Nice to see they are getting challenged on this.

With govt the net payer of interest to the economy the critics should ultimately win this one. You would need some seriously skewed propensities to spend to overcome the raw interest rate channels.

BOE Says QE Benefits to Economy Counter Harm Done to Savers

By Jennifer Ryan

August 23 (Bloomberg) — The Bank of England defended its quantitative-easing program against criticism that it affected savers, saying these costs must be weighed against the economic benefits and that the plan limited the depth of the slump.

“Without the bank’s asset purchases, most people in the U.K. would have been worse off,” the central bank said in a report published in London today. “This would have had a significant detrimental impact on savers and pensioners along with every other group in our society. All assessments of the effect of asset purchases must be seen in this light.”

The report is a response to a government request that the central bank explain the impact of its bond purchases, which began in March 2009 and will reach 375 billion pounds ($596 billion) in November. It aims to counter a government claim that loose monetary policy penalizes “savers, those with ‘drawdown pensions’ and those retiring now.”

The central bank said QE widened the deficits in defined-benefit pension plans that were already facing a shortfall before the program started, though that burden may fall on employers and future employees rather than those nearing retirement now. The impact on defined contribution plans has been “broadly neutral.”

Asset-Price Impact

The central bank also said that QE helped to boost other asset prices, benefiting returns on pensions and other savings. The comments echo those made by Deputy Governor Charles Bean in February, when he said the impact of QE on assets such as equities provides an “offset to the fall in annuity rates.”

The effect “is thus more complex than it seems at first blush,” Bean said in a speech that month.

“By pushing up a range of asset prices, asset purchases have boosted the value of households’ financial wealth held outside pension funds,” today’s report said. However, those holdings “are heavily skewed, with the top 5 percent of households holding 40 percent of these assets.”

The Bank of England said the biggest factor in the drop in interest income that savers receive from deposits was the reduction in the key interest rate to a record low of 0.5 percent, not asset purchases.

Explaining the widening of deficits in defined benefit pension plans and the fall in the annuity income that can be purchased from other pension funds, it said the “main factor” has been the fall in equity prices relative to gilt prices.

This “was not caused by QE,” the central bank said. “It happened in all the major economies, much of it occurred prior to the start of asset purchases, and stemmed in large part from the reluctance of investors to hold risky assets, such as equities, given the deterioration in the economic outlook. Indeed, by boosting the economy, monetary policy actions in the U.K. and overseas probably dampened this effect.”

11 Responses

  1. That’s funny, because I seem to recall a number of high profile MMTers calling for permanently zero interest rates on government borrowing, or even an abolition of government borrowing, hence an end to interest income.

  2. QE is a total and complete farce.

    First, one of the main reasons for the slow recovery is private sector deleveraging, i.e. attempts by the private sector to increase its net financial assets (Keynsian paradox of thrift unemployment). QE does NOTHING to increase those assets, whereas creating new money and spending it into the economy (and/or cutting taxes) WOULD increase those assets.

    Second, QE (and interest rate reductions) are supposed to encourage investment. But why on earth would the optimum ratio in which capital, labour, materials, etc are best employed change just because there is a recession? Absolutely none! I.e. there is no reason to skew demand towards investment any more than there is a reason to skew it towards hair-dressing or fast-food outlets.

    Third, as to LAGS between implementing policy and the effects, there isn’t much to choose between monetary and fiscal.

    I can think of more reasons. But that will do for now.

  3. Warren,
    Can you find out what this guy is drinking, and send a case of it to every member of OUR Congress? 🙁

    Diageo Results: Boss Urges Osborne Spend More

    The boss of the world’s largest distiller tells Sky News that investment in infrastructure would boost the UK economy.
    The chief executive of Diageo has told Sky News the Chancellor should “loosen the purse strings” to stimulate the economy.

  4. The BOE has a perfect record over 500 plus years of lying to the citizens during periodic financial crisis in order to protect the lenders – made up of the upper class and bankers – against the savers – made up of the people that actually work and contribute to society.

    One John Maynard Keynes became famous during such a crisis as a way to sell fiat currency to an ignorant populace. It worked!

    and now we are back were we started, bankers looking for the next economic “theory” to twist into a scam to bail out the lenders against the savers.

    If you were a true patriot you would throw the central bankers and let it all crash, 90% of the people would not suffer in any way as they live paycheck to paycheck already.

    Its the lenders that have the most to lose – jets, boats, cigars, and weekends in Tropez – pretending that they somehow ad value to the world.

    1. I would send all the political appointees home and promote the highest ranking civil servant staffer to Fed chairman, along with the rest of my proposals for reforms
      same with Tsy. all the tsy sec needs to do is sign the money and chase counterfeiters

  5. Warren,
    Just feeling that someone should give you a two thumbs up for the candor and transparency on your site. Info you provide free to the general public here is far more useful to a financial advisor than dozens of sites that charge big time for a subscription.

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