23 Aug 2012

Bank of England: QE makes the wealthy even wealthier

The Bank of England has just released a fascinating defence of the unintended consequences of its massive quantitative easing programme.

Two main headlines here: firstly, it is not pensioners who suffer the most from QE, as goes the popular wisdom. It is in fact the young, or indeed anyone without assets who needs to build them up – so the young and the asset poor.

And secondly: QE makes the wealthy even wealthier. Astonishingly, the bank calculates that the increase in household wealth from the bank’s £325bn QE programme is £600bn. That includes pension wealth. If you exclude pension wealth, then of the £300bn remaining (this is my very rough estimate derived from the ONS wealth study from July 2012) in non-pension wealth, 40 per cent of assets are held by the wealthiest 5 per cent of the population. That is a remarkable £120bn, or £96,000 for every one of the 1.25 million of Britain’s wealthiest. Including pensions and making different assumptions, the wealth increase for the top 5 per cent could be anywhere from £50k per wealthy household to over £200k (statistics on wealth are notoriously flaky).

For comparison, the half of the British population that is most asset-poor (excluding pensions) did not benefit at all from this channel of impact of QE on the economy.

Another caveat, this does not mean those households are definitely wealthier. The asset rich took a big hit from falls in share and house prices at the start of the crisis.

Asset price boost

The big picture though is pretty stark. QE disproportionately benefits the already wealthy. The bank argues that others will also benefit from, for example, not losing their job, partly because of QE.

The clearest message from the bank though is that many of us are not taking into consideration an estimated 28 per cent boost to the price of all assets from its programme of quantitative easing. That includes the pension pots of those who have suffered the most from being locked into scandalously low annuity rates. Yes, the flow of income is small. But the size of the pot is greater than it would otherwise be. And these two factors cancel each other out.

Clearly there is the additional impact of the prolonged lows in Bank of England interest rates. Borrowers, particularly mortgage holders, have gained £104bn (and £89bn of that has gone to the holders of variable mortgages) from the cut to 0.5 per cent. Savers have lost £70bn in interest rate payments. Some of these will be the same people. It’s not difficult to see why many believe the prudent are being hurt to bail out feckless borrowers. It is a massive transfer of wealth that far outdoes anything the Labour government managed.

The bank does admit that pension funds that were in deficit, by for example 30 per cent, would be a further 10 per cent in deficit because of QE. A critic might argue that this has quickened the end of some defined benefit schemes. But it is attempting to turn conventional wisdom about QE punishing the old on its head.

* The Bank of England should be congratulated for publishing this, though the figures are inevitably sketchy. Good pressure from the Treasury Select Committee member Jesse Norman contributed. Also see our Channel 4 News films on this very subject over the past two years.

Follow @faisalislam on Twitter.