Quantitative Easing

June 2024 Forums General discussion Quantitative Easing

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  • #83603
    robbo203
    Participant

    Hi. Quick query. I've been involved in a discussion with one or two neo-Keynesian types on  my local forum.  We hear a lot lately about QE but what is the connection between QE and inflationary policy?  Does it lead to a general price increase? My understanding is that it leads to a rise in "asset prices" but, of course, all things being equal, one person's price increase is another person's price drop – unless of course the currency itself is being inflated and more currency is  being circulated in relation to the level of economic activity….

     

    Is there anything on the SP's site that runs through the basics of QE in step by step fashion – or would anybody like to have a stab at doing that here.  I've still not quite got my head around how it is all supposed to  work   Cheers  R

    #108857
    ALB
    Keymaster

    Here's a couple of short pieces on it:http://www.worldsocialism.org/spgb/socialist-standard/2010s/2010/no-1267-march-2010/letterhttp://www.worldsocialism.org/spgb/socialist-standard/2010s/2010/no-1265-january-2010/cooking-books-2-financial-alchemyThere's also been a short thread on it here on this forum:http://www.worldsocialism.org/spgb/forum/general-discussion/why-hasnt-quantitative-easing-caused-inflationBasically,  you're right: the aim is to inflate just "asset prices" not the general price level. In any event, despite QE, the general price level hasn't risen any faster than it usually does now. In fact, it's now rising slower than this.

    #108858
    steve colborn
    Participant

    QE is Keynesianism. A short, or supposedly short term injection of funds into a monetary system that, as the theory goes, will be removed before any inflationary pressures build up. That was Keynes theory anyway. As members of The Party know only to well, if the injection coincides with an upturn in the general economy, then Keynes ideas are supposed to be seen to work, if not, its another static target for the economically clueless. For economically clueless, read everyone who still think Capitalism can be controlled. Or as I term them, fucking morons!!!

    #108859
    alanjjohnstone
    Keymaster

    Isn't the theory is that this creates funds for business to invest in fixed capital etc and boost the economy with increased manufacture and services but in practice in the US it didn't turn out that way …instead corporations used the injection of funds in share buy-backs to inflate stock-markert price and reward investors and CEOs I wasn't sure so i googled and got this not so much sole cause but a contributory factorhttp://www.ft.com/intl/cms/s/0/16e71bdc-4f16-11e4-9c88-00144feab7de.html#slide0

    #108860
    robbo203
    Participant

    Hi   all,  Thanks for your obsrvations and suggestions.  Incidentally, specifically in relation to the question of inflation I came across these two references in the wiki entry on QE which appear to contradict each other  until you realise that "money supply" or "injecting more money into the economy" may not be the same as printing more currency. But can QE involve an element of printing more currency and if so how does this happen? What is the process?Quantitative Easing Explained. London: Bank of England. 2011. The MPC's decision to inject money directly into the economy does not involve printing more banknotes. Instead, the Bank buys assets from private sector institutions – that could be insurance companies, pension funds, banks or non-financial firms – and credits the seller's bank account..Bank of England . The Bank can create new money electronically by increasing the balance on a reserve account. So when the Bank purchases an asset from a bank, for example, it simply credits that bank's reserve account with the additional funds. This generates an expansion in the supply of central bank money  

    #108861
    sarda karaniwan
    Participant

    You have just introduced a cashless economy.sardaan Ordinarian

    #108862
    Dave B
    Participant

    The fullest explanation by Karl of the idea that the increase in ‘token money’ supply increases prices or inflation is as below.  http://www.marxists.org/archive/marx/works/1859/critique-pol-economy/ch02_2c.htm However what is often overlooked is also ‘his’ idea that the rate at which money circulates, or the velocity of money, will have a counter or inverse affect on inflation. Or in other words if the velocity of money falls it will slow the rate of inflation. This idea so happens to coincide with the ideas of some of the ‘bourgeois’ economists like Friedman?; hence it is a topic of their analysis. They can be useful to read as they often have access to more useful inside information than we have. Their general view, backed up by their data, is that the velocity of money is falling and is at all time lows. As far as the cash rich and finance money capitalists are concerned, and affect it; the velocity of money is lowered by the general level of higher economic risk from investment and low rates of interest and profit. It is fairly simple in theory; if the rate of return on investing capital is low and risk high you sit on your cash and essentially withdraw if from circulation. In fact it was a central theme of Karl’s analysis of economic crises that that was ‘symptomatic’ of a withdrawal of money from circulation. These ‘bourgeois’ economists talk of huge ‘stagnant pools’ of cash held by the capitalists and massive ‘money chests’ held by corporations. Which they ‘should’ be using to purchase productivity enhancing and expanding working capital; which they ‘aren’t’. There is always a connection or relationship between the average safe rate of profit and interest rate on money capital. Normally if the ‘safe’ rate of profit is 5% and money capital can be loaned at 1% then you can borrow £20 million at 1% and buy shares in productive capital that returns 5%. The difference of 4% is generally referred to by terms like ‘margins’ ,‘leverage’ and ‘yields’ etc [Usually the finance capitalists expect you to stump up and risk £1 million of your own ‘profiteer of enterprise’ (Karl) money to show that you are serious.] The fact that in theory you could borrow £500 million from the Bank of Japan for 10 years at 0.5% and build another identical factory to the one I work in, and don’t, much; should say everything about the rate of profit and status of current economic risk etc.   In parallel, in Karl’s ‘fictitious capital theory’; the capitalists think that that the value of their capital eg factories is determined not by its actual labour time value but by the  income stream, or for us surplus value, that it generates. Thus if ‘something’ generates, or even potentially generates, an income stream of say £10 million and in the real and general aggregate world of capitalism the rate of profit on concrete productive capital is say 5% then for them that ‘something’  is worth £200 million; or maybe something a bit less? A real life example was a Manchestersoftware house that I knew about and the people who worked for it etc. It was making a million a year in profits in the 1980’s with an actual asset value of almost nothing. The building was rented and it maybe had £500,000 of hardware etc. The 1970’s hippies who set it up sold it for £30 million to investors and ‘venture capitalists’ who borrowed most of that money. The difference for Karl between the real capital value of £500,000 and the £30 million ‘market value’ would be, ‘fictitious capital’. Or in other words the ‘market value’ of the capital of that ‘business’ was fictitiously ‘inflated’ above its actual value. This problem goes onto to steroids when money can be rented through QE for free by finance capitalists. You can call it ‘asset’ price/share price inflation and bubbles as the ‘bourgeois’ economists do or that an increasing proportion of the ‘market value’ or price of shares and stock etc is ‘fictitious’. You can sort of arrive at the same end position by just looking at it from a different direction.      These ‘bourgeois’ economists tell us that these CEO’s are borrowing money from QE to buy up shares to raise its price. It reminds me of Emile Zola’s book ‘Money’. The capitalist class are being duped themselves into thinking that their increasing fictitious market value of thier capital is ‘profit’ rather than what it is, hot air.I mean who cares about 1% dividends and and 'real' surplus value  if the fictitious value of your stock has miraculously gone up by 5% ?  Karl’s general view was that if you could borrow money at 1% and use it to buy a replicated factory of another successful going concern operating at 5%; then capitalism would nicely equilibrate and balance itself etc. I think he failed in some respect to appreciate the massive concentrations of capital required for advanced production. Thus if you are going to go into making aeroplanes or whatever, you are going to have to go in big and if there are three players and you intend to be a number four you are talking about over production and supply and a nasty dog eat dog high risk economic fight to the death. Which is a bit different to incrementally and gradually moving into a lucrative market for blue suede shoes or whatever.

    #108863
    alanjjohnstone
    Keymaster

    No idea if it is accurate but it has a lot of nice graphs http://www.counterpunch.org/2015/01/23/money-for-stocks-zilch-for-the-economy/

    #108864
    robbo203
    Participant

    This might be of interest to some – "Can banks individually create money out of nothing? — The theories and the empirical evidence" http://www.sciencedirect.com/science/article/pii/S1057521914001070 Thoughts?

    #108865
    DJP
    Participant
    robbo203 wrote:
    This might be of interest to some – "Can banks individually create money out of nothing? — The theories and the empirical evidence" http://www.sciencedirect.com/science/article/pii/S1057521914001070 Thoughts?

    Well if that where the case the question still remains, why then do banks go bust and why is there an interbank market (surely it's cheaper to magic up your own money than to borrow others).The trouble with this kind of analysis is that it uses "money" in the broadest sense and in so looses the distinction between assetts and liabilities…

    #108866
    alanjjohnstone
    Keymaster

    I read this comment 

    Quote:
    If I write up and sign a negotiable IOU and give it to, then I too have created negotiable debt out of nothing. When banks do that, we call that negotiable bank debt "money".But there are some forms of money that can be used to discharge debts, but are not themselves debts for anything else. They are accepted in exchange for goods and services, and for the discharge of debt, merely out of some combination of social convention and legal requirement.The fact that I can manufacture a personal debt out of thin air does not mean that I possess the power to manufacture the means of discharging that personal debt out of thin air. And the same is true of commercial banks as well. They can create an account for you and credit it with any given dollar amount. But that balance in that account represents a debt of the bank that you can collect on any time you want by demanding the form of money that is issued by the central bank. And the commercial bank cannot manufacture that form of money.
    #108867
    DJP
    Participant
    alanjjohnstone wrote:
    I read this comment 

    Do you have a link of where the comment is from?

    #108868
    alanjjohnstone
    Keymaster

    It was a comment placed on a blog that featured this reporthttp://mikenormaneconomics.blogspot.com/2014/12/richard-werner-can-banks-individually.htmlI think it is evidence if the bank create money theory is correct, it is just a glorified "pyramid" or "Ponsi" scheme in the sense that could pay the IOU by writing another…and pay the second IOU by writing another…and again and again…until eventually i am forced to legally redeem one of the IOUs and have to default…and it all collapses…The only debt free money is new wealth created by labour…But i really only guessing since never trained in economics much less banking theoryThe Daily Kos also reported the report explaining more simply the actual experiment http://www.dailykos.com/story/2015/01/13/1357390/-Creating-money-out-of-thin-air

    #108869

    I have my doubts about the efficiacy of the study: one, it's not necessarily an empirical question.  I was once doing the party's monthly accounts, and found I was out by 40p.  I was about to just write this small discrepencey off, but decided to give it another check.  It turned out two lines were out by substantial sums that got me to within 40p of the correct sum.  Even if at the accounting level the banks don't directly credit and debit from different bits of their ledger (immediately) ultimately, they must produce balanced accounts.  So you can't point to one deposit and say 'it became that loan'.Indeed, the paper says what we have always expressely said:

    Quote:
    Instead we find that the bank treats customer deposits as a loan to the bank, recorded under rubric ‘claims by customers’, who in turn receive as record of their loans to the bank (called ‘deposits’) what is known as their ‘account statement’
    #108870
    ALB
    Keymaster

    I think it might be clearer if "quantitative easing" was called by its other name of "asset purchase programme" as that brings out more clearly what it is: the purchase of assets (mainly government bonds) from (mainly) banks  by the Central Bank as a way of converting a part of banks' assets into a form that they can more easily spent. Whether they actually do spend any more than they otherwise would is of course another matter.

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