EFFECT ON THE ECONOMY
EFFECT ON household debt
how it works
Sovereign money creation
flooding financial markets
boosting the real economy
Making the rich richer
helping ordinary people
Between 2009 and 2011,
the Bank of England created £375bn
of new money through a scheme called
Quantitative Easing to keep the economy going.
But this money got trapped in financial markets
and had almost no benefit for ordinary people.
The Bank of England estimates that the £375bn of QE has boosted the size of the economy by around 1.5-2.0% of GDP.
This is extra £30bn of extra spending.
In other words, every £1 of QE
added just 8p to the economy
Under Quantitative Easing (QE) the
Bank of England creates money
electronically, and injects this into
the financial markets by buying
government bonds from pension
funds and insurance companies.
The pension funds then use
this new money to go and
buy other financial assets
(i.e. other bonds or shares).
The money sloshes around
the financial markets, pushing
up the price of bonds and shares.
The money goes directly into the real economy,
where it boosts spending and employment.
SMC is far more powerful at creating jobs and boosting the real economy. For example, if just £10bn were created and spent on the construction of affordable housing, it would boost GDP by up to £28bn.
The Bank of England estimates that this
newly created money has pushed up
share prices by around 20%.
They hoped that the people who owned those shares would feel richer and would start spending more. However 40% of the shares
in the financial markets are owned by
the wealthiest 5% of households.
This means that while QE made each of these households around £128,000 better off, most households got little or no benefit.
One of the intended effects of QE was to
encourage banks to increase their lending.
Even though the crisis was caused by banks
lending too much, QE was partly intended to
encourage people to go even further into debt,
even though personal debt is at a historically
high level - more than £54,000 per household.
This risks making the debt problem even worse.
Sovereign money enters the economy
without anyone having to borrow it,
so no-one needs to go further into debt.
This means SMC can boost the economy
even if household debt is not rising.
And in fact, the new money can be used by
the people who earn it to pay down existing
debts. So while QE may boost the level of
debt in the economy, SMC can actually reduce
Building affordable houses will keep house prices from rising too quickly (which would increase the gap between the richest and
Or the money could be used to retrofit homes to make them more energy efficient.
The government can
then use the money for either
direct payments to all citizens.
The Bank of England creates money
electronically, and adds this money
to the government’s bank account
Sovereign Money Creation (SMC) is far more powerful at creating jobs and boosting the real economy. If just £10bn were created and spent on the construction of affordable housing, it would boost GDP by up to £28bn. In other words, every £1 from SMC
boosts GDP by £2.80
QE was a wasted opportunity.
A better way to stimulate the economy is
through Sovereign Money Creation, where
money is created by the Bank of England,
granted to the government and then spent
directly into the real economy, where it can
boost spending and jobs.
QE was a wasted opportunity.
Instead of creating £375bn of new money and putting it into the financial markets
(making the very richest even better off) the Bank of England could have put just £10bn into
the real economy. This would have created jobs, lowered debt and made the economy safer.
There are better ways of running our economy. Positive Money is a movement to
democratise money and banking so that it works for society and not against it.
Join the campaign at: