What is QE for the People?
Quantitative Easing for the People, also known as Strategic quantitative easing, QE4People, and QE4P, is receiving more attention than ever. Its basic tenets are:
- The way to reverse the economic malaise that began in 2008 is to get more money into the economy, where it will increase aggregate demand and growth.
- The mechanism used in Europe, the U.S., and Japan has been quantitative easing by central banks.
- Quantitative easing has failed because the money created has stayed in the financial system and not reached the groups for which it was intended.
- If central bank-created money can be delivered directly to people and groups who will spend it, the goals of quantitative easing will be achieved.
The most discussed QE4P mechanism is to have governments create permanent zero-interest bonds, which are bought by central banks with newly created electronic money. The money is then spent by the governments or given as grants, directly stimulating the economy instead of sitting as idle bank reserves.
Why is it attractive?
The idea is clever and quite seductive, and therein lies its danger and the reason for this article. It putatively fixes the failed mechanism of conventional QE. The bonds never have to be repaid, so the asset of new money functionally has no corresponding liability. Citizens get the tantalizing prospect of money appearing in their bank accounts, as do target groups like green energy and social welfare organizations. If economic growth can be stimulated by adding large quantities of money to the working economy, QE For The People seems to be the perfect solution.
The idea has been around for a long time. When first proposed it was mostly dismissed it as fringe populism. However, over the last few years momentum has grown and it is now under serious consideration in higher circles. It is the next logical step to get money into the economy after the failure of conventional QE to do so. Current advocates include Adair Turner, former head of Britain's Financial Services Authority, Jeremy Corbyn, head of Britain's Labour Party, and influential financial writer Ambrose Evans-Pritchard. In the Eurozone there is former IMF chief economist Olivier Blanchard, and even Mario Draghi doesn't rule it out. In the U.S. it has been associated with Milton Friedman and John Maynard Keynes. Its loudest cheerleader is Paul Krugman, and who can forget Ben Bernanke's infamous "helicopter money?" There are Facebook pages and blogs. The populist element is intoxicating:
QE4P and the value of money
QE for People has serious flaws which are ignored or quickly dismissed by its advocates. There is no way to get around the fact that it is currency debasement. Sound money is a cornerstone of economic health, debasement is its opposite. Fundamentally it is no different than coin clipping by Roman emperors, Henry VIII's 90% debasement of the British pound, or Nixon closing the gold window in 1971. Confidence in the soundness of money is gone, and wealth is taken from one group and given to others more favored. Janet Yellen is not Henry VIII and Mario Draghi is not the Emperor Nero, but the damage is the same: Lost trust in the value of coins then, and lost trust in the value of fiat money now.
QE4P as temptation
Perhaps a small episode of debasement is acceptable if it can boost growth. That brings us to the second fatal flaw. Once a government crosses into "making" money to pay its bills, more is almost impossible to resist. It's too easy, much easier than raising taxes or borrowing, and the consequences are slow enough developing that the rewards are way out in front of the damage. History has countless examples of this getting out of hand with disastrous consequences (see here and here and here). Whether history repeats or rhymes, the lesson is the same.
QE4P and macroeconomics
Perhaps our central bank and government are enlightened enough, or our society has advanced enough, that we will be able to control the impulse and not let money printing get out of control. Then we get to a third flaw: The theory on which all of this is based is just that - a theory. The experimental test has been going on for seven years, and the realization is growing that it hasn't worked. The theory's adherents, Krugman and the others, say that's because there wasn't enough money applied to the problem or the money didn't go where it was supposed to. After almost $4 trillion and seven years of "emergency" zero interest rates, a reasonable man might think it's time to look for an answer elsewhere, not double down (again). If that's not long enough, we can refer to Japan's 20-year failed experiment.
QE4P and the future
QE4P is moving from the fringe into main economic discourse. Ordinary people and groups likely to benefit from it are enticed by the prospect of money magically appearing in their bank accounts. Economic policy makers like it because it appears to solve some intractable problems and is consistent with the increasingly shaky theories on which they have based their careers. Up to this point, monetary authorities have resisted, perhaps recognizing that the serious long-term damage would far outweigh any short term benefit. However, our central bankers have dedicated many years and trillions of dollars towards QE objectives and QE4P is just a step further in that direction. We may be one economic crisis away from active QE4P. It is up each of us to be alert to this possibility and resist it wherever it appears. Our national economic well-being may depend on it.
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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.