From Ros Altmann:economist and pensions,
    investment and retirement policy expert

  • pensionsandsavings.com

    QE is 10 years old – have the side-effects been driving populist anger, Brexit and Trump?

    QE is 10 years old – have the side-effects been driving populist anger, Brexit and Trump?

    • Ten years since QE started – has this ‘emergency monetary experiment’ contributed to Brexit, rising populism and anti-capitalism?   
    • QE benefits Governments, banks and wealthiest in society and disadvantages younger and less well-off groups. 
    • Central Bank policies may have operated as disguised fiscal policy without democratic accountability.

    QE started ten years ago as an emergency monetary experiment: When the Bank of England (BoE) introduced ‘quantitative easing’, in the teeth of the financial crisis ten years ago, the policy was supposed to be an experimental emergency measure – designed to stave off a 1930s-style, or Japanese-style, deflation and economic collapse. Having pushed short-term interest rates down to almost zero, central banks wanted further stimulus and decided to lower long-term interest rates too as a supposedly temporary measure to revive growth.

    Bank of England created new money to buy Government bonds to boost growth: The policy entailed the emergency creation (‘printing’) of £200 billion of new money, which was used to buy government debt – gilts.  Effectively the BoE has been underwritten by the Treasury to buy government debt. The Fed, Bank of Japan and subsequently the European Central Bank introduced QE too. The ultimate aim of QE was to boost the real economy, growth and jobs, using rising asset prices as the reflation mechanism helping the economy deal with excessive debts built up before the crisis in 2008-09.  Housing, equities, bonds and other asset price increases are an indirect means to that end, not the end in itself.

    Although economic emergency passed QE continued, as if almost mainstream: The policy has been maintained well beyond the economic emergency. Despite rising growth and employment, global central banks have continued creating more money to buy more bonds. It seems that these ‘emergency’ experimental measures are almost becoming mainstream.

    Since 2009, £435billion new money was created to buy gilts, limited to maximum 70% of any gilt issue: In total, £435billion of new money has been created that has flooded into the gilt market, with the only real caveat being that the BoE said it would not hold more than 70% of any single gilt issue, as if that somehow meant it wasn’t influencing the price! As any of the gilts matured, the BoE bought more, to maintain the same level of gilt holdings.

    QE helps Governments borrow more cheaply: Of course, QE just happens to have the spin-off benefit of making it much easier for Governments to fund government borrowing and for banks to manage their indebtedness! For example, the yield on 30-year gilts is just 1.8%, far lower than pre-crisis levels, thus lowering fiscal deficits and allowing higher public expenditure. The wealthiest groups in society also benefit from the overall increase in asset prices that QE engenders, with rising house prices being politically popular with homeowners, especially older voters. But the policy has also disadvantaged others.

    Artificially boosting asset price can have negative effects on society, because assets are unevenly distributed: The top 5% of households own nearly half of UK assets and 80% of all assets are owned by the over-45s. So, the wealthiest and older households have become even wealthier, while QE-induced house price rises lead to higher rents, which have further disadvantaged non-homeowners and the young. Such social and distributional side-effects of unconventional monetary policies are under-recognised, perhaps because the policy is so beneficial to Governments, but politicians would do well to consider the potentially damaging political consequences. So far, QE has acted rather like a back-door central bank deficit financing measure, with markets willing to be fooled in their own self-interest, but the political consequences should no longer be ignored.

    In effect, monetary policy has acted like regressive fiscal policy: QE is rather like a hidden tax rise on people who rent or don’t have many assets, alongside hidden tax cuts for those wealthy groups who benefit. In fact Claudio Borio at the Bank of International Settlements Economic and Monetary Department recently said ‘Unconventional monetary policy is just fiscal policy dressed up’. Such distributional impacts would be politically unacceptable if imposed overtly, but disguising such fiscal measures as monetary policy has achieved similar impacts without democratic accountability.

    QE has hurt millions of households – both savers and borrowers: Many consumers are actually having to pay more to borrow, unless they are borrowing for house purchase. Mortgage rates have fallen (although they need to borrow more as house prices have increased, but credit card and overdraft interest rates have actually increased. Despite QE, consumer borrowing costs are now higher than 2009. Average Credit card interest rates are 18.7%pa compared with 16.1% before QE began – 2.6% higher and overdraft interest rates have risen by 1.7%.

    Savers have also suffered as interest rates are much lower than before 2009: Central bank policy has not benefitted the vast majority of savers, who hold cash. Most people’s savings are in deposits of less than 2 years’ maturity, predominantly bank or building society accounts, ISAs and National Savings, so they have been damaged by monetary policy and do not benefit from increases in asset prices resulting from QE.

    Sharp Falls in Interest rates for savers and borrowers rates have actually risen

    Fixed Rate 2 yr bonds


    Cash ISA


    Credit card interest % Overdraft interest rate %
    Dec 2008 3.0 4.5 16.1 18.0
    Dec 2018 1.4 0.9 18.7 19.7
    Interest rate change over past 10 years 1.6% lower 3.6% lower 2.6% higher 1.7% higher

    Source: Bank of England Statistics Table G1.3

    QE may also be undermining capitalism itself: Government bonds are supposed to be ‘risk-free’ assets. As the lowest risk asset class, other capital markets – and models of capital market pricing – use this as a benchmark. Capitalism assumes capital flows and market forces operating freely, to allocate resources and determine outcomes. when bond yields fall sharply, investors need to find other sources of return, thereby pushing up all other asset prices. However, it could be argued that global monetary policy has interfered with capitalism as QE has distorted this ‘risk-free’ rate. This makes traditional risk and asset price models unreliable. Artificially inflating asset prices may have caused market bubbles, which will not be obvious until the bubble bursts.

    QE has exacerbated wealth and inter-generational inequalities: Apart from the financial effects, there also may be social and political impacts resulting from the exacerbation of wealth inequality and intergenerational inequality. Such effects have been highlighted in several studies, including the BoE’s own analysis, showing that wealthiest groups have benefitted significantly from QE’s impact on asset. The policy has allowed the wealthy to become wealthier, while making younger and poorer groups worse off. The top 10% of households each had £322,000 of extra value added to their wealth, according the a BoE study in 2012. There is also an intergenerational issue; since 80% of financial assets are held by people aged over 45, older generations will have primarily been enriched by QE. Therefore, the majority of households and younger people have faced increased debts while not having the positive wealth impacts of QE.

    Prolonged QE may pose democratic dangers to capitalism: I believe unconventional monetary policies may have played a role in Brexit, Trump and rising populism and the side effects may be feeding popular disaffection with the entire capitalist system – most particularly among the younger generations.  The powerful groups who benefit most from QE – governments, financial market participants and the wealthiest – have so far held sway, but ongoing redistribution may at least partly explain disaffection with the ‘establishment’ and rise of populism.

    Politicians may have started to feel the fallout from QE but what can they do about it? There are other policies which could be pursued that might be more beneficial, and less harmful to average citizens, than ongoing QE. For example, temporary tax breaks for capital projects, new incentives to boost housebuilding or construction, including using pension assets for ‘build to rent’ social housing, or to invest directly in infrastructure with Government underpin.

    How about ‘People’s QE’? Instead of printing new money to buy more bonds, if the Bank of England believes a further stimulus might be required, I wonder whether it would be better and more effective to send a “time limited” cheque to all households, which they can spend as they choose, rather than further boosting assets for the wealthy groups. This would encourage spending directly.

    Can QE actually be unwound – will QT be possible? There is a serious question mark over how the end of QE will play out. There is talk of ‘Quantitative Tightening’ or ‘QT’ where the central banks should start selling back the bonds they hold on their balance sheets. However, actually trying to sell such enormous sovereign debt holdings back into the markets would drive yields and fiscal financing costs up dramatically and may be unaffordable.

    Just allowing bonds to run off without demanding capital repayment: Ultimately, could central banks be tempted to collude to cancel the bonds they bought – allowing them to mature without demanding Treasury repayment and never reinvesting? The same powerful groups who benefited from QE in the first place would once again benefit. Indeed, in that scenario, who would lose? Governments, banks, taxpayers and borrowers would all be winners – so who would make a fuss? Such a massive debt forgiveness could rebase currencies and markets.  Effectively QE would have resulted in a permanent redistribution of wealth and income, achieved via monetary policy, rather than the usual fiscal route and without the necessity of repaying all the accumulated past debts. So how will history judge this period – time will tell.

    I’ll leave you with a summary of QE’s unintended consequences as I see them:

    • QE has enabled Governments to borrow more and more cheaply
    • QE has enabled banks to increase margins and clean up balance sheets
    • QE has increased wealth inequality
    • QE has increased inter-generational inequality
    • QE has been associated with increased consumer debt
    • QE has increased pension deficits and annuity costs
    • QE has distorted investment risk, making asset allocation risk models less reliable, by adding risk to the supposedly risk-free asset
    • QE has sparked a significant asset reallocation move away from potentially higher return equities towards lower potential return bonds, a vicious spiral
    • QE may have undermined confidence in capitalism itself as the distribution of capital has changed.
    • QE may have had increased political disaffection among the majority of voters who may not have benefited from low rates
    • QE may have led to rising populism
    • QE may have fanned the flames of Brexit, Trump and extremist groups.

    One thought on “QE is 10 years old – have the side-effects been driving populist anger, Brexit and Trump?

    1. Fascinating take on QE and deserves a wide audience. I remember you taking the time to draw a diagram of QE’s money-go-round and the pitfalls therein, and have never forgotten it. I hope you can persuade the powers that be round to your way of thinking.

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