Monday, 10 September 2012

Quantitative Easing, ideologically pleasing?!!!

Chancellor George Osborne was roundly booed when he attended the Paralympics recently, and not without good reason! After all he has presided over calamitous economic policies based on austerity that have not brought about growth, as promised. He is also seen as the villain of piece in demolishing totally the credibility of the greenest government ever, by trying to ride roughshod over planning regulations and cutting subsidies for renewable energy, whilst supporting fossil fuels.

The tendrils of the Treasury extend into every facet of government business, not just in departmental spending budgets, but also policy areas. But what of core economic policy, who is this affecting and how, what lurks in the big red box?

I want to have a bit of a rant about the ideological impacts, as well as the economic ones,  of Quantitative Easing in all of its various guises and ask how this economic instrument might deliver a bigger ideological impact than it does an economic one.

Quantitative Easing (QE) was sold to us as a means to deliver money into the economy in order to stimulate lending, thus helping those looking to buy a new home or for those wanting to expand their business. The reality however, appears to be quite different, for the following reasons:

In the US where multiple phase QE was also in use, we had case studies available, which when considered, you may wonder why we went ahead with further rounds of QE.

The Fed's Quantitative Easing Part 2 has destroyed $4.6 trillion in household wealth, all to boost the stock portfolios of the top 10%.

The Federal Reserve's stated goals in launching QE2 were to trigger a "wealth effect" and boost inflation. The net result of their program is a massive destruction of household wealth. The basic idea is that goosing "risk assets," i.e. stocks, then consumers will feel wealthier and thus motivated to open their wallets and spend, spend, spend. This spending won't be based on any increase in income (household income fell in 2009 despite the massive run-up in stocks) but on the illusion of greater wealth created by a temporarily rising stock market.

Read more:

The rich, that’s according to a Bank of England study, out today, on the distributional effects of quantitative easing.
This from the research:
By pushing up a range of asset prices, asset purchases have boosted the value of households’ financial wealth held outside pension funds, but holdings are heavily skewed with the top 5 per cent of households holding 40 per cent of these assets.
The Bank's strategy has been criticised by groups representing savers and pensioners because of its impact on interest rates, annuity rates and gilt yields, which have all fallen since QE began.

In terms of the number of rounds of QE that are issued, it would appear that there is a diminishing utility associated with further rounds of QE, but also an increase in the inherent level of risk.

In effect the top 1% have the most to gain (this is the political, financial and industrial elite) and the 99% are left with the scraps and an enhanced economic risk.

Those risks are hard to pin down, but as in the report to the BoE (above), a part of this lies in the fact that QE may not deliver any long term benefits in employment, guilt yields or house prices (general asset values). You cannot just go printing money without the risk of impacts and probably the most dangerous of those for most of us, is the risk of an unpredictable and explosive dose of inflation!

So, coming back to the question of fiscal policy or ideology, it would appear that this is slight of hand, providing opportunity for wealth creation/harvesting by the few through asset enhancement.  Meanwhile the vast majority might say that they have detected little or no benefit but are however, now saddled with the devaluation of the domestic economy and the risk of an inflation bubble.

Some might say that there is a greater degree of certainty over the ideological outcome  (in terms of where the wealth ends up, its difficult to call it a distribution), than there are over the economic outcomes!

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