UK Opposition Leader Calls For “People’s QE” – It’s Venezuela With Tea & Cakes

Saturday, August 19, 2017
By Paul Martin

by Daniel Lacalle via The Mises Institute,
Aug 19, 2017

It is sad to see that, facing the evidence of the failure of demand-side policies and money printing, many commentators propose some of the most outdated and failed policies in modern economic history. In the UK, Mr. Jeremy Corbyn, the new leader of the Labour Party, believes that the government spends too little. With a current 44.4% of GDP public spending, saying the government spends “too little” is an insult to taxpayers and efficient public bodies alike.

But Mr. Corbyn wants to penalize the private sector creating the largest transfer of wealth from savers and taxpayers to government ever designed… The People’s QE (quantitative easing).

In Europe, we are already used to the follies of magic solutions from populist parties. Syriza, Podemos, and others always come up with “magic” and allegedly “simple” ideas to solve large and complex economic issues, and always fail when reality kicks in, but there are few that match the monumental nonsense of the wrongly-called “People´s QE”. It is the “Government´s QE”, rather.

Why Is this People’s QE a Bad Idea?
The analysis starts from the right premise. Quantitative Easing, as we know it, does not work, and creates massive imbalances. So what do they propose? Sound money? Erasing perverse incentives of printing money and unjustifiably low rates? No. Doing exactly the same, but passing the massive perverse incentive of currency debasement to politicians who, as we all know, have no perverse incentive whatsoever to overspend (note the irony).

The UK policy of increasing money supply in the past has always been based on two premises to avoid hyperinflation and currency destruction: the independence of the central bank as a central pillar of monetary policy, and the constant sterilization of asset purchases (ie, what it buys is also sold to monitor market real demand). The balance sheet of the Bank of England has remained stable since 2012, coinciding with the highest economic growth period, and is below 25% of GDP.

Corbyn´s People´s QE means that the central bank will lose its independence altogether and become a government agency that prints currency whenever the government wants, but the increase of money supply does not become part of the transmission mechanism that reaches job creators and citizens in the real economy. All the new money is for the government, with the Bank of England forced to buy all the debt issued by a “Public Investment Bank”.

The first problem is evident. The Bank of England would create money to be used indiscriminately for white elephants, a disastrous policy as seen in many EU countries, that only leaves overcapacity and a massive debt hole. By providing the public investment bank with unlimited funding, the risk of irresponsible spending is guaranteed. In a country where citizens are aware of wasteful public infrastructure, this is not a small risk. However, the monetary imbalances created by this policy would generate a massive “crowding-out” effect and incentivise cronyism, as the private sector would suffer the consequences of inflationary and tax pressures as well as unfair competition from government and its crony sectors.

The second problem is that rising public debt, even if “monetized” (hidden in the balance sheet of the investment bank), would still cripple the economy even with perennial QE. Printing money does not reduce the risk of rising imbalances as we are seeing all over the world. And the new bank´s potential losses would be covered with more taxes.

The idea of building lots of bridges and airports all over the place to “create” jobs would be mildly amusing if it hadn’t failed time and time again and forgets the cost of running those infrastructure projects once built, apart from the debt incurred. All paid by the taxpayer, who guarantees the capital of the Public Investment Bank.

The third problem is that inflation created by these projects is paid by the usual suspects, the private sector, and citizens, who do not benefit from this spending as the laws of diminishing returns and debt saturation show.

The Socialist idea that governments artificially creating money will not cause inflation — because the supply of money will rise in tandem with supply and demand of goods and services — is simply science fiction. The government does not have a better or more accurate understanding of the needs and demand for goods and services or the productive capacity of the economy. In fact it has all the incentives to overspend and transfer its inefficiencies to everyone else. As such, like any perverse incentive under the so-called “stimulate internal demand” fallacy, the government simply creates larger monetary imbalances to disguise the fiscal deficit created by spending and lending without real economic return: Creating massive inflation, economic stagnation as productivity collapses and impoverishing everyone… except itself.

These policies lead to tax increases, a higher cost of living and, above all, destroying a large part of the British private sector as the government monopolizes the major sectors of the economy and increases taxes for the rest.

The Rest…HERE

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