Category Archives: Monetary Policy

Corbynomics meets Piketty, Stiglitz; From Milibandism to “People’s Quantitative Easing”, the new Labour’s flavour (Part 3 of 3)

The Washington consensus, in response to the fiscal problems of Latin America, espoused fiscal austerity and privatisation. The huge deficits of the governments and the protectionist measures leading to inefficient government companies had exacerbated the problem. Inflation was high because of loose monetary policy. In such a situation it was difficult to attain growth as fiscal discipline was completely lacking. But Stiglitz argues that the fiscal austerity, though a good means in itself, may lead to undesirable consequences if the means itself becomes a problem which can happen if the policies are implemented too fast and in seclusion without the necessary safeguards leading to a devastating situation as witnessed by the Latin countries and others. He further argues that one of the serious drawbacks of fiscal austerity is the increase in the interest rates which can in many cases rise to significantly high levels and which in turn can create insurmountable difficulties for new enterprise creation and job numbers. A country falling into recession because of fiscal austerity will see incomes and wages falling and unemployment rising.

IMF induced recessions, by abolishing subsidies for food and fuel, have led not only to food riots but also high levels of urban violence and high unemployment. The British economist John Maynard Keynes, put forward a simple explanation, and a correspondingly simple set of prescriptions: lack of sufficient aggregate demand explained economic downturns; government policies could help stimulate aggregate demand. In cases where monetary policy is ineffective, governments could rely on fiscal policies, either by increasing expenditures or cutting taxes. While it is true that governments whose budgets get out of control with loose monetary policies lead to rampant inflation yet it is equally true that many countries which witnessed a high growth post the devastating World War II were only due to excessive state intervention in economy by way of tremendous government expenditure. Appropriate government interventions in the market can unquestionably lead to economic growth and even much needed equitable growth. Corbyn’s proposed “People’s Quantitative Easing” has strong economic logic.

Debt monetization is a two-step process whereby the government issues debt to finance its spending, and the central bank purchases the debt by printing money. Governments typically have debt, and can either repay this debt with current income, or by issuing new bonds. A government can either issue new bonds to the public directly or to the central bank. If it sells bonds to the central bank, the central bank will create the needed money to purchase the bonds by increasing the monetary base. Another way of looking at it is when a government spends in excess of its tax revenue it must borrow from the public. The public purchases this debt because it pays an attractive interest rate. If the government has a significant amount of debt outstanding, it may choose to purchase its own debt with newly printed currency. The government has thereby replaced its interest-bearing debt with money, and has thus monetised part of its debt. Now the question being raised is whether “People’s Quantitative Easing” is just another term for helicopter money? Helicopter money was first used by Friedman. It involves the central bank creating money, and distributing it directly to the people by some means (certainly not by helicopter!). It is a sure fire way for the central bank to boost demand. It is a money financed fiscal stimulus. Generally the term now means a tax cut of some form. But what makes helicopter money different from a conventional tax cut is that helicopter money is paid for by the central bank by printing money, rather than the government issuing debt. With doubts being raised over the independence of the central bank, Corbyn will certainly not be amused at his flagship economic policy being compared with ‘Helicopter Money’!