We’ve suspected it for some time but now it’s been confirmed.
Quantitative easing (QE) – the emergency economic measure carried out by the Bank of England (BoE) in recent years – has made the wealthy even wealthier.
It has hardly benefited the poor at all – in direct asset terms, at least.
Those are the striking conclusions from the bank’s own analysis of the so-called distributional effects of the policy.
Before going any further, a quick recap: QE is a policy the BoE (technically speaking its Monetary Policy Committee) has been carrying out for the past three years, since interest rates went down to an apparent floor of 0.5%.
Under it, the BoE has pumped £350bn and counting (the target at the moment is £375bn) into the economy by printing money electronically and using it to buy government debt (AKA gilts).
The theory was that that money would find its way into the economy, boosting growth and reducing employment – and that, as far as the BoE is concerned, has been the case.
A year or so ago it calculated that the first £200bn of QE boosted economic growth by 1.5% to 2% (compared with what we would otherwise have seen).
The problem is that all that money sloshing around the economy (and it is a lot) has had all sorts of unsettling effects on the broader economy.
Most noticeably, it has pushed up inflation and pushed down interest rates on UK government debt.
It has also pushed up asset prices – particularly those of shares and properties (again, compared with the counterfactual).
That has caused a severe fuss, particularly among those who most rely on those interest rates to give them an income – most vocally pensions.
It was in this light that the Treasury Select Committee demanded that the BoE carry out this new analysis: to prove whether it really was pensioners who were hardest hit by the policy.
Well, it transpires that QE has had a more or less neutral effect on the majority of pensioners.
Those without a final salary scheme who are about to retire may take a hit on the interest rate they will receive through their impending annuity, but that will be balanced out by the benefit from the increased value of their pension pots.
Those with a final salary scheme may be affected, but only if their scheme was already in deficit or it did not have a balanced portfolio.
Moreover, the BoE revealed that, in general, the older you are, the more you have benefited from QE.
But while the bank’s paper may well lay to rest the accusation that pensioners have suffered unduly, it reveals that there is a deeper iniquity at the heart of the scheme.
Indeed, the BoE calculates that the scheme has boosted household balance sheets by “just over £600 billion” (a 26% increase), but then it adds: “In practice, the benefits from these wealth effects will accrue to those households holding most financial assets.”
But how much impact does this really have on different types of household balance sheets? One way of working out the answer would be to multiply UK household wealth by 26%. According to the official measure of household balance sheets, the wealthiest 10% of the population accounts for just over 50% of total UK assets, including pensions but excluding houses and physical wealth.
A 26% increase in their assets is equivalent to just under £323,000 per household. And here’s how the breakdown looks per household, starting with the richest at the top. The numbers denote the amount of asset price increase enjoyed by each different decile (that’s a 10% chunk) of the population.
So there we are: QE has disproportionately benefited the wealthy and older people.
It is worth noting the important proviso that it is misleading to look at just one aspect of the impact.
After all, QE has boosted employment and economic growth. Many people simply would not have a job if it were not for QE.
Moreover, those with the most assets were also those who suffered the most in the wake of the Lehman bankruptcy as stocks around the world plunged.
But the analysis is unsettling. QE was supposed to benefit everyone, but clearly its spoils have not been shared out equally.
And that is before we even get into the question of whether many hedge funds and bankers have made a killing on the implementation of QE (they have).
Up until now the most vociferous attacks on QE have been from pension and investment groups. It turns out the biggest noise should have been coming from those seeking to protect the poorest.
UPDATE 1845: There has been some debate behind-the-scenes about which figure best reflects the positive impact for household assets from quantitative easing. As anyone who reads the Bank’s own paper will realise, even they are unclear.
Nonetheless, it’s true that the methodology above would imply that the wealthiest 10% had taken home a combined £800bn, which is clearly more than the total £600bn supposed benefit of the policy.
It underlines how much guesswork is involved in calculated personal wealth, but even if you simply apportion that £600bn to different households, dependent on their wealth levels, the wealthiest 10% still received a windfall of £127,000 from quantitative easing.
On a chart it looks basically the same as above, except with lower numbers. The wealthiest 10% is still the biggest beneficiary while the least wealthy, who started with negative assets, actually lose out as a result of QE.
So it’s most likely that the benefit for the wealthiest 10% is anywhere between £100,000 and upwards of £300,000. What we do know, though, is the pattern: an unequal dispersion of this enormous amount of official spending. And still no clarity about where precisely the money has gone.