‘What would you do with €80 billion per month to stimulate the economy in Europe?’
That was the question posted by the makers of a documentary for Dutch national television (VPRO Tegenlicht) about money creation by the ECB. A few days after the broadcast there would be a Meet Up and the makers called upon the general public to propose alternatives for the current ECB policy of buying bonds for €80 bln a month. I sent the following proposal and was selected to discuss the idea with a panel of economists who –by the end of the discussion – seemed to like the idea.
Does the ECB really create money?
Yes and no. Money as we know it is actually credit – created by banks. The stuff the ECB makes is another type of money that we regularly call ‘reserves’. Whenever we transfer money to someone at another bank, our account is credited by our bank, but in the background they actually transfer reserves to the other bank.
What is more important to understand is that when the ECB buys bonds or other assets from a bank, they rarely transfer wealth to that bank. There may be side effects from that transfer that banks profit from – like increasing prices of certain types of assets – but the essential message is that when the ECB buys bonds for an amount of €80 bln, the sellers hardly get any richer. All that is happening, is that the wealth of the sellers is becoming more liquid. Banks make a slight profit on the sale, but still only a fraction of the €80 bln. So, the ECB does create a particular type of money, but they are not handing it out to banks.
Could the ECB provide people with, for example, a basic income instead?
Luckily not. The ECB is created by governments for the purpose of having a board of smart people to increase or decrease the amount of central bank money to keep prices steady. And, by steady, I mean inflation between 0-2%.
These people are not elected democratically and are not to decide on the way the government spends its wealth. They just convert existing financial assets (mainly government bonds) into central bank money or reverse the process whenever they think it is needed in order to keep prices within the range their mandate prescribes.
Only, people keep believing that the ECB could provide a basic income while they only seem to support banks. And that’s how I ended up at a Meet Up where the audience kept proposing ideas for spending the money on all sorts of social programs. Of course, you could change the statutes of any government body, but there lies no practical value in such debates since people like to see some change happening within their own life time. How about the real alternatives?
Solving a sudoku
You can certainly debate the validity of the objective of economic growth, the practice of government intervention and even about the nature of the Eurozone. But within the paradigm of a Eurozone that seeks growth through monetary policy, the options are limited. Many economists argue for governments to spend more into the private sector to regain more growth but member states don’t want to let go of the 3% ceiling for budget deficits, meaning that not many new government bonds will come into existence while the ECB already bought most of them. Of course this is nothing more than a very large sudoku since all the rules and objectives are man made and subject to change.
The ECB is currently shifting to buying corporate bonds to reach its monthly spending target of €80 bln, but it’s hard to see why that would result in any economic growth. If you want the government to increase spending, but not to increase its debt, then you should buy some of its assets to enable them to spend more money (that can be taxed back in the future).
Buying government’s assets instead of its debt
A government has many assets on its balance sheet, but my proposal at the Meet Up was aimed at one asset in particular. It’s an asset of which it is hard to imagine why a country would still hold any of it, especially when being a member of a currency union. I’m talking about gold, of course. The Eurozone countries hold over 10,000 tonnes of gold, which amounts to about €400 bln. The ECB already has some 50 tonnes of gold and I’d like them to shift their monetary policy to buying the gold of Eurozone countries.
To prevent side effects from irrational behavior my proposal includes that countries would get an option to buy back their own gold for the same price at any later date and that the gold would remain in the member state vaults where it is currently kept. Should there still be any hidden connection between gold reserves and the value of a currency, then you can imagine in this case why that wouldn’t amount to anything substantial since the gold has already accrued on the balance sheet of the ECB through all the government bonds it holds. More important for the value of the euro is how those member states will spend the money they receive from selling the gold.
Mario Draghi and the basic income
Here’s the good news for those in favor of a basic income or other social programs: the money that governments receive can be used to finance such proposals. And if they don’t, you can punish them at the next election. So, don’t blame Mario Draghi for not spending the €80 bln on social programs, but, if anything, blame him instead for not buying gold from Eurozone countries!
Richard van der Linde