The Mosler challenge to 55 economists

In the Financial Times a few days ago, 55 economists criticised the potentially new leader of the UK Labour Party Jeremy Corbyn (results due in a week) for his proposals regarding People’s Quantitative Easing. The idea is that a yet to be set up National Investment Bank sells bonds to the central bank, the Bank of England, and uses these funds to pay for much needed infrastructure investment in the UK.

That is what the economists, led by Professor Tony Yates from Birmingham University had to say:

Peoples’s QE would be a highly damaging threat to fiscal credibility, and unnecessary, since at this time of very low interest rates and tolerable debt/GDP public investment — in many areas much needed — can be financed conventionally.

Everything can always be financed conventionally through more government borrowing, but the Labour party lost the election, it is thought, because more deficits leading to higher debt were seen by the electorate as too risky and hence voted for the Tory Party, which promised more austerity. For the second time in a row, after 2010.

Now,  PQE will actually allow the UK government to finance expenditure for free. The National Investment Bank would have to pay interest on the bonds to the Bank of England, but both are government agencies, and therefore the financing of any investment would be free. This radical idea is part of the appeal of Corbyn, and will contribute to his win as Labour leader, if he actually does win. It also neatly provides a method of not increasing the deficit, or government debt.

Still, the economists believe it would threaten the “fiscal credibility” of the UK to finance things for free. They do not define fiscal credibility, but I would interpret it as the ability to raise taxes and spend money in a credible way. I would think it depends on the size of PQE, compared to the rest of the economy, whether there is a reputational risk, as a tiny £10bn PQE per year programme in a huge £1,800bn  GDP economy as the UK would hugely limit any reputational risk. The risk would in fact be non-existent. But £10bn would enough to finance around 80 hospitals, or more than 50,000 new homes for social housing. So tiny risk, huge reward.

Now the challenge:

Below you find a picture of a US supercar, currently on sale in the UK for just under £100,000. It is a 2010 model of the Mosler MT900S. (Further details here)


I would like to offer it to the 55 economists. There are three financing options:

  1. You can have the car for free. This is PQEE, People’s Quantitative Easing for Economists.
  2. You can pay for the car in instalments. These are £3,000 per year. Forever. So your kids, grandchildren, and great-grandchildren will need to pay. Long after the car will have stopped working. The payments never stop, so over 100 years you or your heirs will have paid £300,000 for the car. But payments continue. Your partner and bank manager might warn you against that option as you have enough debt already.
  3. It will be financed like the last Labour government paid for the hospitals it built through the Private Finance Initiative (PFI). For the next 30 years you will pay 12,000 per year for the car. You will have a maintenance contract for the car, and it means that over 30 years you will pay £360,000. Then the car is yours.

If the economists followed the advice they give the Labour candidate, they would of course reject the offer of a free £100,000 car. The PQEE option would clearly damage their professional reputation They would advocate free money! So that is what they are teaching at university these days, that a potential risk to reputation should always come first, rather than the goods and services which meet the population’s needs at the lowest possible price. It seems.

The economists would prefer the second option, being indebted. That is in fact what happens if a government borrows. It will start paying interest on its debt for ever and ever. Government debt is never repaid (apart from tiny amounts when times are good) and interest will continue to accrue and need to be paid forever. By the heirs of the people who took out the debt.

The third option I have included because another Labour candidate for leadership, Yvette Cooper (husband of former Labour Shadow chancellor Ed Balls) keeps going on about People’s Quantitative Easing being “the private finance initiative on steroids”. I think the PFI financed projects are examples of the great financial scandals of the last 20 years in Britain, where the unscrupulous financial service industry has ripped off unsophisticated clients. In this case Ed Balls, who worked in the UK Treasury at the time of PFI. Yvette Cooper is closely associated with that disaster, which undoubtedly was due to other economists recommending it as a way forward then. If I were her, I would not mention PFI at all, as it just shows that Labour was diddled by the finance sector.

Now, unfortunately the offer of the Mosler car is only hypothetical, should the economists, despite their recommendation what Labour should do, do a U-turn themselves and take stuff for free.

In reality, of course, quite a few, if not all economists, would have chosen the free car,  and dealt with the potential reputational damage later. Or perhaps they would have said that the risk of reputational damage through PQE is quite small, if the PQE amount is quite small. and we should therefore go ahead with a trial version of small PQE.

I would be interested in their response.

Now, if they do not like Mosler’s car, or cannot afford it, they could always read his stuff on economics. I would start with that: “Seven deadly innocent frauds in economic policy“.
That is really free, a free download.


6 thoughts on “The Mosler challenge to 55 economists

  1. My word, this is possibly the stupidest and most ill-informed thing I have ever heard.

    Of course we would all love free stuff, but “financing expenditure for free” is the stuff of make believe. In your Mosler parable you’ve made an elementary mistake. You are assuming that the currency you print to buy the free stuff is of fixed value. So when you print more of it there is more “wealth” to buy goodies with.

    Of course, in real life this is not the case. Increasing the supply of something – especially a fiat currency – devalues it. So all this printed money does nothing more than devalue the currency, and spike inflation.

    This is not exactly a new idea. Central Banks have tried this money printing thing before – though without trying to couch it in the language of PQE. PQE has no relation to conventional QE, specifically because QE is an asset swap (and doesn’t have an effect on base money supply) and PQE, when it comes down to it is monetary financing of government.

    Richard Murphy tries to be clever and suggest that bonds are issued by a NIB and then cancelled (which is illegal under EU law) but the effect is the same. Printing money.

    So what was the result of the equivalent of PQE every time it was tried in the past? Massive currency devaluation and hyperinflation. Every time.

    Think about it. If it really was this easy why isn’t it done all the time? Why don’t we all have Moslers, paid for by the government. Government spending could be near limitless, with no debt. Why would we even need to work, as the government could simply fund everything? This is the logical extension, and is simply absurd.


    • “So what was the result of the equivalent of PQE every time it was tried in the past? Massive currency devaluation and hyperinflation. Every time.”

      I was quite specific in my proposal. If you really think that £10bn a year paid for much needed investments (not goodies – I did not say everyone will get a Mosler), will lead to massive currency devaluation and hyperinflation, you are wrong.

      Also, if you look at Japan, where now 60% of GDP outstanding is money injected through quantitative easing into the economy (my example in my post above 0.5% per year) you are wrong. There is no inflation in Japan. They would love to have some.

      Or how do you think China can afford to build whole cities which stand empty, or high-speed railway lines which hardly anybody uses. Do they have hyperinflation or currency devalutation?

      But do not let reality get in the way of your belief system.


      • Doh!

        “will lead to massive currency devaluation and hyperinflation, you are wrong.”

        Have you got any evidence for this? Other than Richard Murphy style assertion.

        Fortunately I do have some evidence for you.

        Thanks to the ECB, we know that M3 money supply can be one of the big drivers of inflation:

        Your ignorance seems to stem from a complete lack of understanding of how QE and PQE work.

        Regular QE doesn’t directly increase the money supply. It’s an asset swap. Lower interest rates thanks to the effect of QE might increase the money supply, but the injection of X amount of QE does not directly correlate to an equal increase in the money supply. You can see this in the data should you bother to look. if it were true you would see the money supply jump on every QE tranche. I’ll give you a clue – it doesn’t.

        You might want to read this to help you as well:

        PQE however is a direct cash injection into the base M0 money supply. You say 10bn won’t have an effect – but M0 in the UK is only 70bn. You are advocating a 15% increase (still less than the 70%) increase Richard Murphy is. We also know that M0 gets re-hypothecated up through the financial system to M3/broad money (which stands around 2350bn). The ratio at the moment is around 32 (simplifying). So the increase of 10bn M0 is likely to lead to a 320bn increase in M3. Or roughly 20% of GDP. Which is a big number.

        And of course you are arguing for 10bn PER YEAR! Murphy at 50bn PER YEAR!

        Now, not all hyperinflations and currency devaluations are the same, but looking through history we can see every time the money supply has dramatically increased through a direct monetisation of debt (printing money) we get a high or hyperinflation situation, with currency devaluation to boot.

        Argentina is busy doing this at the moment, with M0 doubling every 2 years. The result? The official fx spot has gone from 4 to the USD to 9.35, but the real rate is closer to 14. In 4 years. Inflation data is now controlled by the government, who claim it is 15% or so, but again the real CPI is probably closer to 25%. Not hyperinflation yet but not miles off.

        The Weimar republic increase M0 by approx. 300% over the course

        “Also, if you look at Japan”

        Where they practice regular QE, not PQE. Which doesn’t massively affect the money supply, as I say.

        “Or how do you think China can afford to build whole cities which stand empty”

        It’s regular debt and trade financed. No QE involved at all. They aren’t printing money in the slightest – as they have been running a managed FX peg to the USD for years. Which means in effect they are removing CNY from the system and building FX reserves to keep the currency from strengthening.

        “But do not let reality get in the way of your belief system.”

        You might want to revisit that statement.

        Why don’t you answer the simplest of questions:

        If printing money has no negative effects, why doesn’t the government already do it, and can you show me a single historical example where this has worked?


      • Look, if money supply figures are so important, why do we not have the Fed publishing the M3 money supply anymore? Because it is obviously not important. But even if we look at the real data, here from the US, we see a contraction of the money supply despite QE.

        So you are quite correct that regular QE does not increase the money supply.

        Now, PQE will instead of swapping money for bonds (as with QE) swap money for assets which do not yet exist, but will still need to be build. (roads, hospitals, schools, etc) That is not more inflationary than using government bonds to build the infrastructure. It just means cutting out the middle-man, who would want some interest return on the money lent.

        The definite post why PQE is not more inflationary than government bonds. Because in the end it is capacity constraints which might increase inflation. Might, because it is by no means certain that higher wages and building materials will, in effect have any impact on the Consumer Price index whatsoever. It could just reduce the profits in the building sector.

        Now, private sector borrowing would increase the money supply, though. So we could, as in fact the government does currently, enter into a partnership with the private sector, (PFI) which would borrow on the government’s behalf and build us a road or hospital. That would equally increase the money supply. But it would be a lot more expensive for the government.

        The government needs roads and hospitals, why not go for the cheapest option? And Guernsey is an example where limited money financing has worked. There will always be limits. This PQE is not unlimited, it is within strict boundaries, whatever they will be. You can read more about Guernsey a few posts back about “tax credits and parallel currencies”. It is right towards the beginning of the post.

        Finally, private sector borrowing increases the money supply too. And it increases inflation. We just choose to ignore the asset price inflation which it brings with it. So retail price inflation gets controlled, but asset prices (houses, stock markets) do not enter into the calculation. If they were, you would notice the increase in inflation straight away.

        20% increase of money supply in private sector debt is the same as 20% increase of money supply through issuing money. But we are not talking about that.

        £10bn a year, what I propose, will do exactly nothing to the M3 money supply in Britain, which has been around 2.4 trillion over the last few years. That is a 0.4% increase in the money supply!


    • The financial costs of a National Investment Bank would be the interest rate is has to pay for its bonds. The National Investment Bank can only start operating if it gets a grant from the government to pay interest. It will not have any income from the money it provides to build hospitals/roads/social housing. The UK Treasury pays for the grant. (Or, should there not be a grant, the NHS/Highways Agency/relevant local council pays money to the the NIB to pay for hospitals/road/social housing. But that money comes from the government, too).

      That bonds are bought by the Bank of England, which will have interest income. Any interest income the Bank of England has it will send back to the UK Treasury.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s