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Why easing is not pleasing savers
The Monetary Policy Committee’s decision to announce another £50bn of Quantitative Easing received very little press coverage. Has QE become so routine that the Bank of England conjuring up more money than the UK spends on defence is not particularly newsworthy? The total figure for QE, £375bn, is almost as much as last year’s bill for social security, health and education combined.
And what exactly has been achieved with all that cash spewed out by Mervyn’s Magic Money-making Machine? According to the Bank of England’s own booklet on QE, it should have produced “higher spending and therefore growth”. We have seen precious little sign of this, though the Bank of course claims that without QE the situation would be even worse.
What exactly has become of all the money? It appears to have swollen the coffers of the country’s banks (and boost bonuses). Indeed, deputy governor Paul Tucker said as much in a speech last month, when he admitted that much of the QE money had gone to bolster bank reserves rather than being lent out, as intended.
The negative side of QE
While it is hard to point to any positive benefit from QE (unless you’re an investment banker), QE’s baleful negative effects are all too evident. QE depresses gilt yields. Combined with over three years of record low 0.5% base rates, it has made it impossible for savers to get real returns, while those dependent on savings – many elderly – have seen their incomes savaged. Annuities, which must be bought by retirees, are producing an income 27% lower than four years ago.
The National Association of Pension Funds believes that QE has cost pension funds £270 billion, while the deficit of defined benefit schemes has jumped in just one month by £95 billion to £312 billion. This has unintended consequences. Those deficits have to be plugged by companies, which means they have less to invest in their businesses, thus reducing growth potential. It may even push fragile enterprises closer to insolvency.
QE is also inflationary, exacerbating the gap between rising prices and wages which is making everyone feel poorer. The Bank of England reckoned that the initial £200bn tranche of QE boosted inflation by up to 1.5%. However, because the banks don’t appear to be passing the money on, QE’s current inflationary pressure appears to have eased. The extra money remains in the system, though, like a hand grenade waiting for somebody to yank out the pin and explode inflation, as this article by John Phelan explains.
Sir Mervyn King recently talked of the “deceitful manipulation of one of the most important interest rates”. He was referring to LIBOR but surely that is exactly what the Bank of England – with the connivance of the government – is doing with the most important interest rate of all? It should be evident by now that keeping the base rate at a record low of 0.5% is not producing growth. On the contrary, it is distorting economic signals and gumming up the workings of the economy.
Even the Bank for International Settlements – the central bankers’ central banker – thinks that the Bank has got it wrong. It has just warned that persisting with low interest rates and QE is damaging. In its report, it said: “Prolonged and aggressive monetary accommodation may delay the return to a self-sustaining recovery” because it encourages “wasteful support of effectively insolvent borrowers and banks.”
In other words, the Bank of England’s policies are propping up zombie banks and companies that should be rationalised or put out of their misery and, by so doing, are diverting money away from businesses that are capable of growth. Mervyn King has become Dr. Frankenstein, applying electrodes to a corpse; it may jump when the juice is turned on, but this one will not return to life.
You can’t print growth
So why, if QE helps nobody but Britain’s financially-strapped banks, has the Bank of England decided upon another tranche? Some are now so distrustful that they believe helping the banks is exactly the reason. Albert Einstein said: ‘Insanity is doing the same thing, over and over again, but expecting different results.’ Just because the members of the MPC are intelligent theoretical economists does not mean they are incapable of behaving stupidly.
The Bank is culpable for helping to get us into this mess, thanks to its slack monetary policy during the boom. Yet although the financial crisis was caused by an over-reliance upon debt, we are told that the solution is to encourage still more debt. It is madness, a dangerous madness which continues to deplete the country’s savings. You wonder if the members of the MPC have forgotten that it is these savings which provide the capital that is essential if there is to be a rise in investment and productivity gains, which is what produces real, rather than illusory, debt-bubble growth.
You can print money but you can’t print growth. If you could, every poor country would do it.
Mervyn King has become Wile E Coyote. He has run over the cliff and his legs are now jiggling faster and faster in a vain attempt to stay airborne. Sooner or later, though, he’s going to look down and realise there is nothing beneath his feet.