SUNDERLAND ON SATURDAY: Why it¿s not just pensioners who should fear QE

| August 25, 2012 | 0 Comments

By
Ruth Sunderland

16:21 EST, 24 August 2012


|

16:21 EST, 24 August 2012

The Bank of England’s
latest defence
of its vast
money-printing
spree, otherwise
known as QE, is deeply
disingenuous.

The Treasury select committee
put the Bank on the
spot in April when MPs
highlighted how pensioners
were the sacrificial lambs on
the altar of QE.

This week came the Bank’s
riposte, which rests on the core
assertion that without QE everyone,
including pensioners,
would be worse off, though as
it admits when pushed, the
impact on the economy is in
fact impossible to assess.

The losers: Pensioners have lost out as annuities have fallen by around 24 per cent in four years, and savers have protested as they get pitiful returns on their money with rock-bottom rates

The losers: Pensioners have lost out as annuities have fallen by around 24 per cent in four years, and savers have protested as they get pitiful returns on their money with rock-bottom rates

Are we all losers? Pensioners have lost out as annuities have fallen by around 24 per cent in four years, and savers have protested as they get pitiful returns on their money with rock-bottom rates

Leaving that inconvenient
truth to one side for a moment,
the Bank has done an analysis
of what it calls the ‘distributional
effects’ – who, in other
words, are the winners and losers
from QE, and by how
much.

Presumably the aim was to
prove the Bank’s wizened critics
had got it wrong and ought
to pipe down – but the headline
finding actually has nothing
to do with pensioners.
It is that QE has bestowed a
huge windfall on the wealthiest
people in the land, pegged
by independent analysts at an
enrichment of between
£100,000 and £300,000 since the
first wave was unleashed in
2009.

The Bank did not point out
that as well as being socially
unfortunate, this is economically
inefficient.
Rich people have less need to
spend any additional cash than
poorer ones, so it creates less
of a boost to demand.

Big decisions: MPC member Martin Weale said rate cut would be 'preferable to more QE'

Big decisions: MPC member Martin Weale said rate cut would be ‘preferable to more QE’

But it did note that most of
the wealthy QE winners are
getting on a bit.
Well obviously. With the
exception of a handful of pop
stars, footballers, heiresses
and the like, people do not
become minted in their youth;
their prosperity comes from
years of work.

So why draw attention to
their age? Surely the Bank
could not have wanted to lure
readers of its report into the
schoolboy mistake of concluding
that, since the majority of
wealthy people are older, then
the majority of older people
are wealthy?

The fact that a small minority
of rich oldsters have gained
has no bearing on the majority
of pensioners, who are not rich,
and are not cackling in their
under-inhabited mansions,
clutching their QE jackpots,
while their grandchildren
struggle to raise the deposit on
a one-bed flat.

The Bank’s claim that ordinary,
non-rich pensioners have
not really suffered from the
fall in annuity rates is simply
specious.
Annuities have plunged by
around 24pc since 2008-9,
meaning that retirees have had
a quarter of their income confiscated,
every year for life.
This is supposed to be cancelled
out by a QE-driven rise
in asset values. But pension
funds have not seen their
assets rise in value this much
because share prices have
broadly gone sideways.

The Bank’s analysis of the
damage caused to final salary
pension schemes is also
flawed. It observes, again speciously,
that the effect of QE
on fully-funded schemes is
neutral.
Its economists know perfectly
well that hardly any
schemes actually are fully
funded.
The structure of most
schemes – with a very long tail
of liabilities – means QE is
doing them far more harm
than good.
The vast majority are burdened
with large black holes
that are getting bigger, by
£100bn over three years,
according to some industry
estimates, courtesy of QE.

When young and middle aged
people reach retirement, the
pension cupboard may be
bare.
The first round of QE back
in 2009 probably was beneficial,
because there were genuine
worries over deflation,
and it acted as a strong signal
that the authorities were prepared
to take extraordinary
measure to help the
economy.
The subsequent tranches
smack of desperation.
The hoped-for boost to
growth has not materialised –
indeed, the need for companies
to divert resources into plugging
pension deficits is acting
as a brake.

QE has hurt savers of all
ages along with present and
future pensioners. It has further
enriched the rich and
subsidised borrowers. The
biggest beneficiary of all is
the biggest borrower, which is
of course the British
government.

Money-printing
on this scale – it
so far has
involved buying
up around a third of the entire
stock of government debt,
without a plan for an orderly
unwinding – risks stoking
future inflation and debasing
the currency.
QE bears the hallmarks of
financial repression, economist-speak for measures used
by governments to funnel
money to themselves in order
to liquidate debt.
The row over how badly pensioners
have been hurt by QE
taps into an emotive debate on
fairness between the generations,
but it is essentially a
smokescreen.

Whether we are 18 or 80, we
should all be worried about the
whirring of the money-presses
that threaten to send us down
the road of the banana
republic.

Economy boost? The graph shows the original and revised GDP figures by quarter, with three consecutive contractions - although the last was not as bad as thought

Economy boost? The graph shows the original and revised GDP figures by quarter, with three consecutive contractions – although the last was not as bad as thought

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