In both Japan and the UK, QE isn’t working, he says, because it doesn’t focus on “the most important part of the money supply”, which is bank lending. “UK QE has singularly failed, as bank credit is still shrinking.”
When faced with the claim used by some British banks that the demand for credit is low, Prof Werner is dismissive. “I’m quite used to this argument, because banks in Japan used it for 20 years,” he says. “The banks, of course, have become very risk-averse, as they have many non-performing assets.”
Prof Werner is also critical of the UK’s concentrated banking structure – which he argues has made the economy more vulnerable. “British banking is dominated by a small number of big banks – with just five banks controlling 90% of deposits,” he says.
Richard Werner talking to the BBC in their news item UK QE has failed, says quantitative easing inventor.
What is completely lost in that BBC article is that Werner has always emphasised that the effect of credit creation depends on the use of money. Werner cites two cases:
Case 1. The newly created purchasing power is used for transactions that are part of GDP. In this case, nominal GDP will expand: credit creation for ‘real economy transactions’ C(R) –> nominal growth can result in two outcomes
- Inflation without growth | Credit creation is used for consumption: more money coincides with the same amount of goods and services = consumptive credit creation
- Growth without inflation | Credit creation is used for productive credit creation: more money coincides with more goods and services = productive credit creation
Case 2. Newly created purchasing power is used for transactions that are not part of GDP (financial and real estate transactions). In this case, GDP is not directly affected, but asset prices must rise (i.e. asset inflation): credit creation for financial transaction C(F) –> asset markets.
- Asset inflation | Credit is used for financial and real estate speculation. More money circulates in the financial markets = speculative credit creation.
For a recent deck of his go here
One of the best books that few people know about let alone have read is Werner’s New Paradigm in Macroeconomics Solving the Riddle of Japanese Macroeconomic Performance
That will be covered in the future on this site as it will become more relevant that rate normalization will not be around the corner in Canada, USA or elsewhere where the debt burden for households is large, debt servicing long and the banking sector is fundamentally an extender of credit for real estate speculation, development and home buying rather than a lender for funding new startup entrepreneurial ventures that are critical to economic rejuvenation but also risky: most fail. There isn’t an immediate solution to the lack of funding for start ups but new models of peer to peer lending may be an option.