Friday 14 September 2012

How Quantitative Easing is bad for the economy

The Quantitative Easing wealth transfer: How Quantitative Easing is bad for the economy.

I do tend to write quite long and complicated articles on the assumption that those with short attention spans would be unlikely to engage with complex political and economic ideas no matter whether the article is short and punchy or long winded and precise. As soon as the "complicated word stuff" appears, many people automatically disengage, no matter what the length of the article.

However in this case I'll try to spell it out as simply and concisely as I can because I believe this particular financial matter is of such importance.

The issue is Quantitative Easing (if you don't know what it means here's my attempt to explain it in relatively simple terms & and here's the Wikipedia article).

After creating £375 billion to inject into the UK economy, the Bank of England released some incredible research that estimated that 40% of the economic benefit of their money creation exercises went to the richest 5% of the population. They also conservatively estimated that their policies had devalued British savings by £70 billion.

The National Association of Pension Funds estimate that the BoE's first £325 billion worth of Quantitative Easing policies had damaged pension funds to the tune of £270 billion.

It is quite clear from this evidence that Quantitative Easing polices have tended to transfer wealth from many millions of ordinary people with savings accounts and pension funds to the wealthy economic elite.

There are three main reasons that this kind of poor to rich wealth transfer is so bad for the economy:

1. Capital Flight: The first reason is quite obvious. The super-wealthy beneficiaries of QE are significantly more likely to hire pricey tax lawyers to siphon their wealth out of the UK economy into tax haven economies via complex tax-loopholes. They are also much more likely to invest their fortunes in the untaxed and unregulated global shadow banking derivatives casino. If the newly created wealth floods out of the UK economy into tax havens or the global derivatives market, the wider UK economy will not feel the economic benefit. Many people associate capital flight with poor and struggling economies, however richer economies suffer too, especially if they have lax tax collection regimes or have no capital controls to influence the flow of wealth in and out of the country.

2. Reduced demand: As millions of ordinary people witness the value of their savings and pensions stagnate and shrink in real terms (grow less than the rate of inflation), the rational response is for them to "tighten their belts" and cut their weekly expenditure in order offset their losses. If millions of people are incentivised to simultaneously cut spending, the amount of demand in the economy is reduced causing productive enterprises to suffer.

3. Poor fiscal efficiency: Fiscal efficiency sounds like a complex term but it isn't really. Fiscally efficient spending results in greater economic activity than the scheme cost to implement in the first place (strong fiscal multipliers include spending on affordable housing projects, Infrastructure improvement and Research and Development). Research by Owen M. Zidar has found that in America "a one percent of GDP tax cut for the bottom 90% results in 2.7 percentage points of GDP growth over a two-year period. The corresponding estimate for the top 10% is 0.13 percentage points and is insignificant statistically." Put simply, if poor people are given money they spend it and stimulate the economy. Given that Quantitative Easing transfers wealth from the poor to the rich, it should be seen as extremely harmful to the UK economy, since wealth is being transferred from people that use their wealth to generate economic growth at the national level to those that don't.

Zidar's results are specific to America, but the vast difference in fiscal multiplication between the richest 10% (who generate only 13 cents worth of economic growth for every extra Dollar) and the majority (who generate $2.70 worth of economic growth for every extra Dollar) is so resounding, that it is hard to imagine that a similar ratios do not exist for the UK economy.

The Bank of England's Quantitative Easing policies transfer wealth from millions of ordinary people that create demand and generate economic growth with their wealth, to the "idle rich" that use their wealth for their own benefit and create little economic demand with it. If British fiscal efficiency results are similar to results in the US, the long-term damage being done to the UK economy as consequence of the Quantitative Easing wealth transfer could already be extremely severe.

The wealthy economic elite (financial sector workers, capitalists, government officials, landed gentry etc)  are unlikely to worry about growing levels of poverty, falling economic demand and economic contraction caused by QE or to agitate for change, since they are the principal beneficiaries of the QE wealth transfer. If anything is to be done to oppose this economically damaging wealth transfer process it must be done from the grass roots and in order for that to happen, a hell of a lot more ordinary people need to be made to understand that the Quantitative Easing wealth transfer is extremely bad for them and extremely bad for their communities.

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