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Thursday, 23 August 2012

Thursday, August 23, 2012 Posted by Jake 10 comments Labels: , , , , ,
Posted by Jake on Thursday, August 23, 2012 with 10 comments | Labels: , , , , ,

[Updated September 2016]



The former chancellor, George Osborne, has finally admitted that the Bank of England's quantitative easing (effectively printing money) made the rich richer. He was silent about that fact when he was chancellor. 

On top of that, interest rate cuts hurt savers. So, speaking from Washington in an interview with Bloomberg TV, Mr Osborne said: “We need to offset the very necessary loose monetary policy and the distributional consequences that it is having. Essentially it makes the rich richer and makes life difficult for ordinary savers.” He added: “There’s a role for government policy not in stopping that monetary policy which keeps the economy strong but in mitigating its impact. I think all of us who believe in free markets need to work harder to find an answer to the anger that people clearly feel out there.” What he couldn’t bear to say was that the only way to do that is to increase welfare and benefits, which he cut.

The Bank of England’s Quantitative Easing (QE) programme (which means printing money to buy UK government bonds) props up the nation’s asset prices. For it to help the real economy, it needs to – you’ve guessed it – trickle down. That’s because most financial assets are owned by the top 10%. Half of us have no financial assets at all.

The UK created £375bn ($550bn) of new money in its earlier QE programme between 2009 and 2012. August 2016 brought a fresh injection of £60bn of (QE). It’s the Bank of England’s response to the uncertainty of the Brexit process and worries about productivity and economic growth.

QE is not just being done in the UK. Between 2008 and 2015, the US Federal Reserve in total bought bonds worth more than $3.7 trillion. The eurozone began its programme of QE in January 2015 and has so far pumped in $600bn of extra money.


In 2012, the Treasury Select Committee, seemingly one of the less ineffectual organs of our Parliament (though we wait to see whether their bite lives up to their bark), asked the Bank of England to explain the costs and benefits of its programme of Quantitative Easing to rescue the economy from the banking crisis.


"the total increase in household wealth stemming from the Bank’s £325 billion of asset purchases up to May 2012 of just over £600 billion... In practice, the benefits from these wealth effects will accrue to those households holding most financial assets."

The Bank helpfully commissioned a survey to show how these financial assets, and the £600billion boost to household wealth, has been distributed:

The survey asked the question:

‘How much do you (or any member of your household) currently have in total, saved up in savings and investments? Include bank /building society savings accounts or bonds, stock and shares, ISAs, Child Trust Funds, NS&I account/bonds and premium bonds. Please exclude any pensions you may have.’

It produced the following result, which shows that half of households actually have no financial assets, and therefore had no share of the £600billion bonanza. The £600billion went “to those households holding most financial assets”.




10 comments:

  1. Report in the BBC - "The Bank of England has defended its policy of quantitative easing, despite admitting that the top 5% of households have benefited the most."

    http://www.bbc.co.uk/news/business-19356665

    ReplyDelete
    Replies
    1. It makes no difference who get's what. The brits are the most passive idiots on earth, even when a million march they're ignore - face palmed

      Delete
  2. These smaller blogs and graphs are ideal to share on facebook Thanks

    ReplyDelete
  3. How on earth can £325 billion of asset purchases produce an increase in wealth of £600 *billion* - ie almost twice as much as the asset purchases? Have you got your units right in this story?

    ReplyDelete
    Replies
    1. Sadly, yes. Assets are worth what people will pay for them. When the supply of assets is greater than the demand, then the price of the assets fall.

      Eg house prices go down if there are no buyers, and up if there are buyers. The 'value' of the house exists whether it is sold or not. So in a bouyant market the asset value of the national housing stock is greater.

      QE prints money and buys assets, creating an 'conjured up' demand for assets pushing up their prices.

      Delete
    2. http://en.wikipedia.org/wiki/Valorisation

      A great explanation as to why value is able to increase in the ways it does.

      Delete
  4. In a fractional reserve banking system the 325 Billion wiil effectively be worth far more. It is distributrd through the system as loan contracts and a bank only has to hold a small percentage to leverage the rest as debt. Each contract has interest written in and so becomes more valuable. It also allows bankers to repeatedly re-loan the money with a fraction of the deposits held for liquitity. The problem just now is the bottom half of households cannot take more debt so the system stalls. People have no equity boom to offset the debt and the market has crystallised. As a result the system is stalkibg while real household incomes are diluted. Clever accounting ensures the money is held by corporations n banks n offset in other ways until the consumers are in a position to borrow. Its a fail of epic proprtions.

    ReplyDelete
  5. Evidence to the Public Accounts Committee last week:
    http://www.publications.parliament.uk/pa/cm201213/cmselect/cmtreasy/uc902-ii/uc902.pdf

    "There has been a very significant redistributional effect that has come through from QE. If you happen to be financially asset-rich, you have done very well from QE. If you are someone who depends on a nominal wage and have not much in the way of financial assets, arguably, you have done worse from QE, to the extent that the fall in the exchange rate anticipated QE and may have been locked in by the impact of subsequent QE. The consequence of that has been that real wages have been hit very hard over the course of the last few years, probably the biggest squeeze we have seen since the 1920s. "

    ReplyDelete
  6. 'Fractional Reserve Banking' went the way of the Dodo: http://goo.gl/yqGX7U

    'While the money multiplier theory can be a useful way of
    introducing money and banking in economic textbooks, it is
    not an accurate description of how money is created in reality.

    Rather than controlling the quantity of reserves, central banks
    today typically implement monetary policy by setting the
    price of reserves — that is, interest rates.
    In reality, neither are reserves a binding constraint on lending,
    nor does the central bank fix the amount of reserves that are
    available. As with the relationship between deposits and
    loans, the relationship between reserves and loans typically
    operates in the reverse way to that described in some
    economics textbooks.

    Banks first decide how much to lend
    depending on the profitable lending opportunities available to
    them — which will, crucially, depend on the interest rate set
    by the Bank of England. It is these lending decisions that
    determine how many bank deposits are created by the banking
    system. The amount of bank deposits in turn influences how
    much central bank money banks want to hold in reserve (to
    meet withdrawals by the public, make payments to other
    banks, or meet regulatory liquidity requirements), which is
    then, in normal times, supplied on demand by the Bank of
    England'

    ReplyDelete

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