up to the plate. Governments should finally realize that the central banks bought time for them to find and implement growth-friendly, fiscally prudent measures. When the public, consumers and companies, recognize that authorities are taking the necessary steps, confidence will return. A firm trust in a prosperous future will boost spending and investments, driving the economy to new highs.
People’s QE is not an answer, but a new problem.
Leave a Reply