By John Buttler, originally published in the The Guardian. John is vice president and head of wealth services for Goldmoney and a consultant to Cobden Partners, an economic consultancy.
It is time to start calling QE what it is: a hidden tax on the wealth of middle-class savers and pensioners
The prolonged unconventional, quantitative easing (QE) monetary policy of the Bank of England has effectively hijacked fiscal policy from the government, with disastrous effects on savers and pensioners and in a way that makes wealth inequality worse more generally.
The reasons for this are subtle, which is why they are also insidious.
As quoted by Steve Baker MP in a recent House of Commons debate on QE, John Maynard Keynes once explained how, via inflation, “governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens,” and, “while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth”.
As arguably the single most influential economist of the 20th century, we should give Keynes’ thoughts on this matter due consideration.
It may be true that consumer price inflation remains relatively low due to what economists call slack in the labour market, which tends to reduce or prevent wage growth. But because of the artificially low asset yields associated with QE, savers and pensioners now find they must outright liquidate assets in order to maintain a middle-class lifestyle or to enjoy a comfortable retirement. While that can work for a time, in the end it erodes the middle-class capital base and leaves households with less to pass down to their children and grandchildren.
QE enriches those who have already accumulated enough assets such that they generate sufficient income without the need to liquidate their accumulated capital base. As the Bank itself determined in a 2012 paper analysing, among other things, the distributional effects of QE, “the top 5% of households own 40% of the assets,” and hence they have been the primary beneficiaries of the rampant asset price inflation following the financial crisis of 2008 and large devaluation in sterling.
QE can also be an effective tool to weaken the currency, which makes imports and basic goods more expensive, squeezing the middle class further. While some argue that it is possible to “devalue your way to prosperity”, history has not been kind to the countries and empires that have followed this path. Countries that have pursued stable or outright strong currency policies have generally fared much better. Germany and Switzerland come to mind, as does the pre-1970s United States.
Claudio Borio, the head of the monetary and economic department at the Bank for International Settlements, claimed in a recent speech that radical unconventional monetary policy “is just fiscal policy dressed up”.
Indeed, it is time to start calling QE what it is: a hidden tax on the wealth of middle-class savers and pensioners which, on the one hand, the government can use to finance the deficits associated with a large, modern welfare state and, on the other, redistribute wealth to the top 5% of households. That is not only monetary policy. It is fiscal policy, which the Bank has de facto taken over.
It remains to be seen whether it was a wise decision, but UK citizens recently exercised their democratic right by voting to leave the comparatively less democratic EU. The government has already set about considering what changes its newfound independence might enable it to make to fiscal policy, such as lowering the corporate tax rate to attract much-needed private investment.
It would be even more refreshing to see it reassert its right to determine fiscal policy more generally by telling the Bank to end QE and with it the associated insidious, pernicious distributional effects in favour of the wealthy. The economic policy focus can then turn to where it truly belongs, on how best to generate increasing rates of savings, investment and productivity growth, and in a way that does not disproportionately benefit any one group – whether rich or poor – over another.
The British public was recently allowed to vote on whether they wished to leave the EU. Shouldn’t they also be allowed to vote on whether they would like their accumulated private savings to be devalued?
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