Is quantitative easing the key to economic growth?

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The United States Federal Reserve building (Screenshot via YouTube)

A solution to national debt could be achieved through quanitative easing, a way for new money to be injected into the economy, writes Ellen Brown.

A HUGE CHANGE has quietly taken place in the halls of the U.S. money creation system. Quantitative easing (QE) has become the new norm. QE was supposed to be an emergency measure. The U.S. Federal Reserve pumped out trillions of dollars in new bank reserves after the 2008-09 credit crisis. Bernie Sanders revealed 17 trillion dollars was handed to the big banks over the 2008-10 period to self-administer. Most of that did not filter down to local communities and jobs.

It was expected that quantitative tightening would follow, slowly withdrawing the subsidy to the already super-wealthy at the expense of small business, communities and future taxpayers. The stock market protested loudly to beginning the quantitative tightening process, with the Nasdaq dropping 22% from its late-summer high. Worse, defaults on consumer loans were rising. Consumer debt – including auto, student and credit card debt – is sold as asset-backed securities similar to the risky mortgage-backed securities that brought down the market in 2008.

The problem of debt deflation

The Fed is realising that it cannot bring its balance sheet back to “normal”. It must keep pumping new money into the banking system to avoid a recession. This naturally alarms Fed watchers worried about hyperinflation. But QE need not create unwanted inflation if directed properly. The money spigots just need to be aimed at the debtors rather than the creditor banks. People need the credit flow, not the gamblers in the stock market.

In fact, regular injections of new money directly into the economy may be just what the economy needs to escape the boom-and-bust cycle that has characterised it for two centuries.

Abraham Lincoln said:

The Government should create, issue and circulate all the currency and credits needed to satisfy the spending power of the Government and the buying power of consumers. By the adoption of these principles, the taxpayers will be saved immense sums of interest. Money will cease to be master and become the servant of humanity.”

New money needs to be regularly added to the money supply to avoid an overwhelming debt burden and allow the economy to reach its true productive potential. Regular injections of new money are necessary to avoid something economists fear even more than inflation — the sort of “debt deflation” that took down the economy in the 1930s.

Such a high proportion of our wealth is commanded, sequestered, stashed in tax havens and so forth by the super-wealthy, that the economy would grind to a halt if more credit is not created. No credit means no demand, no jobs. The Australian Labor Party’s response to 2008, including $800 to all citizens and the building of many school halls, was an intelligent and successful response to near financial collapse.

As Australian economist Professor Steve Keen observes, today the level of private debt is way too high and that is why so little lending is occurring. But mainstream economists consider the rate of growth of debt to be irrelevant to macroeconomic policy, because lending is thought to simply redistribute spending power from savers to investors. Conventional economic theory says that banks are merely intermediaries, recirculating existing money rather than creating spending power in their own right. But this is not true, says Keen.

Banks actually create new money when they make loans.

He cites the Bank of England, which said in its 2014 quarterly report:

Banks do not act simply as intermediaries, lending out deposits that savers place with them and nor do they “multiply up” central bank money to create new loans and deposits...


In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood: the principal way is through commercial banks making loans. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.

Loans create deposits, and deposits make up the bulk of the money supply. Money today is created by banks as a debt on their balance sheets and more is always owed back than was created, since the interest claimed by the banks is not created in the original loan. Debt thus grows faster than the money supply. When overextended borrowers quit taking out the new loans needed to repay old loans, the gap widens even further. The result is debt deflation — a debt-induced reduction in the new money needed to stimulate economic activity and growth.

However, the money created through QE to date has not gone to the consuming public, where it must go to fill this gap. Rather, it has gone to the banks, which have funneled it into the speculative financialised markets. QE has worked to reverse the debts of the banks and to prop up the stock market, but it has not relieved the debts of consumers, businesses or governments and it is these debts that will trigger the sort of debt deflation that can take the economy down.

Keen concludes that:

‘ amount of exhorting banks to “Intermediate” will end the drought in credit growth that is the real cause of The Great Malaise.’

QE-funded debt relief

The only way to reduce the private debt burden without causing a depression, he says, is a Modern Debt Jubilee or People’s Quantitative Easing. In antiquity, as Professor Michael Hudson observes, debts were routinely forgiven when a new ruler took the throne. The rulers and their advisors knew that debt at interest grew faster than the money supply and that debt relief was necessary to avoid economic collapse from an overwhelming debt overhang. Economic growth is arithmetic and can’t keep up with the exponential growth of debt growing at compound interest.

Consumers need that sort of debt relief today, but simply voiding out their debts, as was done in antiquity, will not work because the debts are not owed to the Government. They are owed to banks and private investors who would have to bear the loss.


The alternative suggested by Keen and others is to fill the debt gap with a form of QE dropped not into bank reserve accounts but digitally into the bank accounts of the general public. Debtors could then use the money to pay down their debts. In fact, Keen says it should go first to pay down debts. Non-debtors would receive a cash injection.

Properly managed, these injections need not create inflation. Money is created as loans and extinguished when they are paid off, so the money used to pay down debt would be extinguished along with the debt. And the cash injections not used to pay down debt would just help fill the gap between real and potential productivity, allowing demand and supply to rise together, keeping prices stable.

A regular injection of money into personal bank accounts has been called a “universal basic income”, but it would be better to call it a “national dividend” — something all citizens are entitled to equally, without regard to economic status or ability to work. It would serve as a safety net for people living paycheck to paycheck, but the larger purpose would be as economic policy to stimulate demand and productivity, keeping the wheels of industry turning.

This sort of UBI could transform society and has been shown not to decrease people's desire to do useful part-time work. However, proper national accounting would have to include the environment’s ability to create more real product and deal with pollution created. This requires a more intelligent public way of measuring wealth and not entrusting most credit creation to private banks.

Money might then indeed become a servant of humanity, transformed from a tool of oppression into a means of securing common prosperity. But first, the central bank needs to become a public servant. It needs to be made a public utility. An independent public central bank is the way to create real wealth.

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