Last week, in a speech on the economy, David Cameron warned the nation that there is no “magic money tree”. But, as various commentators swiftly pointed out, this botanical wonder does exist – and its name is quantitative easing.
Indeed, some would regard QE as George Osborne's number one economic policy. In his column for the Daily Telegraph, Thomas Pascoe provides a mercifully understandable explanation of how quantitative easing works – or, rather, how it doesn’t:
The reason why QE isn’t stimulating growth or stoking inflation is that so little of the money created has “filtered down to the high street”. It is, however, pushing up demand for investment products:
Certainly, it’s not doing much for equality:
Yet, there is a sense in which the critics of the QE are missing the point. It’s real purpose isn’t to get growth going again, but to help us manage the debt that was built up in order to keep growth going before the financial crisis.
Firstly, the banks earn a great deal of money from handling various QE-related transaction, helping to recapitalise them. Secondly, in buying up so much public debt, the Bank of England is effectively reducing the burden of repayment on future taxpayers. Thirdly, in keeping bond yields low on government bonds, QE keeps interest rates from rising more generally – to the great relief of a heavily indebted population.
If the opponents of QE believe there’s a better way of dealing with our debts they should let us know – especially if that involves letting interest rates rip, thereby unleashing a tidal wave of default and bankruptcy.
Still, Thomas Pascoe’s central point needs to be answered too:
The fact is that quantitive easing, whatever its other justifications, amounts to a vast government subsidy for the rich. At an appropriate time, this money must be clawed back and used to further reduce the burden of debt on the rest of us.