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:
- “Unlike straight money printing, it is designed to transfer money to banks, not to the consumer or to the government. The banks swap their existing government bonds for newly printed money. In theory, the banks now lend this cash on the high street to consumers and businesses. In reality, that has been a problem. Burnt by the financial crisis, banks have imposed tougher lending criteria at a time when creditworthiness is impaired. As such, they cannot lend. Instead the money ends up in the trading account. It gets spent on financial instruments in proportion to the greed (equities) or fear (bonds) of the institution in question.”
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:
- “Across the world, stock markets are booming… Bond prices are also strong in developed markets despite those same sovereigns usually being mired in a debt crisis…
- “In short, if you came into this last year owning assets, you will have done well. Of course, whether protecting asset prices come what may is a good or useful thing for a central bank to be doing is another thing altogether.”
Certainly, it’s not doing much for equality:
- “While those at the top have done well from the magic money mountain that was summoned into being by QE, those who have done badly are those with relatively fixed wages and no assets. As the nominal price of assets increases, and wage growth lags inflation, the distance between the renting class and the owning classes grows greater still.”
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:
- “Western money printing is slowly burning the bridges between rich and poor. Whatever the economic benefit (and I am dubious there), it is worth considering that there is a significant social cost.”
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.