If you speak to a banker or an economist they will tell you that the great monetary experiment they
call Quantitative Easing (QE) saved Western economies from a “financial meltdown” in 2008. To this
day the Bank of England describes its action as: “Quantitative easing is an ‘unconventional’ form of
monetary policy that our Monetary Policy Committee has carried out in order to stimulate the
economy when interest rates are already low. The ultimate aim of this is to boost spending to reach
our inflation target of 2%.” The Bank of England does not explain why today, with inflation running
at 3%, they have already exceeded their target by 50%, and yet there has still not been any
contraction of QE?
As I explained in an article in April 2016, I once worked with the man who first created the term
Quantitative Easing when he was working for the Bank of Japan. He told me it was just a phrase to
reassure the financial markets that the Japanese Central Bank had things under control and knew
what they were doing. He explained that creating credit for fresh bank lending to stimulate the
economy was not a new process and happened all the time. Only in this instant the process had a
new, reassuring name. To bankers and economists the two words had a calming effect: quantitative
– the measurement of large amounts, and easing – the making of small adjustments. To everybody
else they have the ring of an oxymoron, if one makes small adjustments to something large it isn’t
going to make any significant difference. Nevertheless, the phrase inspires confidence – nothing
radical going on here, just some small tweaks.
Unfortunately we live in an age where spinning truth is the default state and words are chosen to
deliberately mislead. Quantitative Easing has been anything but a series of small adjustments. Since
the financial collapse of 2008, the U.K.’s Bank of England has eased (printed electronically) an extra
£435 billion into the economy. Globally, Central Banks have created a total of $12 trillion of new
money whilst holding down interest rates at their lowest for 5,000 years.
Believe it or not there is very little understanding about Quantitative Easing. To quote a very recent
research paper from the Bank of England: “Before QE was adopted in response to the global financial
crisis, central bankers thought that it might work in several ways (see, for example, Bernanke,
Reinhart and Sack, 2004). Similarly, when discussing the MPC’s 2009 QE programme, Benford, Berry,
Nikolov, Robson and Young (2009) highlighted three distinct channels through which it might work.”
So you can see that even now there is no solid theory that underpins the Central Bankers’ actions.
It’s sobering to realise that the developed world’s economy, under American hegemony, is being
controlled by hunch, intuition, and outdated economic models. In short, nobody can say what the
long term outcomes will be in the aftermath of this enormous financial experiment. In that April
2016 article I did suggest there would be only one certain outcome for the real economy as a result
of QE – a property boom.
After the 2008 financial crash, under the guidance of the American Federal Reserve, the Bank of
England and the European Central Bank pushed new bank lending and speculation as an alternative
to writing down debts. People like Bernanke, then Chairman of the Federal Reserve, extolled the
idea that large amounts of bank lending would pump up the economy and the good times would roll
again. Essentially, this was a bail-out for the banks and their bond holders who had made reckless
loans and investments that should have been written down to a fraction of their book value.
Quantitative Easing did nothing for the financial fortunes of businesses and consumers, unless they
could speculate on property. Some economists justified QE on the grounds that there would be a
“trickle down” effect into the real economy. But nearly 10 years after the financial crisis it is obvious
there is very little trickle down – the elite rich hoard money or buy existing assets like property,
forcing the prices ever higher. This is most visible in the handful of capital cities like London. Fifty
years ago London was very much the British capital city with the majority of property owned by
British people. Today, many residents like me have fled to the outer reaches of Britain, and London
has become the home (or second or third home) to many hundreds if not thousands of investors
from around the world. Hot money chasing hot property. The latest academic view seems to be
that: “The term ‘trickle-down economics’ doesn’t really represent a cohesive economic theory.” Well,
who would have guessed that?
Although property is the one area where there could possibly be some sort of long term “trickle
down” effect, if new building had taken place, in the U.K. very little new property has been built.
This means that when enough people bought properties priced over £1 million, it drew in lower
priced properties at the boundaries and eventually raised all property prices. This in turn added fuel
to the fire of a bank-generated property boom: Property is seen as a safe investment and, as
everybody wants to make money, more people have entered the market. Observing ever rising
property prices, people feel this is an investment where they cannot lose. Those who own property
feel infinitely richer as the supposed monetary value rises, while those without property feel
infinitely poorer. I am not aware of any economic or social study of this effect, it may be small or
significant, or not exist at all, we just don’t know.
In a recent speech, Mark Carney, the Governor of the Bank of England, bemoaned the fact that:
“globally banks’ misconduct costs have exceeded $320 billion, capital that could otherwise have
supported $5 trillion of lending to households and businesses.” I find this admission revealing on
several counts, not least his acknowledgement that private banks can create new money and credit
at 15 times any capital injection. Obviously this is a fact but, believe it or not, there is no generally
accepted economic model used today which factors in the ability of private banks to create new
money. Unbelievably, this includes economic models used by the Central bankers themselves.
So let’s follow the money and do some simple math to see what QE has done to the U.K. economy.
Using the ratio used by Carney, that every £1 of capital introduced to a private bank generates 15
times that amount in loans, we can calculate the extra credit created by QE. The Bank of England’s
figure of £435 billion of new money for banks, multiplied by 15, equals £6.5 trillion in loans that
banks can extend to shore up their balance sheets. This is happening now, despite what followed the
reckless loans that were advanced before 2008. And, as I wrote about in March 2016, we know that
at least 79% of bank lending in the U.K. goes on property. This means that nearly £5.2 trillion has
flooded into the U.K. property market. So it should come as no surprise to note that in the countries
wherever QE has taken place, property prices have literally gone through the roof. In the U.K. the
situation has been acerbated because during the last 20 years, while there has been little new private
or social housing development, immigration from within and without the EU has increased demand
dramatically. This has coincided with near zero, or minus, interest rates so that anybody with any
spare cash has sought to invest in property. As I mentioned back in March 2017: houses may earn
more money in a year than many people in employment can earn.
If QE has resulted in a property boom at the same time as fuelling a stock market boom, has it been
worthwhile? After studying the subject I must agree with the views of Stephen D. Williamson, Vice
President at the Federal Reserve Bank of St. Louis, who, in a 2015 research paper, concluded:
“Further there is no work, to my knowledge, that establishes a link from QE to the ultimate goals of
the Fed - inflation and real economic activity. Indeed, casual evidence suggests that QE has been
ineffective in increasing inflation.”
The only obvious inflation created by QE is a great rise in asset prices (property and share prices).
Yet it has wrought untold damage to the real economy. Consider the plight of a young couple trying
to establish a home for themselves and their children. Not only do they have to borrow a mortgage
four and half times their combined salaries, they will have to repay the loan over a much longer
period, typically 35 years or more. According to the Financial Conduct Authority (FCA), last year in
the U.K. 22% of first time buyers will be aged over 65 by the time they have repaid their mortgage.
Contrast that with my generation’s first property purchases: we were able to borrow three times our
salaries (usually not combined with partners’) for a period of 15 – 20 years at a fixed rate. In real
terms now, the larger loans, payable over a longer period, mean young house buyers face a lifetime
of paying interest for somewhere to live on top of crippling student loans. So we have happy
bankers receiving lots of interest and a depressed and miserable population. Welcome to the world
of the lifetime of debt servitude – called Neo-Feudalism.
Paying an affordable rent for secure accommodation, or owning a home, is the foundation of society
and democracy, so expect future political shocks as those struggling to pay rent or to get on the
property ladder start feeling really angry and rebellious. These young people will be locked into so
much lifelong debt they will have little money to spare, so expect lower sales of almost everything.
As economists and bankers only measure quantitative effects there will be no understanding of how
their actions have lowered the quality of life for the bulk of the population, and sent a whole
generation into debt servitude. Quantitative Easing has been a huge fraud on an unsuspecting
population. And, unless you are one of the 1% of seriously rich people, or one of the grasping
bankers who have profited handsomely from this fiasco, the tragic repercussions of the true cost for
everyone else will continue for many, many years to come.
...with analysis & insight...
The Great Delusion.