Not Quantitative Easing – Better

Chris Cook argues for  stimulation of the UK  economy by issuance of money by government to find productive projects directly – bypassing the banks.  The Irish government and electorate has ceded this power to the ECB under Maastricht, unfortunately.  But the argument builds that the Irish government should join with fellow PIIGS to lobby the ECB to make a trillion euro distribution on a per capita basis  to all EMU governments, as Marshall Auerbach suggests.

…In the 1930s, John Maynard Keynes’ friendly adversary, Sir Ralph Hawtrey, insisted that deficit finance would not normally be needed as a counter-cyclical weapon so long as the potentially unstable money supply was kept under firm control. However, in the event of poor control followed by an unusually severe depression like today, Hawtrey diagnosed what he called a “credit deadlock”, in which a collapse of confidence made banks fear to lend to the private sector and the private sector fear to borrow from the banks.

In such conditions he agreed that fiscal policy should come to the rescue to break the deadlock. But he also insisted that its effectiveness depended crucially on how the deficits were financed. If the private sector is frantically de-leveraging, as today, fiscal deficits lose much of their effectiveness if paid for by increased private saving.

Therefore what is needed is for government to expand the money supply (hence net monetary expenditures) by itself spending an adequate amount of newly issued money directly into circulation rather than borrowing from the existing (and declining) circulation. This borrowing from the private sector adds unnecessarily to the national debt.

Quantitative easing will not do the trick if the Bank of England’s net purchase of debt from the private sector largely ends up as increased bank reserves. That is why the money supply in circulation (this excludes bank reserves) has registered sluggish, sometimes negative, growth through our deep recession. And that is why recovery has been equally sluggish despite a soaring public debt...(link to article)