An Assessment of Quantitative Easing for People (QEP)

What is it all about?  QEP is about breaking a taboo, which is direct central-bank financing of government expenditure, also known as monetary financing, in particular helicopter money. Technically, it is about creation of reserves on central-bank government account, credited debt-free, and carried out in parallel and in addition to the banks' ongoing deposit creation. The government is supposed to use the additional money for investment in infrastructure, or transfer payments, or a citizens' dividend.

As conventional Quantitative Easing is ineffective in real economic terms and, on top of this, comes with undesired financial side effects, helicopter money is an alternative instrument of economic policy and would undoubtedly be beneficial to an extent, particularly in countries where there is a high level of idle capacities and a serious lack of effective demand.

Conceptually this means
(a) leaving the split-circuit system of fractional reserve banking and the monetary powers of the banks untouched and

(b) replacing deficit spending on the basis of interest-bearing bank credit with deficit spending on the basis of central bank credit free of interest, without changing the budget and tax policies in place.

Within the present frame of central bank accountancy there is no way of issuing truly debt-free money. Seen like this, helicopter money is not really such a thrilling alternative to conventional sovereign debt under the present conditions of zero or even negative interest due to financial repression.

The dysfunctions related to fractional reserve bankingsuch as the non-safety of bankmoney, the crisis-proneness of banking and finance due to GDP-disproportionate levels of monetary and financial assets and debt, banking privileges and dispro­portionate financial income at the expense of earned incomeare lost from sight.

QEP has been presented as a first step towards sovereign money reform. However,  helicopter money does not contribute to putting an end to bankmoney in favour of full chartalism but aims at conventional Keynesian-style compensatory economic policy, using money creation for purposes of fiscal policy and income policy, thereby avoiding additional government debt or higher taxation including an element of income redistribution. QEP thus continues along the path that has led us to where we are, rather than changing course.

Instrumentalising monetary policy for fiscal and economic policy remains a controversial practice, accompanied by doubts about its effectiveness, side effects and systemic appropriateness.

The present QEP concept says nothing about the justifiable amount of additional money creation, about safeguards aimed at limiting helicopter money or about how QEP and bankmoney would relate to each other.

QEP has problematic functional properties of its own:

Economically, QEP is indeed likely to provide a short-term stimulus for growth and coming closer to the ominous 2% inflation target. In this respect, QEP might be more effective than conventional QE, which feeds the banks and the financial industry, 'stabilises' high debt levels at low interest rates and induces asset inflation.

The desirable effect should however not be over-estimated. Yes, there is a lack of real investment. The question, though, is whether this is due to a lack of effective consumer demand or caused by QE-enabled postponed 'debt deflation' (deleveraging), particularly still-too-high levels of financial-sector debt and still further growing sovereign debt. The more the debt factor applies, the less effective QEP will be, and the more recommendable it will be (anyway) to put the money into infrastructure, education and vocational training rather than a citizens' dividend.

Similarly, the causes of high youth unemployment are regulatory and corporatist rigidities in labour markets and welfare systems, structural mismatches, as well as illicit employment. Monetary policy cannot contribute to solving that type of problem.

QEP may provide short-term budgetary relief, but if it was really effective in triggering higher growth rates, it would also contribute to higher prices and, more importantly in this case, higher interest rates. These would then thwart governments' room for manoeuver due to very high debt levels to be maintained at much higher interest rates. The attainable growth rates are in any event too low to solve the sovereign debt problem. Full sovereign money reform, by contrast, provides a smooth answer to sovereign debt.

Deficit spending has never been implemented as conceived of, that is, as a counter-cyclical stimulus only, with debt reduction in boom times, but has become an all-seasons habit of welfare and warfare politics, depending on the country. Why would this be any different with QEP from now on?

If the monetary reform movement would succumb to certain theories of Postkeynesian descent that declare control over the stock of money, quantities of money and debt levels to be irrelevant, in particular the levels of sovereign debt, monetary reform would be robbing itself paradigmatically of a major pillar on which it rests, making itself appear to be redundant.

Technically, when the government spends the QEP-money, firms and people get a deposit entry, while the banking sector obtains the reserves for free. QEP is thus not about entering into monetary reform, but just about monetary financing of government expenditure by direct transfer of newly created central-bank reserves to the government, whence the money flows to the banks rather than 'the people'.

The more extensive QEP would be, the less the banks would still have to refinance at a cost. QEP is thus a free lunch for the banks too, rendering them even more independent from the central bank and government than they already are.

If one day there is again talk about too much money creation and undesirable rates of inflation or asset inflation, the banks and the government would them on each other. As a consequence, QEP might become stuck in a situation of still out-of-control and, in addition, uncoordinated parallel money creation, eventually losing out to bankmoney as occurred twice in the history of the US (with colonial scrip in the 18th and the greenbacks in the 19th century).

Legally, implementation of QEP requires a change of Art. 123 (1) TFEU, or US Code Title 12, Chapter 3, Subchapter IX, § 355. These laws prohibit direct government funding by the central bank. Achieving an amendment of Art. 123 (1) TFEU is unlikely in the short run. Full sovereign money reform, by contrast, does not necessarily involve changing that law, however desirable certain specifications of Art. 123 (1) TFEU actually are.

Alternatively, experts and the public have to be convinced that QEP is all about useful and legal seigniorage. This can clearly be maintained with regard to a sovereign money system with full control of the quantity of money – which, however, does not apply to QEP as long as there are no clear rules and targets limiting the volume of QEP and relating the volume of government-originated money to the volume of bank-originated money (which will not be feasible within the present bankmoney regime).

If the QEP means were credited as genuine seigniorage (non-interest-bearing and non-redeemable), the central bank would perpetually run on loss carryforwards and negative equity. This seems to be possible in terms of central-bank accountancy and has actually been practiced in a few cases (Israel, Czechia). However, this creates a double standard, since negative equity is largely ruled out for everybody else, thus again triggering juridical controversy.

A similarly unsettled situation arises if the money is credited as a loan, that is, against the collateral of perpetual non interest-bearing sovereign bonds, sort of 'eternal credit'.

It could nevertheless be useful to engage in such a public debate, in that this would raise awareness of the money system, the relation between the central bank and the banks, and the boundaries between monetary and fiscal/budgetary policies.  

Politically, at a point in time when Positive Money is set to start a eurozone QEP campaign and the Swiss monetary reform movement has been successful in launching a referendum on full sovereign money reform, an unpleasant either-or situation is threatening to build up, because QEP is presented by its initiators as a cut-down variant of monetary reform and is likely to be perceived in that way by the public. QEP will thus be a competing campaign to sovereign money reform.

Could it credibly be communicated that both paths could be pursued at the same time? Rather, there is the risk that a QEP campaign will relativise and weaken the political standing of campaigns for monetary reform such as the Swiss referendum and the reform process in Iceland. Why bother about the dysfunctional monetary powers of the banking industry when debt-free deficit spending is considered a seemingly close alternative?

QEP can expect to gain support from the Keynesian hemisphere of economics, the political left, and a range of politicians of various stripes who would be happy to gain some relief from budgetary restrictions. Consequently, if not embedded in a concise frame of monetary, fiscal and economic policy perspectives, QEP runs the risk of being suspected of unsound budgetary policy of old, especially if in connection, right now, with People's QE , the monetary financing program sponsored by the new Labour leader J. Corbyn. This might alienate significant factions in the political middle and to the moderate right.

Rather than representing a halfway house on the road to monetary reform, QEP is likely to detract support from it. As QEP focuses on short-term business-cycle policy, it diverts attention away from the dysfunctional and unjust banking system and signals to big public spenders not to worry about the ratio of government expenditure, the level of sovereign debt, the budget and taxes. As far as QEP is misunderstood as a cut-down variant of sovereign money reform, this is bound to cast doubt on the monetary and financial soundness of full monetary reform too.

Reconciling QEP and monetary reform?

Whatever one's stance, approaches to monetary financing such as overt money finance, helicopter money, QEP, or new greenbacks in the US are ambivalent in terms of monetary reform. To gain coherence and be acceptable to a broader political spectrum than just the political left, the QEP campaign would need to be outspoken on a number of things, for example:
- that QEP, as an alternative to conventional QE, is not an alternative to reforming the monetary system but a short-term monetary-policy measure aimed at supporting economic recovery under the present unresolved crisis conditions;
- that monetary reform and QEP are pursued independently of each other, though not necessarily excluding each other;
- that QEP may involve large, though limited quantities of money according to criteria still to be specified; 
- that QEP is meant to be conducted under the responsibility of the ECB, or any national central bank outside the euro, and that Cabinets and Parliaments have no say in whether, when and how big a QEP program will be run, so that the boundaries between monetary and fiscal policy will not be blurred.

As an additional element, the QEP campaign, as it aims to introduce government spending as a way of issuing sovereign central-bank money, should also call for sovereign-money accounts available to firms and households in parallel to bankmoney accounts. This would then really be a link to monetary reform. Cf. on this website > Separate Accounts and Safe Deposits.


Download the paper
> as a PDF