I went to a debate at Edinburgh’s Heriot Watt University last week. It asked whether quantitative easing (QE) had been a mistake or not.
A few of my favourite people were speaking – Scotland’s investment trust guru, Robin Angus; The Scotsman’s one-time executive editor, Bill Jamieson; bear market expert Russell Napier; and a new entry to my list, Heriot Watt academic David Cobham.
Most debates on QE are crushingly boring. This wasn’t, largely because once you had dissected the arguments, there was very little disagreement. There was argument about how long it should have gone on for and minor fisticuffs about when the inflation it has made inevitable will turn up.
But everyone, even the inflation-phobic gold bug of the group (Robin), agreed that it was a perfectly good idea in the beginning – something had to “stabilise the patient”.
The huge deleveraging on the part of the banking sectors both in the UK and the US meant that if their central banks had not stepped in, there would have been a massive deflationary shock followed by thoroughly unpleasant social consequences.
Everyone also agreed that despite it being entirely justified as a ‘save the world’ policy in its first round, it is still at best an unfair, and at worst an evil policy. Why? Because of the way in which it redistributes wealth.
Very low interest rates and the ongoing purchase of government bonds were supposed to lead to a huge investment boom as people put money into capital projects and new business that would yield a better return than they could get on cash or sovereign bonds.
But that didn’t happen. Instead, those with money have simply bid up the prices of existing assets – and in particular high yielding assets – giving us mini bubbles across the board.
That’s made anyone holding anything from property in the southeast of the UK and dividend-paying equities to classic cars, and even the ugliest bits of modern art, richer. But at the same time it has made everyone at the bottom of the pile poorer.
Persistent inflation has kept real wages down, and, combined with the base rate of 0.5%, has made sure no one ever makes a real return on cash savings – the kind most of the non-wealthy tend to have.
So while QE might have stopped a whopping fall in nominal GDP (Cobham puts it at somewhere between 5% and 12%), it has also pushed down the purchasing power of the general population and devastated their savings.
That, says Robin Angus, along with the fact that, after the first dose, we don’t have the faintest idea whether it works or not, makes QE a policy that “combines the integrity of the Bullingdon Club with the probity of an asylum for the insane”.
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Not everyone feels so strongly about QE. But you can’t deny that if the point of government is to have a go at creating conditions that will allow everyone to get better off, it isn’t going very well.
This isn’t just as a result of QE. It’s also about the way in which we incentivise investment across the economy.* It is about the ongoing attempts to shore up the housing market – after all, nothing pushes up the cost of housing like a rise in the price of houses. And of course, it is about the fact that wealth was held pretty unequally even before QE began.
Nonetheless, intensely activist monetary policy of the type we have seen since the great financial crisis clearly comes with enormous and unwelcome side effects.
But here’s the thing: modern governments like to have a go at fixing their mistakes. If they create a bad policy, they are generally more likely to create more bad policies to fix the problems created by the first bad policy (witness the UK housing market) than dump the first bad policy. So it is with wealth distribution.
Having come up with a macroeconomic policy that will stun historians with its scale and innovation – and not necessarily in a good way – they now feel they have to attempt to come up with micro policies to dampen the social effects of the way it has distributed wealth. The rich have gained from QE, so they must lose elsewhere.
This brings me neatly to the Royal Mail flotation. It was revealed on Thursday that anyone who applied for the minimum allocation of shares would get all they wanted, but that those who applied for more than £10,000 worth will get nothing at all. The idea, it seems, is to reward the ‘Sids’ at the expense of ‘professional investors’.
Shares in Royal Mail soared 36% in the first few minutes of stock-market trading, fuelling accusations that the formerly state-owned postal operator has been sold too cheaply.
To the casual observer this makes no sense at all. The government has firmly denied any suggestions that it is selling Royal Mail off on the cheap. But if it is fairly priced, there is no giveaway involved – only the right ratio of risk and reward – so what’s with the use of the word ‘reward’?
We can only assume that the government hasn’t priced them correctly; that it expects those who get the shares to make a good return on them and that it only wants those people it considers to be in the ‘striver’ or ‘hard-working family’ classes to get that return. If you had over £10,000 odd to invest, that apparently isn’t you.
Rational people would say that picking on the well-off, and in particular the well-off prepared to invest in the UK when it most needs it, isn’t a particularly good idea.
However, I suspect that most people whom the government might consider wealthy on either this or some other arbitrary criteria might soon get used to being picked on. It is a natural consequence of QE.
* I’ll come back to this in a future column, but anyone who wants to know how we got to a point where companies are making record profits, but real wages are falling every year, and growth is flat lining must read Andrew Smithers’ new book The Road to Recovery: How and why economic policy must change.
• This article was first published in the Financial Times.
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