Bill Jamieson: Printing cash is slaying our savings

Published on 23/02/2012 12:53

Pensioners are bearing the brunt of the Bank of England’s bouts of quantitative easing, writes Bill Jamieson

SPEAKING in Glasgow this week to the Scottish Council for Development and Industry (SCDI), Charles Bean, the Bank of England deputy governor for monetary policy, may have felt assured of a compliant if not somnolent audience. But in two key respects he merited a painful and unsparing grilling.

His lesser offence was to sidestep an issue of growing concern in Scotland and which has barely been opened for discussion: how, in the event of the SNP winning the forthcoming referendum, the Bank of England will function as the central bank of an independent Scotland and act as its lender of last resort.

His second offence was his message to millions of pensioners suffering a fall in their living standards as a direct result of the Bank’s plunge into money creation: “Bite the bullet. It’s not that bad.” I paraphrase somewhat, but that was the gist.

The Bank’s relentless drive towards pensioner impoverishment goes by the name of quantitative easing (QE) – that opaque, frosted-glass term for the digital creation of money. Earlier this month the Bank hit the digital buttons again to credit another £50 billion to its account. This will be used to buy some equities, some corporate bonds, but principally government debt. How convenient this is for the government, which owns the Bank and which has a shedload of debt to sell. This buying of gilts from banks, insurance companies and pension funds has two effects. First, it puts ready cash into the hands of banks which they can then use (hopefully) to provide loan finance for companies. Second, it raises the price and forces down the yield, or interest cost, on government debt. The latest bout of button jabbing on the digital keyboard takes the total of credit created so far to £325bn.

This is a colossal sum – money creation on a scale without precedent. Given that, the SCDI may have felt entitled to a more detailed explanation from the Sorcerer’s Apprentice. For this is resort to the Black Ace. And a gamble it is, for there is no clarity as to how well it will work as a stimulus, how long it will take, how many more magic billions will have to be created and, above all, how and when this vast pile of government borrowing will be sold back to the market. What we do know for sure is that it has driven the yields available from UK gilts to their lowest level since the 1880s.

A good thing, you may say. Has it not saved us from deflation and recession? It has certainly not spared us inflation, which in the wake of the first bout of QE went on to rise to 5 per cent – more than double the 2 per cent rate that the Bank is duty-bound to target. QE is reckoned to have contributed between 1 and 2.6 percentage points to the rise in inflation.

And it did not spare the UK economy from a sharp and worrying slowdown last year when there was a pause on the QE keyboard. In fact, the UK economy went into decline in the fourth quarter of last year and may have only narrowly missed a repeat performance in the current quarter. So much for stimulus.

And it has been not at all a good thing if you are among the many millions of people saving for retirement. For here QE is a scheme by which savers are made to pay for the excesses of borrowers. It works as the silent assassin of a nation’s savings.

It does so in two ways. First, it enlarges the deficits of many pension funds. And second, it depresses the return that savers can expect to receive when they convert their accumulated savings into a regular yearly income stream: annuities. Ros Altmann, director general of Saga Group, argues that the Bank’s gilt-buying programme has had a direct effect on annuities. Before QE started in 2009, she points out, a £100,000 pension fund would buy an annuity of about £7,000 a year. Now, however, a £100,000 fund would buy an annuity of just £5,800 a year, a 17 per cent reduction.

As for pension funds, Joanne Segars, chief executive of the National Association of Pension Funds, points out that for companies running final salary pensions, QE has been a headache, working to push their pension funds further into the red. Segars says: “We think the last hit of QE increased pension fund deficits by around £45bn, and the latest tranche will only add to that bill.”

Mr Bean at least acknowledged that the current extended period of rock-bottom interest rates has impacted heavily on those holding most of their savings in deposit or short-term savings accounts, “who have seen negative real returns” (Bank-speak for a direct and ongoing reduction in the purchasing power of their savings). Some, he went on, “have every right to feel aggrieved at losing out, since they did nothing to cause the crisis”. But then, he added, neither did most of those in work; and while annuity rates have fallen, the rise in asset prices and thus pension funds as a result of QE has provided an offset to the fall in annuity rates. But while this may have worked to some extent in 2010, markets plunged sharply in the late summer of last year. This suggests that higher asset prices may indeed be an offset – so long as the Bank keeps hitting the QE button.

And there is a telling difference between the plight of pensioners on lowered annuities and working households which have suffered. Younger employees have decades ahead of them in which they can repair and reverse the damage to household savings. Pensioners have no such comfort. They are at the end of their working lives and there is little they can do now to ameliorate the suffering caused by QE.

This plunge into monetary easing is a direct consequence of the bursting of the great debt bubble and the consequent slow and painful recovery. It has the effect of letting the government off the hook and sparing it more politically difficult policies. Is it the role of a central bank to do this?

As worrying as all this has been, there is a lack of public criticism of the QE policy. This raises searching questions about the scrutiny under which the Bank operates. The Bank is, of course, rightly vigilant in guarding its independence from politicians and government. All the more reason, perhaps, for independent commentators to speak up.

And it begs questions for a Scottish administration post-independence, as to how the country’s central bank will operate under two governments. Mr Bean neatly sidestepped this issue in Glasgow, saying it is up to Westminster. But it is bound to have a robust view as to the practicalities involved.

For the moment, the Bank of England is getting away with the silent murder of our savings.