5 Nov 2011

Quantitative Easing and Debt Elimination

It's funny how everything changes when you look at something from a different angle. It was only yesterday that I came to the conclusion that there is a way out of the European Debt crisis that involves getting the European Central Bank to lend the Greek government the 329 billion euros that they would need to wipe out their government debt. After that, the Greeks would have to pay back the 329 billion euros over (say) 10 years with the interest at 1.25%.

Since yesterday, I've been thinking about how this relates to Quantitative Easing.  In a sense, what I am proposing looks a lot like QE - something that the UK government is very fond of. Via the Bank of England they already injected £200 billion into "the economy" between 2009 and 2010. And they are about to start the printing presses again for a further £75 billion over the next few months.

But there is a huge and very important difference. This is how the Bank of England describes what they will do (from their pamphlet on Quantitative Easing):
The Monetary Policy Committee’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. So the seller has more money in their bank account, while their bank holds a corresponding claim against the Bank of England (known as reserves). The end result is more money out in the wider economy.
In other words, the money goes straight to the financial sector, who can use it however they want. They can move it all out to the Cayman Islands. They can buy Credit Default Swaps. They can buy CDOs. In fact, they can do whatever they like - no strings attached. The Government hopes that some of this money may end up doing something useful, but there are absolutely no controls.

In the form of Quantitative Easing that I propose, the new money can be used for one thing, and one thing only. And that is paying off government debt. If the money is provided to the Greek government, it can be transferred directly to the banks and other lenders who have generously lent the Greek government (although at 17.78% interest, it can hardly be described as generous).  This would do one of two things, depending on whether the banks doing the lending had the money they lent originally, or whether it was created out of thin air by the miracle of fractional reserve banking. If it's the first, then the banks will have some money that they can then lend to others - that's good. In the second case, the money (and the debt) just disappears.

Given that the amount of government debt (close to 10 trillion euros  for the 27 EU countries), getting a large proportion of it to disappear into thin air would be a very very good thing. It would break the stranglehold that the markets and the ratings agencies currently have over democratically elected governments - a stranglehold that allows them to dictate social policy and force massive austerity on blameless populations. Just look at what Italy is going to have to do in the coming months to keep the IMF happy.

So, while I'm firmly opposed to Quantitative Easing as it is currently practised, I am all in favour of Quantitative Easing if it specifically used to pay off debt. The governments who would benefit would still have to pay the money back progressively over time, but the stranglehold will be gone.

Finally, let's make it abundently clear. Lending another 8 billion euros to the Greek government so that they can pay the interest on their debts is going to do nothing at all. The only solution is to lend enough money for the Greeks to pay off all the debt.

It's like trying to help a friend who has borrowed £30,000 from a loan shark who comes round every week and demands £100 in interest and threatens to smash his head in if he doesn't pay (£100 a week in interest is what he would have to pay if the loan sharks was charging the same 17.78% interest rate being applied to the Greeks).  Lending him £100 every week to stop the thugs beating him up will do no good. It will indeed just encourage them to increase the interest to £200 a week. No, you have to lend him the £10,000 and tell him that he can pay back over ten years. That's what we should be doing with the Greeks.

1 comment:

  1. how do we make this happen? are their any policy makers talking about this?