No one who knows Sir Mervyn King would describe him as a radical. The Bank of England governor looks every inch the owlish academic, yet he is midway through what is possibly the greatest gamble in Britain’s economic history. Under the frosted-glass term of ‘quantitative easing’, he may soon have the Bank artificially create £600 billion of credit to its own account, the bulk of which would be used to buy government debt. Other countries have attempted quantitative easing, but never on this scale. Sir Mervyn is boldly going where no central banker has gone before — yet with the minimum of debate over the policy’s costs, its consequences and its victims.
The problem is clear enough. Britain seems to be stalled in a Zero Era with flat consumer spending, next to no pay rises, a slump in investment, no-growth economy — and ultra-low interest rates. And this is no coincidence. The digital banknote printing which Sir Mervyn has conducted so far — about £275 billion — has kept interest rates low. This is QE’s first and most powerful effect. The idea is that investors, dismayed by the low return from government debt notes, will instead buy other assets more likely to help with the economic recovery.
Low rates of interest are, of course, great news for a government which needs to borrow £4,000 a second — but not for savers who see the value of their nest egg destroyed by inflation. It hurts pension funds, so what we think we’re putting towards retirement will be worth far less. Companies see the value of their pension fund plunge — and have to top it up. This is what QE does: transfers wealth from savers to borrowers. If the Chancellor stood up and admitted as much, it would cause uproar. But because QE is a complex Bank of England mechanism with a boring name, no one much cares.
We need not guess at its effects. The Bank’s own analysis has confirmed that the first £200 billion of QE pushed up inflation by anything from 1 to 2.6 percentage points. This was slipped out in the small print of a Bank report, barely making a ripple. Compare this to the political outcry which surrounded the 2.5 percentage point rise in VAT last January. Every household had to pay considerably more for shopping due to QE, too, and, as with VAT, it has hit the poorest households hardest.
Now that Britain is about to get another massive dose of QE, we have little choice but to take on trust the Bank’s forecast that inflation will rapidly tumble back towards its target rate. Sir Mervyn seems quite sure that his QE will not interfere with this. Yet the Bank’s recent record of inflation control — its single most important function — has not been good. The target has been overshot in 59 of the past 68 months. Sceptics are surely entitled to ask why, with such a patchy forecasting record, the Bank seems so confident now.
And can we be sure that it will improve the economy? When QE was first deployed almost three years ago, with a mere £75 billion, it was seen as a one-off measure. But when growth stalled, the printing presses were put to work yet again. This is why analysts are expecting the next round of money printing to be colossal. The Bank of England optimistically thinks the British economy will grow by almost 1 per cent this year, and almost 3 per cent next year. Michael Saunders, analyst at Citibank, reckons this is a pipe dream — he estimates growth will be a desultory 0.2 per cent this year and just 1 per cent next year. If he’s right, then the Bank will probably keep pumping out those banknotes. And the side effects — for savers, pension fund holders and shoppers — may get worse and worse.
This deepening savings crisis caused Otto Thoresen, new director-general of the Association of British Insurers, to make an astonishing admission last month: ‘People are wondering,’ he declared in a speech to an industry conference, ‘if pension-saving is really worth it. We must persuade people that it pays to save.’
Some hope, many might say, as the Bank cranks up the QE machine for another onslaught of digital noughts — and with plenty more where those came from.
The best that can be said about QE, so far, is that things might have been even worse without it. That British banks might have found it even harder to stay afloat — and that the extra inflation, and the hammer blow dealt to savers, has all been a price worth paying. But we will never know. Stephen Lewis, an economist with Monument Securities, puts it thus: ‘QE may be heading off the serious liquidity crunch that might otherwise occur and which might easily turn into a solvency crisis. Its benefits, therefore, may lie more in minimising negative hypotheticals than in delivering positive gains.’
This may well be true, and QE may have succeeded in minimising these ‘negative hypotheticals’. But the Zero Era of low rates is also crushing millions of non-hypothetical savers, punishing the virtue of thrift and destroying the very pillar of capital on which tomorrow’s economy depends.