Warum Robin Hood der bessere Zentralbanker wäre17. Oktober 2016
Geld drucken und Zinsen senken: So versuchen Zentralbanken, die Wirtschaft wieder anzukurbeln. Doch außer den Kontoständen der Reichen wächst nichts. Dabei gibt es ein wirksameres Mittel: das Geld den Armen geben.
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Graeme Maxton is the Secretary General of the Club of Rome, a global network of renowned independent thinkers dedicated to addressing the challenges facing humanity. He also is the co-author of »Ein Prozent ist genug«, currently a no. 1 bestseller in Germany.
Since the financial crisis in 2008, central bankers Central banks are responsible for the monetary policy within a certain currency zone (e.g. the European Central Bank (ECB) in Frankfurt for the euro zone). They inter alia refinance commercial banks and watch the stability of the price level and the monetary value. and economists in Europe, America, Japan and the UK have introduced 2 largely experimental economic policies – ultra-low interest rates and Quantitative Easing, or QE. QE is a way of injecting money into the economy. Central banks buy bonds from banks and other financial institutions, improving their balance sheets, in the hope that they will increase their lending to people and businesses stimulating economic growth. They have done this, they say, to boost economic growth. If struggling economies are injected with new money, goes the thinking, demand will rise, increasing the consumption of goods and services. This will create new jobs, which will reduce inequality and kick off a virtuous cycle, putting the economy back on a healthy and sustainable path.
»Unfortunately, the thinking behind these policies is entirely wrong.«
Similarly, central bankers tell us, if interest rates are cut sufficiently low, people will no longer want to save money. They will borrow and spend it instead. This will stimulate new demand and lead to faster economic growth, too.
According to policy makers, both of these ideas also help countries avoid another problem: deflation. This is something greatly feared by central bankers and economists because there is no cure. It is a situation in which prices fall steadily over months or even years. People delay spending (because whatever they are buying will be cheaper next month) and this pushes the economy into a spiral of slowing demand, mounting unemployment and decline.
This is the thinking behind these strange policies, which have been so enthusiastically supported and promoted by many seemingly wise people in recent years.
Unfortunately, this thinking is entirely wrong. More unfortunate, perhaps, is the fact, that the bankers and policy makers who have promoted these ideas have not understood their true impact, which is why they stick to them. This is also why they have been unable to explain why the policies have not worked as they promised during the last 8 years.
To understand what is actually happening (and maybe even help politicians understand), we need to rewind our economic memories back to the financial crisis.
When the 2008 finance crash hit, the US housing bubble burst and Lehman Brothers and other financial institutions went bankrupt, the entire financial system was in danger of collapse. The world’s biggest bank at the time, The Royal Bank of Scotland, found itself in so much difficulty that it was nationalised by the British government, as were others in the US and Europe. As well as buying bank stocks to support their share prices and trying to stabilise the economy by providing incentives to businesses, many governments and central banks offered unlimited lending facilities to commercial banks – at ultra-low rates of interest. This allowed them to borrow as much money as they needed to stay afloat and almost no one, except the central bankers, would see how much trouble they were really in. Central bank lending is generally not very transparent – it e.g. took Bloomberg 3 years and a court order to find out which banks used QE.
These measures were originally planned to be temporary, to tide the banking system over for a few years, until the economy started growing again and commercial banks were able to stand on their own 2 feet.
Unfortunately, things have not worked out as intended. The economy in most rich world countries has not bounced back and many commercial banks remain almost as financially comatose as they were in 2008.
At the start, QE worked like this: central banks would buy the debts of commercial banks, usually their mortgage-backed securities, Typically, thousands of mortgages are grouped together, and given a credit rating by a credit ratings agency. The best rating is Triple A. The package of different mortgages is then divided into shares and sold to investors, often other banks. The institution selling the shares gets money which it can re-lend, selling more mortgages. It also spreads its risk. If people cannot pay their mortgages, the liability is then with all those who bought shares in the mortgage-backed security, not the bank which lent the money in the first place. After the 2008 crisis, many banks found that many of the securities they had bought were almost worthless, weakening their balance sheets to the point to which they became insoluble. many of which were losing value. The policy then gradually morphed into central banks buying bank bonds, which are a form of debt, to encourage them to lend more, to boost economic growth.
How were central banks able to do this? Where did they raise the money? Through taxes?
Certainly not. They simply printed new money, though even this is a misnomer for no printing presses were required. They basically changed numbers on balance sheets, on computers, boosting the balance sheets of the commercial banks.
It is important to understand that the original reason central banks adopted this radical printing money policy was not to boost the economy. It was to save the banking system. Only once the commercial banks became slightly more stable, and it became clear that the economy was still not growing, did central banks continue printing money, this time in an effort to stimulate economic growth.
And they did this on a staggering scale.
Between 2008 and October 2014, the United States’ central bank, The Federal Reserve, printed between $75 billion and $85 billion and injected it into the economy every month. Cumulatively, it created $4.5 trillion – more than a quarter of America’s annual GDP. Graeme Maxton and Jorgen Randers: »Reinventing Prosperity: Managing Economic Growth to Reduce Unemployment, Inequality and Climate Change«, Chapter 3 This was the same as adding another Australia, India and Spain to the world economy.
»The central banks have injected so much money into the global financial system that it has been like adding another China.«
The British government did much the same, creating $500 billion, while the Bank of Japan and the European Central Bank (ECB) also printed many hundreds of billions of yen and euros – and continue to print them today, in 2016.
Together, these countries have injected so much money into the global financial system since 2008 that it has been like adding another China. If this money had been converted to demand and output, it would have increased the GDP GDP is the total market value of all goods and services produced in a nation in a set time period, less the costs of the inputs (such as raw materials) used (with an adjustment for trade). When money is put into an economy, if it is spent, it will create demand for goods and services. This will raise output and so GDP. If the money is not put into the economy though, if it is saved, as was the case with the banks, it will not generate any increase in GDP. of these countries by more than 25% between 2008 and 2015. Graeme Maxton and Jorgen Randers: »Reinventing Prosperity: Managing Economic Growth to Reduce Unemployment, Inequality and Climate Change«, Chapter 3 Yet their GDP grew by just 11%.
Why was there this shortfall?
The reason for that difference is that much of the money created was simply kept by banks, to make them financially stable again, and most of the rest was used to invest, speculatively. Banks used the money to buy property, stocks and shares, raw materials like palm oil and rubber, art, wine and old-timer cars. They did not lend it to people and businesses, as the policy makers and central bankers who promoted the idea had expected. They went on a spending spree.
The Financial Times (Octobre 18th, 2013) explains how speculation of certain assets like prime property, paintings, fine wine and others boosts their prices This is one of the main reasons why the prices of shares, property and wine have risen so much (and been so volatile) over the last 6 or 7 years. There were huge quantities of money washing around the economic system and those who controlled it tried to make some sort of return. This boosted the prices of all sorts of assets. It is not because there was new underlying demand for many of these items. It was because bankers chose to buy them, speculatively, in the hope that their price would rise and they would make a profit.
Little of the money created by central banks was used to boost the real economy. Real economy, as a part of a national economy, covers production, distribution and consumption of goods and services. Contrary, the financial sector serves as market place for speculation – or to secure future price fluctuations. The financial sector thus does not concern a real exchange of goods and services for the ultimate purpose of consumption. The »Washington’s Blog« (June 26th, 2013) reports on money created through Quantitative Easing In the US, more than 80% was retained by the banks. The money did not go to ordinary people or small and mid-sized businesses. And it certainly did not go to all those people who are unemployed or who lacked of income. That would have been a much more effective way to boost the economy. If the unemployed or poor had been given the money, they would have spent it immediately – and created the demand that was needed.
What happened instead is that money was created out of thin air by central bankers and paid to commercial bankers, allowing them to get richer.
The story with very low and negative interest rates is similar.
Since the 2008 crisis, interest rates in much of the rich world have fallen to their lowest levels – ever. Since the Bank of England was founded in 1694, for example, it has never offered lower interest rates than today. Several European countries For example Sweden and Switzerland and Interest rate of the Japanese National Bank Japan even have negative rates for professional investors Usually, the definition of who is to be considered as professional investor is provided by the respective law. In general, professional investors are people or institutions who administer their funds professionally, i.e. through a commercial enterprise. today, which is unprecedented (and logically strange). Consumers, when lucky, can still get 1–2% interest – a margin encouraging them to spend instead of saving their money.
QE and ultra-low interest rates: McKinsey Global Institute, Distributional Effects and Risks, Consultant’s report, November 2013, figures are in constant 2012 USD Again, the consequences of lowering the costs of borrowing like this have been that bankers and the rich have gained the most, especially in the US. Low interest rates have not boosted broader economic spending, or certainly not by much. Rather, they have boosted commercial bank earnings, lowered the costs of government borrowing and increased business profits as well as the income of shareholders.
»Instead of boosting the economy, this policy fosters redistribution – from the poor to the rich.«
Commercial banks have boosted their profits because their margins The (simplified) margin is the difference of interest rate at which banks borrow money and the interest rate at which they lend it to their customers. have gone up. Put simply, they can borrow for almost nothing, and then lend to consumers and businesses at whatever rate they can get away with. Credit cards that offer 12% interest rates may seem like a bargain to consumers used to even higher rates, but for the credit card issuers they are like a licence to print money when they can finance this lending almost for free.
Many big corporations have also gained from ultra-low interest rates, through lower interest payments. This privilege did however not translate into more jobs, wage increases or research and development. Rather it was used to boost profits, pay shareholders and buy up their own company shares. Corporations buy their own shares (»buy back«) e.g. to increase demand and decrease supply for the purpose of boosting the company’s share price. Financial investors, such as venture capitalists Venture capital is a form of investment made by private companies specifically to support early-stage emerging businesses that are thought to have high growth and earnings potential. and hedge funds, A hedge fund is a pool of money from various »partners«, used to invest in »alternative« investments, in the hope of making higher returns. have been able to borrow more cheaply too, allowing them to buy up weak companies. Again, this has allowed wealthy individuals to get richer, because they can acquire assets more cheaply. The current economic system favours the rich, as Thomas Piketty pointed out in his ground breaking book »Capital in the twenty first century«. The rich are favoured because they are able to invest in the companies that make profits, and receive dividends, and because they have savings on which they earn interest. The poor have the opposite – they buy products which gives a profit to shareholders and borrow money which gives an income to lenders.
Rich-world households have been the main losers from the low interest rate policy. QE and ultra-low interest rates: McKinsey Global Institute, Distributional Effects and Risks, Consultant’s report, November 2013, figures are in constant 2012 USD According to a study done by management consultancy McKinsey, the rich world’s householders lost $630 billion in interest income between 2007 and the end of 2013. European banks and life-insurance companies have also lost out, due to the decline in interest income, and many pension funds have run into difficulties.
The main beneficiaries of the low interest rate policy have been the wealthy, especially in the United States, and the finance industry, again mostly in the US.
In effect then, super-low interest rates have increased the flow of money from those who borrow (generally, the poor) to those who lend (generally, the rich), widening inequality even more.
This is not to say that low interest rate policies and printing money cannot be used to generate economic growth. It is just that these strange policies have to be applied differently. Rather than printing money and giving it to banks and the rich, or helping the rich borrow more cheaply, the policies should be focussed instead on those who would benefit the most, on the poor and unemployed.
»The current policy of printing money to boost economic growth will never work.«
There are several ways this can be achieved. Most obviously welfare benefits, for the unemployed, pensioners and sick, can be increased, to provide them with something like a guaranteed basic income. As well as boosting spending, this has several other advantages. It tends to increase the wages of the lowest paid (why would they work if they can get an income to stay at home), and it makes a transition to a more sustainable economic system easier, just like transforming to a more sustainable energy system: If people no longer need to worry about losing their jobs, because they can still feed their families, they will be more open to industrial change and an economic transition.
This has been done before, in the 1930s in the United States, when the government printed Back then, the central bank indeed did print and not just »print« the money. money to pay workers to build roads and national parks under President Definition of Roosevelt’s »New Deal« on Encyclopaedia Britannica Roosevelt’s »New Deal«. The workers spent what they earned on food, drink, transport, and heating, creating new demand. This higher demand was spotted by businesses, who saw the profit opportunity and so built the capacity to satisfy it. Printing money helped reflate the US economy after the Great Crash. On Octobre 25th, 1929, the world experienced the worst stock market crash of the 20th century. It went down in history as »Black Friday«: A speculation bubble burst at Wall Street and the whole world got swept into an economic crisis. It took the world about 25 years to recover.
Moreover, printing money is likely to be needed more in the future because many of the challenges that face humanity cannot be solved by privately owned businesses alone. They will require state intervention, and state funding, and some countries will need to print more money to pay for this. This is because many of the big challenges we face require collective action and investments that do not earn an income. Building sea walls to protect cities, or rebuilding bridges washed away by floods because of climate change is not very profitable.
China is doing this already.
In 2014 the People’s Congress The People’s Congress is the parliament of the People’s Republic of China. announced that it would spend US$800 billion to clean the nation’s air and water over the following decade. This involves paying 8 million Chinese engineers and others to produce clean air and water, rather than consumer goods and services. These people will receive freshly printed money as wages which will, of course, be spent on food, housing, and entertainment and so boost domestic demand. So the effort to clean the air will work just like the stimulus packages of the United States during the Depression.
There are many areas where printing money to fund structural change makes sense: increasing our capacity to generate renewable energy, solving climate change, addressing widespread poverty, reducing migration, helping the dispossessed and protecting biodiversity. None of these can be solved by commercial enterprises alone – or in some cases at all. They need state intervention.
Of course, there is a price to pay for solving our problems in this way, at least theoretically. Economists say that printing money creates inflation (though there is little sign that this theory works right now). For people in Germany, in particular, the idea of creating inflation like this might appear especially scary. This problem is especially relevant in Germany due to the history with inflation in the 1920ies, i.e. depression leading to Nazis (which might even explain the love for paying cash) But it is not, for 3 reasons:
- First, the rich-world’s economy needs slightly higher inflation, because the risk of deflation is real and will become even more problematic in Germany as the population ages. Economic growth comes from rising productivity and increasing population. If the population falls, demand will decline and producers will have to lower prices until, that is, they have cut capacity to match demand. If the population continues to decline they have to continuously cut prices and then capacity.
- Second, slightly higher rates of inflation will gradually reduce consumption, which is also necessary if we are to get off today’s wasteful and unsustainable economic treadmill.
- Finally, if printing money created too much inflation, it can be dealt with easily – because the simplest way to reduce inflation is to raise interest rates.
The current policy of printing money to boost economic growth will never work. But it could, if the money was given to those most in need. Moreover, the same policy can be used more widely, and more wisely, to solve humanity’s biggest challenges.
Printing money will not kill us, after all. But climate change will.
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