Suppose the Chancellor of the Exchequer stood up at the dispatch box and said, in the budget or the autumn statement, ‘I am giving £85,000 to the richest people in the country’, how might we react? Yet, according to MPs discussing the thorny issue of QE, that is the equivalent of what has happened in the UK thanks to the Bank of England.
MPs have been discussing two of the most contentious letters rattling around politics and economics today – QE – and they are not happy.
QE – or quantitative easing – has never been short of critics. The policy involves central banks going out with money that they had just magicked pretty much from thin air, buying medium and long-term government bonds. The policy was not quite as radical as is generally assumed – central banks traditionally set interest rates by selling or buying short-term bonds – if they wanted rates to fall, they kept buying short-term bonds until rates fell to the level they had targeted. And to increase rates, they did the opposite, and sold short-term bonds.
But after the crisis of 2008, and by the time interest rates had fallen to either zero, or near zero, (½ % in the case of the UK) it was felt that this policy was no longer sufficient, so they topped it by buying medium and longer term bonds.
To this, came the immediate reaction that QE would lead to runaway inflation or even hyper-inflation. Such criticism was based on a misunderstanding of how the broad money supply grows. Banks create money with their lending, governments could create money if their spending exceeds the product of net tax receipts and borrowing, but QE was never going to create money unless one of those two things happened. Instead, banks were reluctant to lend, and the UK government imposed austerity.
You may be interested to note that those who criticised QE because ‘it would inevitably lead to high inflation’, are still criticising it, but for other reasons.
But what QE did do, was push up on asset prices – firstly on bonds and then on house prices and equities. And when asset prices are higher, banks tend to be more relaxed about lending – hence it was hoped that the broad money supply would then grow, creating economic growth, and maybe some inflation.
Well, QE may have been a factor in ensuring we didn’t get economic Armageddon, it may have supported some growth; and while it has not created excessive inflation, it may have stopped deflation from getting entrenched.
But QE, because it leads to higher asset prices, which tend to benefit the rich, has been said to cause growing inequality. And since inequality is said by some to be a cause of some of the deeper problems with the global economy – as inequality is associated with higher savings globally, as the richer you are the more you tend to save, which in turn is associated with low interest rates – some say that QE has exacerbated the very problem it was meant to solve.
And now MPs have been looking at this very issue.
In a debate on Thursday 15th September, the House Commons – a very quiet House of Commons, which itself is a scandal – debated the issue.
Ian Blackford MP said: "If we look at the growth in financial wealth, we can see the contrasting experience of those who have benefited from this wealth effect at a time that real wage growth has stagnated. We know from an analysis published by the Bank of England in 2013 that QE had boosted asset prices and that the top 5% of households owned 40% of those assets. The analysis from the Bank of England at that time estimated that the top 5% of households had become richer to the tune of £128,000 on average. QE has demonstrably exacerbated wealth disparity between rich and poor.”
Steve Baker MP said: “One of the great tragedies of this subject [Quantitative Easing] is that, although we might think it is one of the most important issues of our time, it is not well understood, as can be seen from the attendance in the Chamber. Although the public feel the effects of it widely, their representatives are not as well equipped to participate in debates on the subject as they might be.”
And finally, Helen Goodman MP said: "Were the Chancellor of the Exchequer to stand up at the dispatch box and say, in the budget or the autumn statement, ‘I am giving £85,000 to the richest people in the country’, I think that even members on the government benches would be alarmed and concerned, and perhaps even slightly rebellious. But because it is being done by the Bank of England and is rather hidden, we are not seeing the same level of concern, and we need to see the same level of concern.”