China is creating volatility. Oil prices are oscillating wildly, as are stock markets. The financial world is living in fear that despite both these facts, the U.S. Federal Reserve and Bank of England might increase interest rates.
And running through the economy is an undercurrent of fear. As the Observer noted in an editorial that reflected the mainstream view last weekend: "According to some City analysts, the stock markets are pumped with so much cheap credit that a crash is just around the corner. And they worry that when that crash comes, the central banks are all out of moves to prevent the aftershocks from causing a broader collapse."
The reality is that monetary policy has run out of steam; no longer able to provide a stimulus to much of the world when rates can only increase.
At the same time, the influential Federal Reserve Bank of St Louis in the U.S. has said there is little evidence that quantitative easing (Q.E.) as practiced in the U.K., U.S. and EU to the combined tune of several trillion dollars has helped the real economy when its main impact appears to have been to boost asset prices. Q.E. is now part of the problem and cannot, therefore, be the solution.
And at the same time we know that fiscal policy that sucks money out of markets, whether by way of increased borrowing or tax increases to fund investment can't help either: both are themselves potentially deflationary measures before a boost can be delivered.
It is as if the world's economies and its economists have run out of road at the same time. No wonder they sound worried. And at just this moment, along have come the "Corbynomics" endorsed by left-wing British Labour leadership frontrunner Jeremy Corbyn, and People's Quantitative Easing (PQE). I am biased on this issue: I am credited with being the author of both, despite not being officially associated to the Corbyn campaign or Labour party, but PQE is what matters here. Its essence is simple and is based on three propositions.
The first is that austerity does not work. Cutting government spending when everyone else is trying to save, as is happening in many economies including the U.K.'s right now, just reduces GDP and so tax revenues and is in the process akin to shooting the economy in the foot when it needs a leg up. PQE provides a stimulus instead.
Second, the U.K., like many economies, needs significant investment in infrastructure and a body to co-ordinate its delivery. PQE delivers this via a National Investment Bank.
Third, when there is unemployment, under-employment and low productivity and so excess capacity in the economy the physical resources needed to stimulate the economy exist. In that case all that is required is the cash.
And this is the cash that PQE provides. It does this by resorting to something we all know governments can do, but which we have been told must not happen. PQE turns on the money printing presses, electronically of course.
Despite the paranoia about governments printing money, there is nothing unusual about their doing so. Governments have done it many times throughout history: quantitative easing has explicitly embraced the process to the tune of about $5 trillion, worldwide. But there remains an obsession that although money-printing can be used to create liquidity for financial markets (conventional Q.E.) it must not be used to create jobs, infrastructure and boost real income (PQE).
The paranoia is based on three things. The first is a fear of inflation, but that is inappropriate at present, firstly because we actually need it and conventional Q.E. has failed to deliver it.
Second, it's incredibly hard to create inflation when there is under-employment in an economy. And third, if there's any risk of inflation from PQE, taxes could be increased to negate that risk at any moment. This fear is, then, misplaced.
Second, there's a fear that PQE will put politicians and not central bankers back in control of the economy. I do not share that concern. In a democracy, I want politicians in charge. And it's not as if the bankers have done such a good job—none of them noticed 2008 coming their way.
Third, bankers don't like it. If the Bank of England does in effect (if not directly, for EU-based legal reasons) provide funding to the government, then bankers are cut out of the funding loop, and the buckshee money it has provided to them.
The paranoia is misplaced then. But what is the gain? Simply that by almost costlessly creating the money the economy now needs, the British government and Bank of England can kick start U.K. recovery in a way that nothing else can.
And how is it paid for? In three ways. Firstly out of the taxes paid and benefits saved as a result of people being put to work.
Secondly, from returns made on building assets such as social housing.
And third, by building the basis for long-term prosperity and sustainability, especially if new energy programs are in the investment mix.
In that case, the economist's cupboard need not be bare and the economy can be fixed. What's extraordinary is that it has taken a left-wing candidate for leadership of the Labour party to say that.
At the same time it is also completely logical that this is the source, because what PQE is saying is that the solution to our problems is in the government's own hands (or at least, in its central bank). It's many years since a politician, let alone an economist, has had the guts to say that. But now they have, and the world is already noticing.
Richard Murphy is the director of Tax Research UK. His new book, The Joy of Tax, is published later this month by Penguin Random House.
