Permanent ‘Quantitative Easing’

a possible economic solution

Photo by Giorgio Trovato on Unsplash

‘Quantitative easing’ (QE) is a term used to describe a new approach to creating money. It was invented in 2009 by Ben Bernanke, Chairman of the U.S. Federal Reserve System (our central bank), as a response to the financial crisis brought on by the bursting of a huge speculative bubble in residential mortgages in 2008. The finance industry was in danger of complete collapse, which would have caused the whole economy to stop functioning.

The purpose of QE was to create as much money as needed to prevent that from happening. To better understand QE, it is helpful to know how money was created before it was invented.

There were two ways money was created before QE: banks making loans and money created for the central bank to use to purchase newly issued debt of the central government. I’ll describe each as briefly as possible.

When banks make loans they do not hand over actual money. They create credit: they credit an account with money that isn’t actually there. That credit is used make some kind of purchase(s). A recipient of that credit counts it as income. At that point the credit has become part of the money supply. (The borrower returns a like amount of income — plus interest — to the bank; whether banks are increasing the money supply depends on whether borrowing is larger than repayments are.)

The other way money was created before QE was invented was the creation of actual money: currency. Money was/is created (‘out of thin air’) for the central bank to use to purchase newly issued debt of the central government. How much money would be created for that purpose was/is something for the central bank to decide, based on the state of the economy: it always has other money on hand and assets it can sell to get more, and it can ‘encourage’ banks and other large financial entities, such as insurance companies, to participate in buying the central government’s newly issued debt.

How was QE something new in the world?

Most importantly, it did not involve new debt. In QE the money is used to purchase existing debt of one kind or another — to include, at the time of its invention, the infamous ‘toxic assets’ that were at the epicenter of the economic crisis that precipitated QE. Before, whether it was banks making loans or currency being created for the central bank to use to purchase newly issued debt of the central government, creating money had always involved new debt being created, one way or another; with QE, it does not.

It is in that sense that I propose a permanent QE: a permanent creation of money — as currency — without involving debt. I propose creating enough money to fund a minimum guaranteed income and to fund all government (from central to local) — at the current level of total government spending. The former would eliminate poverty (as well as any need for Social Security). The latter would eliminate the need for taxes/public debt. While a lot of money would be constantly created, over any given period of time the amount of money that would be created would be absolutely limited.

Many questions arise. I have been working on this proposal for some time. It is fully thought-out. All questions are answered.

For the sake of full disclosure, there are two caveats:

  1. To retain complete freedom from taxes/public debt, total spending by government could not exceed its current per capita level. Any additional spending that any government did undertake could definitely be limited, however, to selling bonds. That would require taxes of some kind/duration for repayment, but would be much different from simply imposing/raising permanent taxes.
  2. There would have to be a limit on hoarding money: at some point money would have to be returned to the central bank — but people and businesses would retain plentiful pools of money (based on income) and (unlike taxes) no money would ever be collected from any person or business before it could be used for purchases/investment.

Having read those caveats, here is a full list of the benefits of this proposal: the existing economy would become fully self-regulating, with no unemployment (at no cost to anyone), no poverty (without having to redistribute anything), no taxes (of any kind), and no public debt (at any level of government) [the last two subject to the above caveat]. Also, sustainability would be increased (even without additional regulations or any changes in behavior). There would be built-in safeguards against inflation (beginning with the absolute limit on how currency would be created at any time). To be clear, there would still be no limit on income/wealth.

Those outcomes would not be the result of rules and regulations. They would follow, as certainly as day follows night, from using a permanent ‘quantitative easing’ to fund a minimum guaranteed income and all government.

If interested in learning more about this proposal, there is “Same Economy, Way Better Outcomes for Society.” For, primarily, economists there is “Paradigm Shift.” (Both are in Medium).

unaffiliated, non-ideological, unpaid, academically trained philosopher and political economist