Quantitative Easing — House of Commons, 2016-09-15
Topic: Macroeconomics
Steven John Baker (Conservative, Centre-right): I am delighted to participate in this debate and congratulate the hon. Member for Ross, Skye and Lochaber (Ian Blackford) on securing it. I certainly support him. Like him, I am pleased to agree with my right hon. Friend the Prime Minister’s comments on monetary policy. That is certainly a first for me, and I hope to explore more with her how we should move forward I pay tribute to the journalist Tim Price of MoneyWeek for bringing forward a petition on the parliamentary website against QE, which has so far secured more than 4,700 signatures. I hope that by the end of this debate, with the enormous audience it is bound to draw, there will be a few more signatures One of the great tragedies of this subject is that, although we might think it is one of the most important issues of our time, it is not well understood, as can be seen from the attendance in the Chamber. Although the public feel the effects of it widely, their representatives are not as well equipped to participate in debates on the subject as they might be I will talk about the two areas mentioned in the motion: the effects of QE and the future development of policy. It might be helpful first to turn to page iv of the last inflation report, which sets out the channels through which monetary policy works. The first is by bringing forward spending by lowering the "real interest rate". The next is by lowering debt servicing costs, which is the "cash-flow channel". There is the lowering of funding costs, which is the "credit channel". It also mentions the "wealth channel", which is people selling assets to the Bank, so that they can "reinvest the money received in other assets", thereby supporting asset prices. The "exchange rate channel" bears consideration, given that our exchange rate has just dropped. That is an object of Bank policy. There is also the "confidence and expectations channel", which demonstrates that the Governor, the Bank and the Monetary Policy Committee are aware of the importance of their role in the markets of creating expectations and the effect that that has on the real economy The hon. Member for Ross, Skye and Lochaber made some good points about wealth inequality—a matter on which I will dwell. In 2012, the Bank of England wrote a report on the distributional effects of asset purchases. It states: "By pushing up a range of asset prices, asset purchases have boosted the value of households’ financial wealth held outside pension funds, but holdings are heavily skewed with the top 5% of households holding 40% of these assets." After the MPC’s last inflation report, the Treasury Committee picked up on wealth inequality and the extent to which it is promoted by what I would call "easy money" and by QE specifically. The Committee is increasing its focus on the issue. I am glad to see present the hon. Member for Bishop Auckland (Helen Goodman), who serves with me on the Committee, and I look forward to hearing what she has to say. I think that hon. Members on both sides of the House are converging on a genuine concern that the processes of the market are being undermined in their justice by the current set of monetary policies If anything, QE has an upside: it has made explicit a phenomenon that has been going on for a long time. The hon. Member for Ross, Skye and Lochaber mentioned the quantities of M4 outstanding. If we look back a bit further, we will see that M4 outstanding in 1997 was about £700 billion. If we plot the quantity of M4 outstanding, we will see an accelerating rush through that supposed moderation and in the quantity of M4 outstanding. Is it any wonder that we seemed to have abolished boom and bust, and seemed to be getting better off, when actually there was an enormous acceleration in the supply of credit, leading to a crisis, broadly a stagnation in the creation of money, and the categorically different economic environment in which we find ourselves today This has gone on for a long time. The Office for National Statistics and the Library published a paper looking at price inflation back to 1750. It has an instructive chart—I regret that I cannot put it on the record—which shows, on a linear scale, that the value of money was broadly flat until about 1914-18. There was some inflation during the wars and then, from 1971, the value of money collapsed. What happened in 1971? The final link to gold was severed and money became inflationary. As ever, Governments’ third means of financing themselves after tax and borrowing has been currency debasement, and it is that continuous, chronic expansion of credit that has brought us to the position we are in. Although we are now increasingly concerned about the wealth equality effects—the justice effects—of QE, the point is that the money supply has been chronically expansionary since 1971, and therefore those effects have been going on throughout my lifetime I will not read out the whole passage, but in "The Economic Consequences of the Peace", Keynes wrote: "By a continuing process of inflation"— that is, increasing the money supply— "governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth." What has changed? Nothing much. That was, of course, only Keynes; I am not quoting some wild-eyed libertarian monetary scholar Is it any wonder—I have given advance notice of this—that we see reported in The Daily Telegraph today a speech by the hon. Member for Hayes and Harlington (John McDonnell), in which he said: "We’ve got to demand systemic change. Look, I’m straight, I’m honest with people: I’m a Marxist… This is a classic crisis of the economy—a classic capitalist crisis. I’ve been waiting for this for a generation!" He went on to say, if the House will forgive me for repeating this: "For Christ’s sake don’t waste it, you know; let’s use this to explain to people this system based on greed and profit does not work." I have covered this theme before. The point is that, if this is capitalism, I am not a capitalist. It is not capitalism when money, under the centrally planned and directed policy of a committee of wise men and women at the central Bank, creates a chronically expansionary environment, which we are now beginning to realise has real wealth effects. That is not capitalism. If the outcome is unjust, that is because of our monetary arrangements, in my view. There will be other factors, but I think that that is potentially a profound cause of wealth inequality and injustice in the market economy.