Why easing is not pleasing savers

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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.

Deceitful manipulation

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.

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6 Comments

1. frances

   July 11, 2012 at 3:18 pm

   What everyone has forgotten is the people who were spending were the retirees with a nest egg ………….they due to LOW INTEREST RATES AND INFLATION SIMPLY NOW DARE NOT SPEND …………..Mervyn King is indeed like Wily Ceyote ……….he does not give a damm because through what can only be insider trading has a pension each year equal to most peoples life income

   The question must be asked HOW HAS THE B of E Pension Fund made such huge leaps in value when every other Pension Fund has bottomed out and is in negative equity

   B of E also claims Assett prices have increased……………OH YEAH which assetts because not one single one of my portfolio of shares has increased indeed majority are HALF THE VALUE they were 4 years ago before all this chaos started

   As far as i am concerned the B of E /FSA /Treasury and both current and previous Governments are culpable and should all be hung drawn and quatered for what they have DELIBERATELY done to savers most of whom are also Pensioners which its been proved with every single Government policy David Cameron etc HATES PENSIONERS but loves Overseas aid and Illegal Immigrants

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2. Stephen

   July 11, 2012 at 5:26 pm

   Frances has hit the nail on the head. With what the Tory MP Boles (can’t remember his first name as I have heard of him before) said Tuesday re nothing is cast in stone re bus passes, winter fuel payment and free TV licences for those over 75, I think that there will be a great silver voters backlash in 2015. What these oiks don’t realise is that the number of pensioners are increasing day by day and the Coalition/ Tory party are getting more opposition all the time.
   But I did get a letter from the Pension Service asking me to get in touch as I will be claiming my State Pension from November. I spoke to a very nice and polite lady in Preston who was charming. At least there is one government department that is polite to our age group.

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3. A

   July 11, 2012 at 8:59 pm

   I have given up with the people in power. Their only remit has been to keep asset prices high and nothing more.

   They have total contempts for the savers, tenants, pensioners, youth..

   Instead of allowing the market to correct (with te obvious implications for reckless banks and indivinduals) they have asked all of us to share the burden of the ones who were recklesss and just lead the whole country to stagflation..

   Disgrace. All around us there are signs that this wonderful country is been led to depression in order to save the banks…

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4. John.

   July 12, 2012 at 7:49 am

   The most depressing thing in all this for me personally is that if politicians really, really wanted to get this sorted out, really, truly wanted to bite the bullet and take action, they could. We have given them the power to act through the ballot box, instead they are all about squabbling amongst themselves and preserving the establishment and the cosy relationships with powerful privileged elites, coddling and protecting the obscene advantages these reptiles enjoy and securing the personal benefits they stand to gain from such relationships. The whole edifice stinks.

   Incompetence plays a large part in this too, why can’t we have a national bank such as the mostly state owned RBS or Northern Rock that was, before the idiot politicians sold it off the bit that worked well for about half what the public paid to bail them out leaving the exchequer anywhere from £400bn to £650bn worse off once all the arrangements have worked themselves out.

   Of course they would need to be run by competent, regulated professionals and any politician would need to be shot on sight going anywhere near, but lending public money to UK based businesses that have an address here and so pay their taxes properly should go some way to getting the economy moving again.

   The problem with private banks, including and especially central banks via their high street proxies, is that they’re all about turning a profit at the expense of those forced to use their monopoly money.

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5. drrdf

   July 14, 2012 at 11:32 am

   “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?”

   What all the media is conveniently avoiding with reference to the LIBOR scandal is the evident and necessary involvement of the BoE and King in this. It would not have been possible to maintain UK base rate at the supposed “emergency” artificial level of only 0.5 % for so long if the LIBOR rate had been allowed to be freely set by the market, since LIBOR would have risen much higher than the artificial base rate. Historically LIBOR has always been around 0.1 or 0.2 % above UK base rate under stable economic conditions. Even with the now admitted manipulation it is almost double UK base rate; that demonstrates market pressures even with the present interest rate manipulation. Added to that quite a few retail deposit takers are currently offering between 3.0 to
   3.5 % for instant deposits, when the artificial base rate is only 0.5 %! No bank would pay 3.5 % for retail instant (at call) deposits if it could actually borrow from other banks at 0.9 %; that would not make commercial sense. So it is clear that LIBOR has been manipulated and artificially held down by the banks under direct instruction from King and the BoE, so as to allow the BoE to continue to enforce its artificially low emergency base rate. Without that gambit the BoE would not have been able to artificially hold down the base rate for so long, and the cost of servicing the public debt accumulated by a series of profligate politicians would have become impossible. Real market pressures on rates are also demonstrated by the previously historically unseen spread between the artificially low base rate and retail deposit rates actually being currently paid (around 700 % or more); this situation has never been seen before and shows that the complete situation is manipulated so that there is no longer any free price discovery mechanism in the markets. It shows that the market forces are straining to get out of the cage fabricated by King and the BoE with their manipulation. When they do rise it is likely that interest rates will rise suddenly by a large factor; that will then do untold damage to the UK economy. It is all rather like a large dam holding back an increasing deluge of water; once the dam cracks and collapses the escaping water does untold damage.

   Now this gross manipulation has been exposed of course King and the BoE are trying to pin the blame on scapegoats such as Barclays (Diamond), RBS and Lloyds, so as to take the heat off themselves, where it actually belongs. These rogues controlling the economy will do anything to attempt to save their own skins when their deeds are exposed. For some reason they seem to also be able to control the general media, who do not expose this and all the other manipulation and corruption any longer. Part of it may be that most of the journalists and media staff have mortgages, and they do not want to rock the boat for fear it might cause their mortgage rate to increase dramatically; but that is certainly not the only factor at work here, and there is clearly some other connivance going on with the principal general media.

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6. Anne

   July 17, 2012 at 1:27 pm

   Well said,Frances.I can only agree with your comments.

   Mervyn King has to go. It is not surprising that Andrew Sentance resigned his own positioj. He will have known precisely what was going on.

   Money in the banks that ordinary people have scrimped to save,belongs to those very people.Likewise does the interest gained on those investments. However it appears that Sir Mervyn and the Government have uses for OUR money and have discovered a way of `creaming it off` for their own benefit. Therefore this constitutes robbery.Perhaps the term `money laundering` could be used here?

   Also don`t forget that the Government `bought` a policy of austerity in exchange for an agreement of some kind with Europe and so this would also explain why `all the doors are shut` to the majority of the population – with certain exemptions for particular Groups and individuals – in terms of making sure the general population have a shortage of money. This explains the facts of no cost of living increases for workers and rock bottomk interest on people`s savings. This ensures that the economy does not grow, further ensuring that the erosion of people`s money and pensions continues. This will continue until the present Government is booted out. There is no true recession. The current situation has been manufactured artificially by the present Government. Their scapegoat is the previous Government. What the present Government is actually doing is stealing as much of workers conditions and money as they can,under the guise of an economic recession,that has been artificially created.

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