Brian Monteith: Quantitative easing may ease coalition out

QE is at best a failure, at worst an evil, helping the rich at the expense of the poor, writes Brian Monteith

There can be no doubt about the fear in Westminster and Whitehall about the difficulty of trying to achieve a sustainable economic recovery. The political strategy of the coalition is predicated on being able to show recovery is happening before the next general election in 2015, but that prospect is disappearing fast.

While unemployment figures have improved, the experts who should know cannot explain why when economic growth has, even after last week’s improved revision, been negative. A shrinking economy should normally have a shrinking workforce. Meanwhile, business confidence remains poor while retail sales and property values give no comfort, either.

Opponents of the Chancellor blame his austerity measures, but what austerity? State spending is programmed to continue increasing, funded by more borrowing. Last week’s figures showed that in July, a month that usually brings in bumper tax receipts, the government had to borrow £600 million compared to a £2.8 billion surplus last year.

Those who wanted Plan B advocated by Ed Balls, of borrowing more to solve the debt crisis, have already got it – and, as we might expect, it’s not working.

The fear of the coalition Treasury team is that, having adopted uncritically the policy of the Bank of England and previous Labour government, to rely upon quantitative easing to stimulate demand, they have no ideas of their own if it does not work – and all the signs are that it isn’t.

The fear of the Bank of England and the Treasury mandarins is that try as they may to find evidence that QE is working, they cannot. Last week the bank spun the unprovable argument in a paper submitted to the House of Commons Treasury Select Committee that the economy would have been worse off without QE – and that a further dose is needed.

Quantitative easing is the policy whereby the central bank buys government debt held by banks, with money it has conjured up out of thin air. It is essentially printing money, like Robert Mugabe did in Zimbabwe or the Weimar Republic did in the 1920s, only this time it is not official printing presses producing notes to go in our pockets or fill wheelbarrows; instead this is electronic money that we never see.

First used in Japan, where its influence in tackling deflation is still disputed, QE started here in July 2009 with £200bn of new money authorised by November 2010. A further £75bn was sanctioned in October 2011, £50bn in February and another £50bn was proposed last month, bringing the total to £375bn.

The problem is that the Bank of England cannot provide any hard evidence that its policy is working while tangible evidence that it is hurting real people and businesses is emerging with embarrassing regularity. Worse still, if the bank’s defence of its actions is accepted then the main beneficiaries of QE have been the wealthiest in society, resulting in a growing chorus of criticism.

Edinburgh economist and author of The Golden Guinea, Michael Nevin, argues that the claims for QE appear illusory at best, saying that when first launched it was claimed QE would boost bank lending to businesses and stimulate investment – but the parsimony of the banks remains the loudest complaint of businesses, especially in the vital SME sector.

It was said QE would put money in people’s pockets that would help retail sales climb – but sales are broadly unchanged from a year ago, and retailers are increasingly pessimistic for what the future holds.

It was said QE would stimulate the housing market but, on Friday, Lloyds TSB reported that falling house prices have trapped millions of mortgage holders who are unable to move.

In a really bold claim, it was said QE would drive economic recovery with growth over the three years 2009–12 of 9 per cent. If only.

Such was the depth of the recession, it was also expected that inflation – a direct cause of expanding the money in circulation – would not materialise, but Mervyn King, the Governor of the Bank of England, has had to write to the chancellor nine times explaining why inflation has overshot 3 per cent since QE was introduced.

So if all those benefits have not been delivered, what then has quantitative easing achieved? The bank’s paper claimed that it had helped asset values climb, most notably share values, but if this claim is accepted then it means the policy of the bank, Labour and coalition governments has been to deliver a huge transfer of wealth from the poorest to the richest – because the wealthiest 5 per cent of the public owns 40 per cent of equities.

But has QE boosted share prices? Michael Nevin suggests not: “Back in July 2009, as QE got under way, the FTSE 100 index stood at around 4400. This week, three years on, it has risen to around 5700 – an increase of approximately 30 per cent in nominal terms. Over the same period the world MSCI stock market index rose from 250 to 325 – also an increase of 30 per cent. So the UK stock market has performed in line with the world as a whole. There is no evidence of any differential impact as a result of QE.”

So even this claim is dubious, but if right is a damning indictment of the idea that “we’re all in this together”. Either way, QE is at best a failure or at worst an immoral abomination punishing savers, pensioners or people on fixed incomes.

Dr Ros Altmann, director general of Saga, argues that annuities have fallen 25 per cent since 2007 and some 14 per cent since July last year – resulting in many pensioners having no possibility of benefiting if annuity values improve.

Tory backbenchers are now becoming alarmed at how a policy that was introduced under Labour is hurting so many people – and expect the blame to be levelled at them for continuing with the method. We can expect to hear more by the time of the Conservative Party conference.

The government needs to establish a philosophical narrative and the policies to match – not borrow from the discredited debt-funded growth of Brown and Company. If it doesn’t, it will be quantitatively eased out of power in 2015 – and it will have been its own fault.


• Brian Monteith is policy director of ThinkScotland.org