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Quantitative easing has not worked as advertised so
far. Why push ahead with more...?
"YOU'VE lost control
– Bank of England takes over," says the Bank of England's cute little game for
school-kids if you let the hot-air balloon you control crash into the ground,
rather than happily floating it around the 2.0% annual inflation target.
But
if the Bank loses control in the real world? Are there grown-ups ready to
take over? And what if the Bank purposefully drives its balloon up into the
clouds, so far above its 2.0% inflation target – its primary mandate,
set by Parliament, and over-riding the secondary aim of "support[ing] the Government's objectives for growth and
employment" – that wage-earners, savers and consumers alike start
hurling themselves out of the basket?
We
shall never know what would have happened without near-zero interest rates
and the first £273.5 billion of quantitative easing. But as the Bank
sticks at 0.5% for the 36th month in succession – and starts creating a
further £50 billion in new money – we can say what has happened
with them:
· For every £1 the Bank of England created from
nowhere since March 2009, the total UK money supply grew by only 35p;
· For every £1 million the Bank has created,
more than two people have become unemployed;
· Finance-sector salaries outpaced the average wage
(rising 8.8% vs. 5.0%), but still lagged the cost of living (up more than 11%
on the Consumer Price Index);
· The average house price rose almost 10%, while the
FTSE All-Share index rose by nearly two-thirds. Both were beaten by gold (up
70%) and silver (130%).
Was
this really the aim? Let's ask the Old Lady herself.
"The
purpose of the purchases [according to the Bank of England's own information]
was to inject money directly into the economy in order to boost nominal
demand."
Two
ideas there then – injecting money into the economy, and boosting
demand. Neither are part of the Bank's primary
mandate, remember, but both ideas have stuck, albeit in the popular
imagination more than reality. "Bank
injects £50bn into economy," announced the BBC
last week, "to give a further
boost to the UK."
But
while the Bank has already created and spent more than £273 billion on
buying government bonds in the last three years, the UK money supply (using
the broadest measure, known as M4, and covering all the money in banking
deposits) has risen by only £97 billion. Gross domestic product has
scarcely budged either, rising by only 1.7% (to the end of September) despite
the 4.9% actual growth in M4 money.
So
for all the good it has done, where did the Bank stick this injection?
Well,
"The asset purchase programme is not about giving money to banks,"
stresses the Bank in its version of Quantitative Easing Explained.
"Rather, the policy is designed to circumvent the banking system."
Not
that the programme does side-step the banks. Instead, as the Bank of England admits elsewhere, it
sees the Old Lady "electronically create new money" and then use it
to buy UK government bonds directly from the banks, whether held on their own
account or on behalf of their clients such as investment funds and insurance
companies. Still, handed this new cash in return for the gilts that they
sell, "These investors typically do not want to hold on to this money,
because it yields a low return," says the Bank. "So they tend to
use it to purchase other assets, such as corporate bonds and shares. That
lowers longer-term borrowing costs and encourages the issuance of new
equities and bonds."
Simple,
right? The Old Lady wants to cut interest rates and boost the level of
capital raised by businesses – private non-financial corporations as
the Bank calls them, those companies outside finance and banking which
everyone's so sure had nothing to do with the bubble or bust. Indeed,
"the objective of QE is to work around an impaired banking system by
stimulating activity in the capital markets," according to Charlie Bean,
the Bank's deputy governor for monetary policy. And yet PNFCs have shared
little in the flood of money issued by the Old Lady's computer-key strokes.
Since
March 2009, total capital issuance by
private non-financial firms has totaled
£44.5bn – greater than the £34.0bn they raised over the
preceding three years, but that was a time of boom, not bust, so the Bank's
stated purpose still begs the question. And the total raised is still nothing
compared with the total £275bn "injection".
Once again, then, where did the Bank's "injection"
go – and was that its aim?
"Money
is not growing quickly enough to keep inflation close to the 2% target,"
says the Bank of England in an educational briefing for
schoolchildren. "The Bank is injecting money into the economy
to boost spending to meet the inflation target."
Okay,
so here's an outcome the Bank should happily claim for its own. But whether
boosting inflation is a good thing or not, inflation has in fact been well
above the Bank's official 2.0% target since 2009. So far above, that governor
Mervyn King keeps having
to write open letters to the government – as he must under the policy
framework established when the Bank gained full control of interest rates in
1997 – explaining why he's repeatedly let inflation breach the upper
3.0% limit for the last 24 months in succession.
The
risk of under-shooting inflation looks awfully thin, and the perils of
under-shooting might seem academic as well. Because incomes have failed to
keep up with inflation – the very opposite of those "second-round
effects" so feared by the Bank under Sir Mervyn
when it failed to raise interest rates in the face of the banking bubble that
started a decade ago. Today, even indebted households have failed to benefit
from the drop in what money will buy. Because inflation only eats into debt
when a rising income lets you pay it back faster.
Maybe
the Old Lady knows what she's doing. Or maybe she thinks "two" now
means "three-point-eight". Or maybe she's just losing sight of her
2.0% inflation target, fast becoming a speck in the distance from her hot air
balloon. Or maybe – just maybe – now that the Bank holds so many
billions of pounds in government debt, it daren't let the total start
falling, for fear of a train-wreck in the gilt market. Once you pop, you just
can't stop, and it did after all switch to buying fewer
long-term gilts and more medium-term debt at this month's
£50bn announcement. Which would fit with fretting
about a pile-up of maturing debt in the "medium term", rather than
trying to suppress interest rates on 30-year gilts.
Either
way, quantitative easing has failed to work as advertised to date. Reviewing
the evidence so far, we're genuinely none-the-wiser about why in the hell the
Bank is now pushing ahead with more
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