Many happy returns (for the few). Five years of quantitative easing

Quantitative easing is five years old today. Over the course of that time, monetary policy in the United Kingdom has changed beyond all recognition. The reason why is summed up in the chart below. Back in the pre-QE days, the majority of UK government debt was owned by insurance companies and pension funds.


Today, the biggest single owner of UK Government debt is the Bank of England. To put it another way, since 2009 the Government has issued around £750bn of debt (this has been a very expensive recession). The Bank of England’s holdings are equivalent to about half of that.

These are staggeringly large sums. Quantitative easing is a staggeringly large policy. And yet because it is deeply complex, because the assets being bought by the Bank are more-or-less invisible, the scale and significance of the scheme is often lost on us. I’ve tried, occasionally, to sketch out just how enormous it has been (for instance, it could have put a man on the moon; or bought every single property in Scotland), but I suspect the importance of this policy still has yet to sink in.

However, as with all sizeable economic policies, QE is having significant economic and social consequences. Among the most important is the fact that, even by the Bank’s own calculations, QE has made the rich considerably richer. This has happened through a variety of channels. One is rather simple: QE tends to increase the value of assets, so those who already have assets see the value of those assets going up, whether they are shares or properties.

My calculations based on Bank of England figures, of how much QE has benefited each income decile. Richest at the top
My calculations based on Bank of England figures, of how much QE has benefited each income decile. Richest at the top. More here

By the same token, the extra cash pumped into the economy has, by most estimates, meant that unemployment is lower than it would otherwise have been.

It has also been responsible for a major redistribution of wealth from savers to borrowers. Those who put aside money before the crisis, presuming that was the sensible course of action (encouraged, for that matter, by politicians and policymakers) have suffered substantially as a result of QE and rock-bottom interest rates.

All the same, we are apt to overlook the significant economic effects of monetary policy in recent years, in part because the Bank of England is independent rather than political, in part because we prefer to blame the Government for most things. Even the politicians themselves overlook it. Ed Miliband blames David Cameron for the cost of living crisis. David Cameron blames Labour, who were in office when it really began. But neither of them ever seems to mention the fact that what’s happened to wages, prices and assets is influenced far more by monetary policy than by anything the politicians are capable of.

So for the avoidance of doubt, let me put it as clearly as possible: quantitative easing was a necessary intervention. It helped Britain avoid a Great Depression-style collapse. However, this enormous economic policy came with enormous unintended consequences. It is likely to exacerbate inequalities of wealth more than almost any other policy in recent history. At some point, politicians will have to address this – most likely through fiscal (eg tax and spend) policy. But so far none of them seems capable of even diagnosing the issue, let alone suggest any solutions.