Peter Jones: Growing sense of quantitative unease

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China, Germany, Brazil and South Africa are all furious with America. And bank bonuses are back in the spotlight with, as they report their quarterly results, public anger focusing on the big sums they continue to pay to their investment banking people.

What connects the two? The arcane subject of quantitative easing does and, before you switch off, let me say that I am going to explain how it is costing you and me while rewarding the investment bankers.

In fact, I'd go further than that and argue that we are in danger of creating an insane system in which investment bankers have an incentive to keep on wrecking the financial system because every time that happens, they make money and we lose. Not that they care about that.

Quantitative easing, or QE as it now breezily known, you will no doubt know by now is the practice adopted in the last year by central banks of pumping money into the economy to try and stimulate growth. They did this, because interest rates had been reduced to nearly zero and therefore had become useless as an economic stimulus tool.

So the central bankers, at the behest of governments, pushed money, 200 billion in the UK's case, into the economy. When I wrote about this in this space before, quite a few readers raised the same question: isn't this going to cause inflation? To which the answer was, yes, it would in normal times. But these were, and still are, abnormal times. So inflation, certainly in terms of rising prices in the shops, was not likely and was, frankly, the least of our problems.

Some inflation is occurring, more on that later, but meantime: where's the 200bn? A lot of clever people are puzzled by this. Richard Werner, the economist who invented the term QE, was quoted in Prospect magazine as saying QE in Britain had been a "sham" and that "so far, money has just been passed from central banks to commercial banks".

This seemed likely when you consider the mechanics of QE. On certain mornings, the government's Debt Management Office will sell hundreds of millions of government bonds. The buyers include banks. That same day, the Bank of England will buy bonds from, yes, you've guessed it, the banks, giving them cash which the Bank and the government hopes they will use to lend and stimulate the economy.

To stay within EU law, the banks have to be the intermediary in this transaction. And of course, it's the investment bankers who do this trade. They don't do it out of selfless goodwill to help the economy; they do it to make a profit and earn themselves bonuses.And since bank net lending is not rising, the idea banks are sitting on heaps of cash seems plausible.

But when I asked Stephen Hester, chief executive of RBS, how much QE was stashed in RBS' vaults and how much profit he had made from it, he said the bank didn't have any. The money was out there in the economy, he said, visible as part of the public spending deficit.

I'm not entirely convinced by this, but for the moment, I'll take him at his word. So where is the 200bn? The explanation goes back to the whole point of QE, which has three effects. Those readers who worried about inflation illustrate the first effect. At the time, there was a risk of deflation (falling prices) which would have severely damaged the economy. QE prevents deflation by creating an expectation of inflation, helping to keep the economy moving.

Good, but the second effect is that QE depresses interest rates, especially long-term interest rates. When, if you are rich, you can't make much money by holding long-term cash deposits or bonds, you look to put it somewhere else more profitable. That means stock markets, commodities such as gold and, at the moment, emerging markets such as Brazil and China. Right now, the value of all these investment areas has risen quite sharply. This is where QE-induced inflation is occurring and it is debatable whether another asset bubble (that may yet burst) is occurring. But meantime, yes, investment bankers are coining it from that too.

You and I, on the other hand, unless we were clever enough to buy these things when QE started, are losing out because the interest rates we get on our savings are pitiful. Banks also lose here, incidentally, because the net interest margin they can collect between what they give to savers and charge borrowers gets squeezed flat.

The third effect is the currency of a country which indulges in QE loses value compared to other non-QE affected currencies. This is why China, Germany, Brazil and South Africa are angry with America. Last week's $600 billion of fresh QE announced by the Federal Reserve will devalue the dollar, making exports to the US more expensive, depressing the economies of the exporting countries.

Well, isn't this just great. We have a class of people, investment bankers, who made fabulous sums of money out of inventing fancy derivative financial products which caused consumer and corporate debt to balloon to the point everything came crashing down.

Then the investment bankers made more huge sums out of buying and selling the hundreds of billions in debt that governments had to issue to fix the economic mess these gamblers made. And now they are making yet more loot from central banks having to print money under the guise of QE.

Still they insist that they must be paid fat bonuses, while we wilt under rising taxes, dwindling incomes, and savings that earn nothing.Are there any circumstances under which investment bankers do not make money? And are we not in danger of creating a system in which they have every incentive to periodically wreck the system, because we will pay and they will earn more bonuses?

As readers will know, I'm a strong supporter of the capitalist system, and law and order. But thoughts like these make we want to join the next mob of anarchists which shows up to smash investment bank windows. Something must be done. But what, please, what?