The story so farIn 2010, the then new UK Coalition Government controversially deemed it necessary to seek to reduce the deficit in the face of severe recession with their policy of austerity.
Central banks responded to the environment of imploding growth that followed by driving interest rates to nil by adopting a zero interest rate policy (ZIRP). When zero interest rates appeared to be insufficient to kick start their respective economies, and in particular the ability of the commercial banks to lend to customers, they introduced a new and novel policy termed quantitative easing (QE). In brief, this involved the central banks creating fiat money (currency that is declared by a government to be legal tender but that is not backed by a physical commodity) to buy in government debt. This drove down interest rates right along the yield curve, but just as importantly, it created an environment in which the banks could rebuild their battered balance sheets.
QE has clearly been a force for good in getting economic activity back on track, but there have also been unfortunate and mostly unintended consequences viewed by some politicians as pernicious. The debt burden in Western economies is higher now than before the crisis. Speculative activity is evident in many asset classes. Savers have lost out to asset owners and speculators. Institutions such as pension funds, which rely on yields from government bonds, are struggling.
Out of optionsArguably, the previously untried policy of QE would not have been necessary had the option of increased government borrowing and spending been available as the downturn unfolded.
And unfortunately, the legacy after six years of anaemic and patchy recovery is that interest rates remain close to zero, government debts are at all-time highs and central bankers still own all of the debt bought through QE. In the case of the UK, the Bank of England is left with some £375bn of it, which equates to roughly half a years’ worth of government spending.
When Jeremy Corbyn was elected leader of the Labour Party, he was initially much ridiculed for his suggestion of ‘People’s QE’. This was a proposed policy of printing money for the Government to invest directly in ‘socially beneficial’ causes. For example, instead of buying financial assets from commercial banks, People’s QE would see the money used to fund infrastructure, housing and green energy. The theory is that these investments would be of direct value to the public, lead to higher productivity, which would in turn lead to improved wages, which would then boost the economy.
A compelling optionIt would not involve buying back existing Government debt, and so might have fewer of the perceived pernicious consequences – such as inflating already expensive asset prices than current QE. The debate would then be a political one about which project or projects would be deemed most deserving. On reflection, his suggestions have been taken more seriously and, should we be faced with another economic downturn, People’s QE might become a compelling option.
The original version of this article was published in the March 2016 print edition of the Review.