Bank of England again pretends it is not killing savers

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Earlier this month I complained here about why QE was no longer considered newsworthy, even after the announcement of another £50 billion of QE. Suddenly QE is hot news again and it’s all thanks to the Bank of England. As part of its response to the Treasury Select Committee’s call to explain what QE has done, rather than what Sir Mervyn King says it has done, the Bank has produced a report on the “Distributional Effects of Asset Purchases“.

As with so many utterances from the Old Lady of Threadneedle Street, it is an extraordinarily self-serving, smug document which claims that “without the Bank’s asset purchases, most people in the United Kingdom would have been worse off. Economic growth would have been lower. Unemployment would have been higher. Many more companies would have gone out of business. This would have had a significant detrimental impact on savers and pensioners.” It gives no actual proof of this. We simply have to take it on trust. For all we know, Merve and his Merry Men saved us all from plagues of locusts, boils and frogs too.

How QE benefits the wealthiest

What has attracted most attention, however, is the admission – as we and others have complained all along – that QE has been responsible for a massive transfer of wealth to the very wealthy, as well as from savers to borrowers. It admits that savers have lost out on their deposit income. But it claims that they have been equally compensated by the way QE has boosted asset prices. This is, of course, an outrageous and disingenuous mangling of the facts. As the report itself points out, 40% of all financial assets are owned by the very wealthiest. It admits that “the benefits from these wealth effects will accrue to those households holding most financial assets” and glosses over the fact that the majority of savers have no assets other than their cash deposits. Roll your cursor over the graph in this Spectator piece and you’ll see the reality of this redistribution of wealth through QE. And, yes, that is a negative figure for the poorest 10%. 

As Nassim Taleb, the Black Swan author says:

Quantitative Easing is a transfer of wealth to the rich. It brings up the housing prices.  The state is subsidising the rich, it is the top 1 per cent that benefit from quantitative easing, not the 99 per cent.  Quantitative easing really is flooding banks with money so they pay themselves bonuses with it.  Banks have money and assets so now they can borrow easily.  The poor guy here who is unemployed and can’t borrow is not going to benefit from QE.

The report admits that savers have lost £70 billion since September 2008 through lower interest rates, but fails to take inflation into account. It does not think (or does not want) to remind us just how severe inflation has been; since that date CPI has risen by 11.7%, further undermining the value of savings and indeed wages. That, of course, goes a long way to explain the rise in the price of assets such as equities. As so often, Sir Mervyn King confuses a rise in the price of assets with a rise in the value of assets.

The Bank claims that its policies are even-handed. “Such distributional effects typically balance out over the course of a policy cycle: some groups benefit relative to others as interest rates are increased, but that is reversed as interest rates are lowered.” As Andrew Sentance has pointed out so often, the MPC is far keener to put rates down than up. Base rate has been on a downward trend since 1990 and this has had a dramatic effect on the economy; indeed it is partly responsible for the seriousness of the crisis. The Bank may waffle on about how these things balance out in the long run, yet their macroeconomic policies have a real and painful impact on individuals.

The inflationary genie is ready to burst out

The report concludes that ”weak growth and above-target inflation” are the painful and unavoidable consequences of the financial crisis, once more blaming rises in oil and other commodity prices. It does not explain that the rise is due in large part to the fall in the pound after interest rates were slashed. “In response to these difficult circumstances, monetary policy has been exceptionally expansionary for an unusually long period of time.” A more honest view comes from former MPC member Kate Barker ,who says that “the MPC’s failure to take sufficient account of the rapid rise in credit may well have exacerbated the UK’s recession,” admitting that interest rates should have been higher in the mid-2000s so that the debt boom did not get so out of hand. Far from saving us all, the MPC made the crisis even more severe than it otherwise would have been.

Let us not forget, too, how experimental QE is. Printing money, by whatever means, is inflationary. Although the bank will so far only admit that the first £200 billion of QE raised prices by getting on for 1.5%, most of the QE money is currently sitting, biding its time, in some dark corner of the banking system. Unless the Bank of England is incredibly adept at reversing QE that money will eventually find its way into the wider economy. It won’t only be £375 billion either. Because of the fractional reserve banking system, the inflationary impact could be horrendous. Taleb imaginatively compares inflation to ketchup:

You ease, you ease, you ease, you don’t see inflation and then suddenly – puff! –  you have a huge amount of inflation coming.  Like you try to pour money out of the ketchup bottle and nothing comes out, nothing comes out and then everything splashes, this is how inflation comes.  Inflation doesn’t come in a pretty nice way so don’t mess with inflation. Every single person who has done quantitative easing or a form of printing money has effectively lost the argument.

In this report, the Bank has confessed that its policies heavily favour the wealthy at the expense of those with less. The MPC is playing with a hand grenade – with the pin out. It really is about time Sir Mervyn King and his colleagues took their heads out of their economic textbooks and took responsbility for the way their policies are affecting people who have to live in the real world.

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4 Comments

1. Frances

   August 24, 2012 at 6:09 pm

   But will the MPC and Sir Mervyn or indeed the puppet master George Osbourne listen

   NOT ON YOUR LIFE

   The entire lot of them produce crap in the way of reports with not one shred of evidence to back up their claims

   If only the Majority of Pensioners affected so badly by low interest rates could afford even the cost of a postage stamp to write in and complain because the generation most affected can barely afford a telephone bill much less Royal Mail and certainly are neither computer literate or can afford a computer

   Sir Mervyn and the entire MPC and their Puppet Master George Osbopurne are RICH RICH RICH and getting more so by the minute

   Why was Merve the Swerve given a Knighthood ??????????????

   FOR HIS ABILITY TO TWIST THINGS TO HIS ADVANTAGE

   Recommend (16)
2. Thomas G Clark

   August 26, 2012 at 2:29 pm

   Excellent analysis.

   Prudent people like pensioners and savers are being robbed in order to prop up reckless speculators.

   QE is simply a policy of “magicing up” money in order to distribute it to the wealthy, with no consideration for the adverse impact on savers, pensioners and ordinary working people.

   Recommend (10)
3. Howard

   August 31, 2012 at 8:03 am

   One thing the report does not mention is the effect on the Bank of England officials’ pension funds. As the “Telegraph” reported on 3 July QE caused Bean & Tucker’s pension pots increase by £1.04m & £1.35M due to a fall in gilt yields.

   I invited them in open letter to join the rest of us & switch their index linked fund to a normal fixed annuity (The pension scheme is 95% invested in index linked gilts).

   Needless to say I have had no reply!

   Recommend (7)
4. Michael Thomas

   September 25, 2012 at 7:30 pm

   Mervyn King should be put on trial for Treason for his part in debasing the sovereign currency of the land.
   It”s patently obvious that the low interest rate policy is designed to create inflation in order to reduce the real growth of the National Debt while the government fails to pull in its own belt.
   What happened to the originally-declared primary goal of the MPC, ie controlling inflation? If it will not discharge this responsibility, it should be abolished and interest rate policy taken back under political control where voters have an opportunity to pass judgement.
   PROSECUTE MERVYN KING.

   Recommend (5)