THE BANK OF ENGLAND’S report to the Treasury on August 23rd, The Distributional Effects of Asset Purchases, looks flimsy at best. Gone are the bold claims made for Quantitative Easing when it was first launched back in 2009.
QE will boost bank lending to business....
That doesn’t seem to have happened.
….and stimulate business investment....
QE will put money in people’s pockets and drive retail sales upwards....
Sadly not. The CBI reported this week that sales in August were broadly unchanged from a year ago, and retailers are increasingly pessimistic about future prospects.
QE will stimulate the revival of the housing market....
Nope. Today Lloyds TSB has reported that millions of mortgage holders are unable to move because they have lost their savings and deposits as a result of falling house prices.
QE will drive economic recovery, with economic growth of per cent over three years between 2009 and 2012....
Funnily enough, this hasn't materialised.
All of these impacts will be seen against a backdrop of low and falling inflation....
Things don’t seem to have quite gone according to plan in this respect either. The Governor of the Bank of England is obliged to write a letter to the Chancellor of the Exchequer if inflation rises to more than 3 per cent, explaining why it has happened and what he plans to do about it. Perhaps a kindly relative will give Sir Mervyn King a new pen for his Christmas. Given the number of missives he’s written to George Osborne since the start of QE, he’ll be needing one.
But now, after months of diligent research, the Bank of England has come up with one positive consequence of QE.
QE has boosted share prices....
At last! Complete success!! Triples all round!!!
Sadly, on closer examination, even this claim looks a rather doubtful.
Back in July 2009, as QE got underway, the FTSE 100 index stood at around 4400. This week, three years on, it has risen to around 5700 – an increase of approximately 30% in nominal terms. Over the same period, according to The Economist, the world MSCI stock market index rose from 250 to 325 – also an increase of 30%. So the UK stock market has performed in line with the world as a whole. There is no evidence of any differential impact as a result of QE.
On this shaky evidence, the Bank of England claims that, without Quantitative Easing, “Economic growth would have been lower. Unemployment would have been higher. Many more companies would have gone out of business.”
The writers of this report may have thought they were on safe ground in making these sweeping assertions. After all, they may have reasoned, no one can ever prove anything different. We just don't know what would have happened had QE never been introduced.
But here is one scenario which is entirely consistent with the evidence:
• annuity and savings rates would not have been artificially forced down;
• consequently, the income of pensioners and savers would have been higher;
• so their expenditure would have been higher, helping to stimulate retail sales;
• the pension scheme liabilities of the corporate sector would not have increased. Pressure on corporate finances would have been less, enabling them to invest more;
• the rise in consumer expenditure and corporate investment would have stimulated economic recovery.
This scenario is, I submit, at least as likely as the highly improbable narrative being spun by the Bank of England. One doesn’t have to be a fully paid-up member of the Austrian School to conclude that the Bank’s meddling in the money supply has hampered the process of adjustment and impeded economic recovery.
Yet even the Bank’s own highly tendentious account comes to very worrying conclusions about the distributional effects of QE. The Bank’s report concludes that it has acted as a sort of reverse Robin Hood – taking from the poor to give to the rich. Pensioners, small savers and those on fixed incomes have all suffered as a result of QE. Those who have benefited are the relatively well-off, who hold substantial amounts of financial securities.
Is the arbitrary redistribution of income from the poor to the rich really what the government and the Bank of England want to achieve?
If not, is it not time to call a halt to the failed QE programme once and for all?
Michael Nevin is author of The Golden Guinea: The International Financial Crisis, 2007 – 2014: Causes, Consequences and Cures. Commentary on the evolving international financial crisis such as this article can be found on the book's website www.goldenguinea.com