In 2008 the world changed. That year the neoliberal financial system promoted by Ronald Reagan and Margaret Thatcher, which the IMF and World Bank required so many countries to adhere to, came close to meltdown, as banks in many countries (Australia and Canada, notably, apart) either failed, or came very close to collapse.
The conclusion drawn by neoliberal politicians was that the financial markets – if not all the banks – that had failed must be saved from their own folly. Much of this folly had arisen from lending far too much money to over-priced property markets. To save them governments used a technique called quantitative easing (QE), which most had never tried before.
There are two ways of looking at QE. The easy version is to explain what actually happened.
In 2008 the governments of major economies, like the US, UK, EU states, Japan, Switzerland and others, told their central banks – the Federal Reserve, Bank of England, European Central Bank, and so on – to create money on their behalf. They then spent this money on bailing out their economies, which were at risk of falling into deep recession as a result of bank failures. They then did exactly the same thing a decade or so later to address the problems caused by Covid-19. What they had discovered was something that most politicians deny exist: the so-called ‘magic money tree’.
What they had discovered was something that most politicians deny exist: the so-called ‘magic money tree’
There is actually nothing magical about governments creating new money. They do so every time they pay for anything. It’s just that most of the time they cancel the impact of their doing so, by either getting that money back in tax, or by appearing to borrow it back from the financial markets where it has ended up. When doing QE, the only difference was leaving the extra money that they had created in the economy. They did not tax or borrow it back. That’s all that really happened following 2008 and again in 2020 and 2021.
Obfuscation
But governments making this discovery caused a problem for neoliberals. It proved three things: that governments could do this any time they liked; that governments were not dependent on taxes to spend; and that governments were not in hock to the financial markets for borrowed funds.
They could simply create money rather than borrow it. The whole mythology around government funding was shattered. The neoliberals knew that would not do.
As a result they put in place a massive sham that maintained the myth of market power in government finance; this was what came to be called QE. Using QE, governments did three things. Firstly, they spent, as noted already. Secondly, they sold government bonds to supposedly cover the cost of the spending they had made. These are best thought of as long-term, fixed-interest savings accounts that can, however, be bought and sold on stock markets. That meant money flowed back to the government. And thirdly, they instructed their central banks to buy bonds of near similar value to those that governments had just issued. The result was that the money that the new bonds had been issued for now flowed back to the financial markets once again.
There was absolutely no reason to do it this way. As is apparent from what I note above, the second and third stages I describe effectively cancel each other out. However, four things happened as a result.
The first was that banks were directly advantaged by the profit made on buying and selling unnecessary bonds.
The second was that the governments involved could pretend that the bonds issued by them were still in existence, even if they had effectively been bought back by government-controlled central banks. As a consequence they have dramatically overstated the scale of government debt since 2008; in the UK, potentially by up to £1 trillion. This in turn led to the creation of entirely false narratives about the need to repay this debt.
Third, it was claimed that interest was still payable upon these bonds, when in practice those payments went straight back to the government paying it. The supposed cost did, however, support the austerity narrative.
Fourth, and most importantly, because of the way in which government money has to move from a central bank that creates it into the real economy, that money has to be routed through commercial banks. In other words, when the government spent money in 2009 to support those who were unemployed, or in 2020 to provide support for those impacted by Covid, they did so using money that their own central banks created which was then paid to a commercial bank who forwarded it on to the planned recipient.
To do this, governments created a special type of bank deposit account only available at their central bank to the commercial banks of a country. As an example, in the UK commercial banks ended up with about £900 billion of these deposits with the Bank of England, a sum approximately equal to the amount of government debt subject to QE arrangements.
Backhanded
These balances represented money created by the government, at its own choice, and the commercial banks had absolutely no real involvement in the process of creating it. But in spite of this, governments around the world then decided that they had to pay out commercial rates of interest on these deposits to the commercial banks which had nominally deposited them.
Taking the UK as an example, again, in the last year more than £40 billion was spent on paying interest on accounts of this type to commercial banks.1 This was equivalent to about 40 per cent of the total state pensions budget, even though the banks had literally done nothing to earn this money and there is no legal requirement to pay it. Banks won at everyone else’s cost, in other words.
It’s fairly easy to see how these arrangements have been abused by neoliberal politicians , central bankers, commercial, bankers, and others to support their narratives and fill their pockets. In particular, the debt narrative also suits their purposes. Politicians have claimed that the payment of interest requires that they impose austerity, so that government costs can be contained.
It’s widely known that austerity measures have hit the poor hardest in most societies. QE has, therefore, assisted a reallocation of resources in many Western economies from bottom to the top. Meanwhile, governments largely failed to use the opportunity QE created: keeping interest rates low to invest in the green transition, public services, and so on.
Then, in 2020 everything changed. Covid required government expenditure on an unprecedented scale. As a result, governments shook their magic money trees again. Using the exact same QE process as they had after 2008, the UK government did, for example, almost exactly double the total amount of new money that it had created and injected into the economy using the previous QE process.
This time, though, a further problem arose: Covid was followed by inflation. It was caused by market disruption as trade reopened following lockdowns, and by market speculation in response to the onset of war in Ukraine, but it was blamed on money created during the Covid crisis, which was disguised by the QE process, again. Neoliberal government responses have been draconian. Although they should have simply let inflation work its way through the economy, permitting wage and benefit rises to protect people from its impact, governments and central bankers forced up interest rates instead.
This has worsened the cost of living crisis, most especially for those with mortgages or who pay rents – closely linked to mortgage costs in economies where most landlords are private. Meanwhile it has encouraged capital flight from the Global South, triggering debt crises in some of the world’s poorest countries.
Old dogs
But this was not enough for central bankers, who also found a new trick to use: reversing QE. This simply means that they began to sell the bonds they bought using QE back to financial markets. They had no reason to do this, barring one thing, which was that this supports their policy of high interest rates, which also happens to keep the wealthy very happy.2 The sting in the tale of QE is, then, that it now legitimizes poverty and destitution, whilst rewarding the banks and the wealthy handsomely even though they have done nothing to deserve it.3 And so, the misery will go on.
In summary, QE bailed out banks, and handed them additional income in doing so. It also increased the money supply in the economy in a way that increased the wealth of some in society. Now it is being used to reinforce a high interest policy, exacerbating the cost-of-living crisis. Throughout, it was structured to reinforce the austerity narrative.
None of this need have been the case. As it was used though, QE has been a disaster, even if government spending that it disguised was not. QE was never necessary. In the form that it was undertaken, it should never happen again.
- Richard Murphy, ‘If only the government preferred people to bankers we’d all be more than £30 billion better off’, Funding the Future, July 2023, a.nin.tl/30bn
- Richard Murphy, ‘Glossary’, Funding the Future, a.nin.tl/qe ; a.nin.tl/qt ;
- Richard Murphy, ‘The history and significance of QE in the UK’, Funding the Future, November 2020, a.nin.tl/QEUK
