Money-printing has impoverished Britain and no one is accountable

Telegraph

3 days ago

Quantitative easing (QE) entered the lexicon in 2009 when, for reasons which remain obscure to this day, the world's Western central banks decided to push not only short-term rates, but also long-term interest rates to near-zero.
It was a coordinated monetary response to the very severe 2008-9 global financial crisis. The Bank of England was an enthusiastic partner in this enterprise, singing the praises of the policy at the time. It argued it would pump money into the economy and hence stimulate economic activity in the post-credit crunch period when economic and investment confidence was low.
How did QE work? Announced in March 2009, the Bank of England started buying long-dated bonds (mostly government bonds or gilts) to push down interest rates (by pushing up the price of the bonds). The Bank of England had already reduced the Bank Rate from 5.5pc at the start of 2008 to 0.5pc in March 2009.
For most people, this was hard to understand, since it meant that governments issued debt which their central banks (guaranteed by the state) bought using money borrowed from commercial banks by way of a central bank 'overdraft'. The growing central bank overdraft was dressed up, presumably to reassure the public, as 'creating central bank reserves' – which sounds a lot better. If you're not confused already, then you're doing well.
To summarise: QE involved rigging the government bond market so that interest rates were ultra-low, nearly zero, across the board, and in most of the developed Western economies.
How did it work out for us in the UK?
Well of course, this wasn't an experiment with a control, so we can't know definitively. But let's look at some sample figures – and start with economic growth.
According to the Office for National Statistics (ONS), between 1958 and 2008, UK real growth per capita averaged 2.2pc per year. QE started in early 2009, so measuring from then, the real growth rate between 2009 and the end of QE in 2022 was about a quarter of the previous growth, at 0.6pc a year.
Now there were lots of mitigating factors – such as the 2020-21 Covid crisis – but if we stop counting in 2019, to avoid the Covid years, growth between 2009 and 2019 was only 0.7pc a year. So we can't really blame Covid.
So, the answer to the basic question, did QE promote growth?, is no.
What about government prudence? In my opinion, by far the most important aspect of QE was that it lasted so long, and became so embedded in our collective psyche, politicians around the world began to believe that borrowing money was free.
For more than a decade, it certainly looked like that. Investors sat quietly buying very, very expensive government bonds to finance widening fiscal deficits. Many of these investors, particularly pension funds, were effectively forced to do so to satisfy pension regulators' demands for what is known as 'asset-liability matching', for which long-dated government bonds, particularly index-linked bonds, were a near perfect liability match.
The global financial crisis, which had revealed very 'unmatched' portfolios, encouraged governments to strengthen the rules about asset-liability matching, hence the willing investors buying gilts at any price. In any case, gilts performed very well in the period between 2010 and 2021: as interest rates continually fell, their prices continually rose.
Businesses that normally would have gone bankrupt didn't because they could finance or refinance their debt at almost zero cost. There was even an academic movement called Modern Monetary Theory, which argued that borrowing money was, in effect, free, so governments could loosen their purse strings without constraint.
As a result of this perception that borrowing was very cheap or 'free', the Government borrowed like it has never borrowed before. According to the ONS, the total financial liabilities of the public sector rose from £1.4tn at the end of 2009 to £3.4tn at the end of 2021 – a more-than-doubling of overall government debt in just over a decade. And this in a period of suppressed inflation.
What's more, this figure does not include the unfunded public sector pension liability, which at the end of March 2022 stood at another £2.6tn. You might wonder why the Government doesn't recognise the public sector pension liabilities in its main accounts, but this is a separate topic for discussion.
A very important secondary effect of QE was that real assets – those that produced returns for investors – rose in value very substantially. House prices, shares and commercial property were all buoyed by the fact that they yielded much higher income than the interest payable on the borrowing to buy them. It was a simple income arbitrage – borrow money very cheaply, and invest in anything that yielded a higher return.
In the UK, buy-to-let residential property exploded as an investment activity. This shouldn't have been surprising: a saver could borrow money with a mortgage at 2pc or less, and invest in property that yielded 5pc or more. Property prices themselves were strong, so both income and capital gains seemed attractive.
It is also worth mentioning that individual savers, a much-ignored and abused section of the UK economy, were horribly treated during the whole QE period. Interest rates (particularly after tax) failed by a long way to keep up with (even modest) inflation, so saving became a way to lose money – and borrowing became a way to make money. These observations turned into habits and ways of thinking for people – instilling exactly the opposite of good financial instincts into the general population.
Finally, on the direct effects of QE, let's look at the effect on the Bank of England.
The Bank was used by the Government as its agent – some might say poodle – to buy the Government's own debt with money the Bank borrowed from the private banking system. The Government indemnified the Bank against any losses that it might incur in this hedge fund-like market activity. That indemnity was necessary, as it turned out, as at the end of QE the gilts the Bank owned turned out to be worth several hundred billion pounds less than the overdraft used to fund their purchase.
The effect was for the Government to borrow about £800bn of very short-term money on overdraft with a variable interest rate, instead of long-term, low-interest issues of gilts. So when interest rates went up, as they were ultimately always going to do, the taxpayer had much less cheap borrowing secured. We are now paying dearly for something the public didn't understand and wasn't consulted on, and now appears to be utterly pointless.
Let's summarise.
QE was designed to 'pump money into the economy' to stimulate investment and economic activity. From the growth figures, it appeared to do the opposite (although there are many other factors in play). No mention was made of the possible downsides, and these now appear to be legion and severe. They include:
Extreme laxity in public sector finances; a disregard for the long-term effects of public sector indebtedness; much higher valuations of real assets (largely residential property); a stealth tax on savers; a central bank with a weakened reputation and a bloated negative balance sheet guaranteed by the Government.
Has anyone who served in government been criticised for this decision? Has anyone lost their job? Does anyone even know who made the decision? Do we know the identities of the economic advisers who suggested and promoted this idea? Have we as a nation thought about the consequences so we can learn lessons for the future? The answer to all these questions is 'no'.