Qualitative Easing : The Urgent Need to Pick Winners

To invest in the future of our families, our communities, our companies, our nations or our planet we have two choices – either we save up or we borrow from those who already have money or can create it.

Saving up is a delightful route which has much to commend it, but it implies unfashionably delayed fulfillment. It also assumes we can earn more than we spend for a period, which is problematic for the wage-slave, inadvisable for the nation-state and impossible to aggregate for the planet. And for the planet, delayed fulfillment likely means extinction.

Thus the effective investment of borrowed (or created) money is a critical success factor for our future welfare, individually and collectively.

The major challenge here is that the owners of accumulated wealth and the permitted creators of money and credit-as-money are not effective allocators of capital. If we look at the three sources of investment money, private wealth, bank-created-credit and sovereign money we can see that each of them sees strategic allocation of capital as the task of the others.

Private wealth justifies itself through the narrative of the heroic entrepreneur, the maker (versus the taker), the just desserts of the energetic and creative profit-seeker. Once accumulated it generates a manic obsession not to be lost. The narrative is grounded in competition and enlightened (short term) self-interest. It has no mechanic to address the bigger picture other than via crumbs from the philanthropists table.

Bank-created-credit is responsible for the vast majority of money in circulation. An economics textbook (if it talked about money creation at all which most do not) would describe the banks’ credit allocation decisions as being informed solely by risk and reward. The bank takes a hard-headed view of the investment potential of the client and sets an interest rate that takes into account the perceived risk. This story might have legs as far as short term investment is concerned were it not for the fact that banks taking excessive risks are generally bailed out by the state (a.k.a. joe public’s taxes). But even if it did, longer term patient investment is needed to address systemic planetary-scale issues.

Banks are very poor proxies for well-being. In the past governments have issued various forms of strategic guidance, i.e. they have indicated which sectors they expect bank-allocated-credit to be dispensed into. Some economists have argued that this has worked, at least in terms of national competitiveness. But the practice has generally fallen out of favour. For the politician, this avoids having to take difficult decisions – to ‘pick winners’ as opponents of this practice describe it – decisions that can come back and bite them when things go wrong. Much better hide behind the invisible hand of the market. (Though banks aren’t even a good proxy for the market but that’s another story.)

Perhaps its unfair to expect banks to look at the wider picture sua sponte. They may have special privileges – especially the ability to create credit out of thin air and charge interest on it, and to be immune to bankruptcy – but at heart they are corporations with responsibilities to shareholders, and of course to their senior executives.

Nation states, though, have not relished the job of setting explicit national strategic priorities either. It’s too much like hard work and doesn’t fit five year political horizons. Furthermore they have bought into the competitive narrative too, and are held hostage by the four freedoms, especially freedom of capital. Prompted by corporations threatening to relocate they are too busy racing to the bottom (low tax, less regulation) to look up from their feet.

So we’re stuffed.

Unless, that is, we can change the mindset. We are besotted with Quantity, with ‘the tyranny of numbers’. The drive to summarise in numbers, to facilitate comparisons and measure ‘success’ has resulted in us conflating disparate entities. Not all investments of a given size are ‘equal’; not all 100 euro transactions are ‘equal’. Value cannot be reduced solely to numbers. There is a Quality aspect. Maybe we need #QualitativeEasing rather than Quantitative Easing.

What might this mean in practice?

At an individual level, everyday we buy stuff. In terms of the ‘economy’ 20 euros spent on a cuddly bunny or a halloween costume (for better examples see the #extremeconsumption hashtag) is the same as 20 euros spent on bread or 20 euros donated to Friends of the Irish Environment. In terms of our duty to consume there is no difference. It all adds into GDP. Maybe we should discriminate more [1].

The dissatisfaction with GDP as a measure of well-being is resurfacing. A group from Feasta is working with one of the leaders in this field Hans Diefenbacher on a well-being index for Ireland.[2]

But this is all awareness raising. Meanwhile capital continues to be misallocated, so how might a more qualitative perspective insert itself into national economies?

Banks are largely a dead duck. It has been said that we need banking but we don’t need banks. They have failed in their duty as a proxy for future welfare and need to be replaced in that regard. There may well be possibilities for more value-driven banks to emerge. Maybe one or two of the challenger banks might differentiate themselves. Public banking can also do a much better job of allocating capital as they do in Germany where more investment finds its way into productive capability rather than in boosting asset prices.

However two promising channels come from polar opposites – the re-emergence of the direction-setting state and the growth of value-based currencies.

The first involves the nation state readopting its responsibility for strategic direction. There is a need to start picking winners or at the very least to stop backing losers. If the free movement of capital undermines the ability to make sovereign decisions barriers must be created. It sounds Luddite because we are all indoctrinated with the prevailing narrative, but where has ‘progress’ got us to? The grey area between such a positioning and the doom-laden prospect of a Soviet style ‘planned economy’ needs urgent exploration. If we allow opponents to label this direction with reference to a failed past we will be lining up further inequitable misery. If current boundaries cause homogenisation of ideas and thus repress innovation, the boundaries must be moved.

The second involves the development of value-based currencies, inevitably pioneered via crypto variations. There are already signs of this line of thinking as several hundred cryptocurrencies approach ICOs. Many of these developments will be ponzi schemes latching on to the excess liquidity seeking better returns following QE. One or two will be gems, and the innovation will be as much in their governance as in their consensus algorithm.

But at all levels and in all ways there is a need to seek out Quality. Quality is subjective but there will be consensus within various groups as to its meaning and instantiation. There is no point in pushing vast amounts of money, credit and capital through preferenced channel-intermediaries without attempting to discriminate between intended results.


[1]: See ‘Designing an Intentional Currency’
[2]: https://www.feasta.org/2017/10/18/significant-discrepancies-between-irish-peoples-overall-well-being-and-irish-gdp-levels-during-the-period-2000-2014-according-to-new-study-published-by-feasta-and-fest/

Featured image: https://commons.wikimedia.org/wiki/File:Fredmeyer_edit_1.jpg

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