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Bank of England again pretends it is not killing savers
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.