The Money Programme

We saw in the last post that – contrary to the opinion of some commentators – QE does involve meaningful creation of money in the form of bank deposits. But we also saw that it puts that money in the hands of people who simply reinvest it in financial assets. What the economy needs, if it is to recover from the pandemic and grow, is not reinvestment but spending – real economic activity by actors in the real economy.   So what should policymakers do? How can spending in the real economy be encouraged? Well, the obvious answer is that money must be provided to participants in the real economy, not simply to investors. How can this be done?   This is where we come up against another false picture that influences our understanding of money and the economy, namely, the picture we have of taxation and government spending. In this picture, the government takes money from people and businesses in the form of tax and then spends it. Just as in the case of loans and deposits, experts and layme

What is happening in the economy and the markets? [1]  How can financial markets – or certain important parts of them, including most notably US markets for large-market-cap equities and corporate credit – be booming when businesses are shut, millions of people are out of work and a huge wave of personal and corporate insolvencies seems inevitable?   Most answers point to the actions of the Federal Reserve and other central banks, who have been carrying out something called quantitative easing, or ‘QE’.   Through QE central banks increase their balance sheets by creating the means to buy financial assets. Many describe this as printing money and worry that doing so on this massive scale must result in inflation. After all, didn’t Milton Friedman once say that “Inflation is always and everywhere a monetary phenomenon”? Haven’t we learned from Zimbabwe and Weimar Germany?   Others say that isn’t right: when central banks buy assets, they buy them from banks and pay for those assets with