BOE’s QE: A hidden tax on the wealth of middle-class savers and pensioners?
The prolonged unconventional, quantitative easing (QE) monetary policy of the Bank of England has effectively hijacked fiscal policy from the government, with disastrous effects on savers and pensioners and in a way that makes wealth inequality worse more generally.
The reasons for this are subtle, which is why they are also insidious.
As quoted by Steve Baker MP in a recent House of Commons debate on QE, John Maynard Keynes once explained how, via inflation, “governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens,” and, “while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth”.
As arguably the single most influential economist of the 20th century, we should give Keynes’ thoughts on this matter due consideration.
It may be true that consumer price inflation remains relatively low due to what economists call slack in the labour market, which tends to reduce or prevent wage growth. But because of the artificially low asset yields associated with QE, savers and pensioners now find they must outright liquidate assets in order to maintain a middle-class lifestyle or to enjoy a comfortable retirement. While that can work for a time, in the end it erodes the middle-class capital base and leaves households with less to pass down to their children and grandchildren.
QE enriches those who have already accumulated enough assets such that they generate sufficient income without the need to liquidate their accumulated capital base. As the Bank itself determined in a 2012 paper analysing, among other things, the distributional effects of QE, “the top 5% of households own 40% of the assets,” and hence they have been the primary beneficiaries of the rampant asset price inflation following the financial crisis of 2008 and large devaluation in sterling.
QE can also be an effective tool to weaken the currency, which makes imports and basic goods more expensive, squeezing the middle class further. While some argue that it is possible to “devalue your way to prosperity”, history has not been kind to the countries and empires that have followed this path. Countries that have pursued stable or outright strong currency policies have generally fared much better. Germany and Switzerland come to mind, as does the pre-1970s United States.
