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Putting the saver’s case to the Treasury Select Committee, part two
The Treasury Select Committee is conducting an inquiry into Quantitative Easing and the way it has redistributed wealth in the UK. After providing written evidence, Simon Rose of Save Our Savers and pensions expert Dr. Ros Altmann were asked to give oral evidence to the Committee. The first part of the session concerned the effects of the Bank’s policies on savings and pensions. In the second part, interest rates and the legacy of QE were discussed.
After a question to Rose Altmann about how low interest rates had helped the economy, Simon challenged the commonly-held view that low interest rates produce growth. “Suppressing the price of money artificially does not necessarily benefit an economy. If that were the case, why do we have interest rates at all? If you suppress the price of something, it is no surprise if the supply of it diminishes.”
He went on, “You have a body of savers in the country who are desperate to lend money, and you have people who want to borrow money but can’t, so it’s clear that at this level of interest rates the system is not working.”
Later, responding to Pat McFadden’s questioning on whether many retirees were dependent on savings, Simon pointed out that, according to the National Pensioners Convention, 5 million pensioners relied on cash savings for at least half of their income. Pressed by Mr. McFadden on whether he thought interest rates should rise, Simon said it was clear that low interest rates have created a zombie economy and that they should indeed rise, not only for the sake of savers, but the whole economy.
For her part, Dr. Altmann felt that, as a result of the Bank’s policies, the markets might force rates up more sharply than would otherwise have been the case.
The legacy of QE
Welcoming the committee’s inquiry, Dr. Altmann expressed indignation that the Bank could institute a policy with such wide-ranging effects on so many people. “If the Government were to stand up in Parliament and say, ‘We have decided the economy is in a hole and we have to take away 10% of income from older people, from savers and from pension funds, and we have to give that money to the banks and to people who have borrowed a lot to be able to afford their borrowings more,’ Parliament could debate that and could decide whether there is a valid case for redistributing income from older people to younger people, from middle asset owners to the very wealthiest. We have not had that.”
She also pointed out that QE had been brought in as an emergency measure. “If you look back to 2009, the reason given for trying quantitative easing was to avoid deflation. That was the original remit and the Bank of England’s forecasts were that we faced a Japanese-style deflation. Having overcome those risks most clearly, the Bank continued with its policy of QE and it has not given a clear explanation of why there is a need for further QE if its remit is indeed inflation targeting.”
Simon agreed, pointing out that, “the Bank of England’s own booklet on QE talks about reducing the risks of inflation falling below the 2% target. It says, ‘If inflation looks set to rise above 2%, the MPC could put downward pressure on spending and inflation by raising bank rates, removing the extra money.’ Well, it has been above 2% for 39 out of the 45 months since QE began.”
He also took the opportunity to put the all-important case for savings in the economy, pointing out “the importance of savings not just for savers, but for the economy as a whole. The Bank seems to underrate this considerably, but our savings provide the money for investment, which enables the economy to grow. Undermining savings, not only for this generation but for future generations, risks decapitalising the country, so that we cannot maintain our capital stock or grow it. It is extremely dangerous.”
Jesse Norman remarked that, in this recession, people had not been thrown out of their houses to the same degree as in other recessions because of the Bank’s easy money policy. Simon demurred, saying that “you could argue to some extent that ameliorating the effects of the recession has been a form of pain relief rather than of cure. Perhaps to have seen a little less support for companies that are now being kept alive by forbearance from the banks, for instance, might enable other companies who can’t currently get finance to have started up.”
Summarising her arguments, Dr. Altmann said, “What the Bank seems to be doing is concentrating on protecting the downside. But you are not going to get out of the hole unless you find the upside. With pension funds, buying gilts may stop you getting worse, although it hasn’t, but it does not give you the returns you need to make up your deficit. With QE, by helping banks rebuild balance sheets or borrowers afford loans that would otherwise be unaffordable, you don’t get growth. There is nothing coming through from the Bank that says, ‘This will create growth,’ and it hasn’t created growth.
“The evidence is clear. I believe that ending QE is much more likely to herald a period of growth and I would predict that, if we do not have any more QE, the economy will be much freer to grow than if we do.”
The chairman of the Treasury Select Committee thanked Simon Rose and Ros Altmann. “That is admirably clear. Both of you have given very forceful advice to us on this important aspect of the whole QE question of the distributional effects, and we are very grateful to you for coming this morning to do that.”
The inquiry is continuing but we understand that it is unlikely to progress much further until the other side of the Budget, which is on March 20th
Video highlights of the evidence session are available by clicking here.