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.

27 reader comments

  1. Peter Stewert says:

    So now that we have a fuller picture as to what printing money and giving it to banks results in, but does this mean anyone in the media might find a more descriptive name, at last, because QE never did it for anyone except high-functioning psychopaths in The City?

  2. Young_Pessimist says:

    Thanks Faisal. I am 30 years old and a saver.

    Recessions are a process that transfers wealth from the rich (plus asset owners) to the poor (savers and asset accumulators). If assets fall in value, then my pension will be better. But I am forced to buy expensive bonds and equity. Anyone under 35 should actually want assets (including houses) to fall in value – think about it!

    The real impact: I am seeing many friends looking or actually moving abroad. I plan to do the same. Anyone under the age of 35 should do this. Then we will see how well the economy grows when all the highly skilled move to other places. Most young people are too blind to see how poor their pensions and life will be.

  3. Philip says:

    This shows the problem with any instrument of Government economic policy. It seems to me they are all using crude economic thinking whivch takes no real account of behavioural or wider socio-economic consequences. QE, aimed at stimulating the economy, has largely been used by the banks to strengthen their balance sheets. Will large scale investment in rail or road or even house-building programmes benefit British workers & companies or overseas ones? The Bombardier example is a telling one. Government crowd-pleasing measures on benefits – like the cap on housing benefit – move workers away from potential jobs and make it uneconomic to travel to jobs on minimum wage. Why aren’t these intelligent people in the Treasury thinking about not just the first level effects but the actual outcomes? It continues to feel as though what they all se as important is today’s media headlines & we’ll worry about tomorrow’s consequences tomorrow.

  4. Saltaire Sam says:

    Still don’t understand why the bank of England gave the money to the banks who showed themselves incompetent and dishonest while screwing up the economy

    Share it among those earning 50k pa or less and the increase in demand for goods would have gone a long way to ending the recession.

    All the time the government thinks the answer is banks, the problem will just drag on. The answer is people.

  5. Ben King says:

    My understanding was that QE didn’t stuff pensioners, so much as annuities buyers. Which remains the case, no? Has the BoE contradicted that?

  6. Philip Edwards says:


    Oo, look.

    More system rigging by the privatised Bank of England.

    Now THERE’S a surprise.


  7. Laura Louise says:

    Why are you showing images of the Michael Faraday £20 note in your programme tonight on the subject of QE? That particular note was withdrawn over 10 years ago.

  8. Colonel Madd says:

    Well done for your very clear cut presentation of the effect QE has had on the UK.The UKs lamentably uneducated economics commentariat should have been all over this story from the beginning

    Perhps a follow up piece on the effect it HASN’T had i.e doing anything to revive the British economy might be in order

  9. JR says:

    The rich get richer, and the poor get poorer, then the poor have to go on the government’s Forced Unwaged Labour schemes, to make the rich even richer.

    And this comes after The Bank of England helped rig the LIBOR rate, so as to make the rich even richer at the expense of the poor again.

  10. Richard Wise says:

    Good report Faisal which clearly exposes the distributional effect of QE — but you could have dug deeper.

    QE is definitely not ‘printing money”. It is a change in the composition of the portfolio of assets private banks hold in accounts with the B of E — mainly to facilitate clearing.

    QE is the government buying back its own interest paying IOUs (Treasury Bills) with its own non-interest paying IOUs (Cash). It is equivalent to moving money from a deposit account to a current account.
    The idea behind QE is that the banks deprived of their guaranteed income from holding gilts will now be forced to invest in private business.

    Why do something so stupid as buying your own IOUs?
    Because the government is in thrall to the bonkers neo-liberal model (reinforced by the Maastricht Treaty) which commits the logical fallacy of conceptualising the finances of the state as being the same as those of a household. Thus the nonsense of ‘UK PLC maxing out on its credit card.’ Effective political rhetoric since it chimes with voters ‘common sense’ but bad economics as the spectacular failure of the policy to get banks to lend proves.

  11. Brennan says:

    Waht’s this? Giving 65 billion pounds to the banks to ‘invest’ in the economy just made the rich richer? Who would have believed it.

    If you want to invigorate the economy by boosting ‘consumer confidence’ and increasing demand for goods and services, the obvious thing to do is give money to the poor. The poor do not have assets or savings and thus have a tendency spend their money. Unfortunately the poor are not as good as the rich at convincing tory politicians that they know how to ‘create wealth’ in the face of overwhelming evidence to the contrary.

  12. Young_Pessimist says:

    QE and the Conservative policy is no worse than what Labour would have produced. Labour would have added greater spending (stimulus) but required more debt to finance this. Same impact: tax young savers.

    The real truth is GDP is far too high due to a credit bubble and a government spending bubble. It should be 30% lower (consider % of government overspending vs tax revenue, and the velocity of money at 2x. i.e. 27% (IMF) * 2 (approx) * 0.5 % GDP from govt spending = 27%).

    Both party figures use future GDP growth to make the sums match: GDP growth that is at the level produced WHEN there was a credit and government spending boom. It surely has to be lower. The US has the same problem, hence why you get comments like “mathematically impossible”.

    Best bet: move abroad if you’re young
    Second best: we need some radical reform of capitalism and how economies are run

    QE will continue as the banks would collapse without it. But at some point we will hit our fiscal cliff and stimulus to keep an hugely inflated economy is pointless. We should have listened to Jimmy Carter. Perhaps Greece will do the dirty work for us but then no banks means no economy.

    I heard Canadian…

    1. Richard Wise says:

      With the greatest respect Young_Pessimist you completely misunderstand the nature of money in the modern age.

      The state’s money is not based on some commodity like gold or silver. Money is more like a voucher which the UK state, as the sole issuer of its own sovereign currency, can create at will. This voucher is the only thing that the state will accept in payment of taxes which all are obliged to pay on pain of imprisonment. In fact mostly this ‘voucher’ only exists at the atomic level as electronic digits in state & bank computers.
      It is only neo-liberal ideology (EG. The Maastricht treaty) which mandates that the post-hoc accounting difference between one time period’s tax revenue and state spending must by filled by state borrowing on the money markets. In any case 80% of UK government debt is owed to UK citizens.
      £s are the UK government’s IOUs which are extinguished when taxes are paid.

      The obligation of a responsible government is to create the monetary conditions to keep the population productively employed.
      Please respond because this needs to be debated.

    2. Charles Jurcich says:

      Government needs to spend another £40Bn into the economy to see some reasonable growth. If it chooses to insist on “borrowing” the money, it would be exploiting the very low interest on Gilts which QE has helped to create. Alternatively it could increase the deficit without issuing more debt as Richard Wise has alluded to – George Osborne can simply tell the Debt Management Office to issue less debt than the deficit by putting a cap onthe amount it issues – yes, government can do this.

  13. jackie97 says:

    Yes, just another form of dodgy trickle down, verging on criminal fraud, bailing out ‘failed’ banks and city of London etc In the eyes of the general public, the reputation and integrity of the BOE etc no longer exists, to say the least.

  14. Andrew Dundas says:

    Adding to your information, Faisal, you’re probably aware of the electoral implications.
    Wealthy folk gained from the Corporation Tax cuts – which drive up share prices just as Bond values rise when QE makes interest rates shrink. Cuts in Higher Rate Taxes have also helped the wealthy. So that’s a triple bonus for the wealthy, and a whammy for the least wealthy.
    How come? Well, one explanation is that wealthy folk provide most of the income of political parties (as well as they being the most likely to vote), and to one of those Parties in particular. Moreover, the Sutton Trust found that the overwhelming majority of media controllers was born into the same wealth category.
    So that’s why the wealthy gain when we have Conservative Governments.

  15. sue_m says:

    Giving money to banks, who then continue to overpay their already overpaid and incompetent high level exec’s with obscene salaries and bonuses, should be a criminal offence.
    It certainly looks fraudulent to me when the BoE and govt claim QE will help the economy when clearly the economy continues to nosedive but bankers and their political pals continue to party.
    Just to add insult to injury the bankers use some of that bonus money – paid for by the cuts and increased taxes joe public is bearing – to employ tax advisors to help them avoid paying their dues in income tax.
    A major overhaul of unregulated banking and unbridled capitalism will be the only way out of this mess. I pity the generation growing up now as society divides further into privileged and poor. We will be back in the middle ages by the time they reach adulthood.

  16. young_pessimist says:

    Mr Wise, you don’t need to turn this personal but banter is all good. I doubt you know how money works. I was referring to impact, which will be the young via future tax hikes and I agree with your views to.
    Money and inflation are too complex for anyone to understand.

    If a government leads to higher Employment, Great, but if that leads to unsustainable Gdp growth that fuels trade deficit we find that in the long run it needs to collapse. Infrastructure spending or welfare leads to the same thing. Unless we create innovative products or services we are doomed. Cheep labour is another option but I certainly don’t see myself doing that.

    What I deeply believe is that the UK will struggle to find trading partners in the future and people wont accept ios’s. Why shouldn’t a young person move abroad.

    1. Richard Wise says:

      young_pessimist why do you doubt that I know how money works?
      For what its worth I have a degree in Economics and have taught the subject.
      I think our differences concern the most basic question: what is the nature of money as it exists now in the neoliberal globalised & computerised 21st Century?
      My basic position is chartalist. (http://en.wikipedia.org/wiki/Chartalism)
      Money is information, it is social, it is not stuff it is relationships – promises. Our monetary system is a virtual system which exists matrix-like only in computers. What is real are people and resources.
      The UK government as the issuer of its own sovereign currency can buy any resources or skills which are available for sale for £s.

  17. Prince Charles says:

    Without Qe (UK,USA and China) it will be a disaster.
    With Qe it will only be a catastrophe.

  18. Young_Pessimist says:

    I agree with the comments here and various people do have different views due to the impact on them.

    In terms of IOUs, I agree. But IOUs are not evenly distributed, for example tax rates will either have to increase or service levels fall. And it is also impossible to distribute services evenly to a population, and even if that was done through a controlled approach, people require different things due to varying skill sets or body type. Should I have £100,000 of UK IOUs but am unlikely to receive the same healthcare as my grandparents?

    I refer to the impact. The young will have to pay a greater proportion of IOUs than prior generations and will receive lower levels of service in the UK. So why not move to another country that it not at the peak of the cycle. Education for children may well be better in Canada. Property is cheaper in Poland. Debt is lower in many places.

    Smart young people will leave and then you have a disaster beyond fixing. So policy needs to change: taking the pain today is the only way to avoid it.

    1. Richard Wise says:

      The UK government as the sole issuer of the £ sterling can purchase anything thats available for sale in £s now or any time in the future. It is never revenue constrained. The constraint is the availability of resources to purchase — care homes and care workers for example. It is the coalition’s doomed austerity measures that are trashing the future — not the so called ‘deficit problem’. The idea that the government must save its tax revenue to spend at a later date is fallacious and based on the false idea that the state’s finances are the same as a private household’s or firms. There are no treasury coffers where the taxes are saved for future spending. When taxes are paid the government’s IOU is extinguished and the spending power they represent vanishes from the economy.

  19. Young_Pessimist says:

    What point can the IOUs balance run up to? Why not create an infinite number as I am willing to provide very expensive services (I do a very good Murray Walker impression) and high aggregate demand (I like expensive watches). Alternatively you can build a care home in my back garden and I can provide care assistance. In fact, why doesn’t everyone do this. No point being an engineer.

    Creating endless IOUs distorts good investment from bad and hiding behind a belief that more is better doesn’t help. The government does spend money badly, otherwise we would have the best products and work force in the world.

    IOUs are created and lead to a drain on the economy in the longer term. They do have to be paid back – either through reduced services, higher taxes or inflation. A lot can be hidden behind the belief the economies will grow through it but debt levels are increasing at a far higher rate than GDP, so that doesn’t work.

    1. Richard Wise says:

      No one is saying there should be the creation of ‘endless IOUs’. Of course it would be inflationary to create more purchasing power than there are resources and things to buy.
      But that is not the case at the moment when there is rising unemployment and firms going bust.
      The UK government always has the ability to finance particular projects by directly crediting the bank accounts of those firms providing the goods and services. The IOUs can be directed at specific aims which directly get people back to work and put spending power in people’s pockets. It is only the coalition’s obsession with neo-liberal ideology and the ‘magic of the market’ which prevents this happening. Of course the government can spend on bad things (futile military adventures for example).
      However government spending on green infrastructure, education, public transport, health facilities etc far from being a burden for future generations, would create real assets for our children and grandchildren.
      The UK government created IOUs to finance the war against fascism. Would it have been better to have lost the war and have a lower national debt?

  20. Robert Taggart says:

    The BofE does not make this scrounger any richer – quite the contrary – our savings are not paying out nearly as much as they used to. One was poor – one be even poorer now !

  21. Young_Pessimist says:

    Mr Wise – I do doubt you know how money works. You are an Economist – a historian of how money has worked,. Do you have a full understanding of a shadow banking system and what items like CDOs really do?
    The problem we have is debt creation is exponential (the public sector is simply replacing a deleveraging private sector, just look at the charts). This is unsustainable without automation and lower due diligence (conveniently what happened in the last decade)
    So you may be right – QE can keep the machine rolling, but it collapses on itself through the need for exponential debt growth, automation and lack of due diligence. In other words money is spend on terrible services in an unsustainable way that blow up and create inefficiency.
    And if this becomes too centralised, we are communists before you can say Keynesians.
    Economics doesn’t teach you this. Mathematics and the ability to think beyond history doe. And working in the financial industry teaches you how money and funding really works rather than in a out-dated and wrong text book that will be re-written in a few years .
    In the process, savers pay in a QE policy to further enrich those who already hold assets in the…

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