King 'S Gambit

By Jamieson, Bill | The Spectator, February 11, 2012 | Go to article overview

King 'S Gambit


Jamieson, Bill, The Spectator


How quantitative easing is changing Britain

No one who knows Sir Mervyn King would describe him as a radical.

The Bank of Eng land governor looks every inch the owlish academic, yet he is midway through what is possibly the greatest gamble in Britain's economic history. Under the frosted-glass term of 'quantitative easing', he may soon have the Bank artificially create £600 billion of credit to its own account, the bulk of which would be used to buy government debt. Other countries have attempted quantitative easing, but never on this scale. Sir Mervyn is boldly going where no central banker has gone before - yet with the minimum of debate over the policy's costs, its consequences and its victims.

The problem is clear enough . Brita in seems to be stalled in a Zero Era with flat consumer spending, next to no pay rises, a slump in investment, no-growth economy - and ultra-low interest rates. And this is no coincidence. The digital banknote printing which Sir Mervyn has conducted so far - about £275 billion - has kept interest rates low. This is QE's first and most powerful effect. The idea is that investors, dismayed by the low return from government debt notes, will instead buy other assets more likely to help with the economic recovery.

Low rates of interest are, of course, great news for a government which needs to borrow £4,000 a second - but not for savers who see the value of their nest egg destroyed by inflation. It hurts pension funds, so what we think we're putting towards retirement will be worth far less.

Companies see the value of their pension fund plunge - and have to top it up. This is what QE does: transfers wealth from savers to borrowers. If the Chancellor stood up and admitted as much, it would cause uproar.

But because QE is a complex Bank of England mechanism with a boring name, no one much cares.

We need not guess at its effects. The Bank's own analysis has confirmed that the first £200 billion of QE pushed up inflation by anything from 1 to 2.6 percentage points.

This was slipped out in the small print of a Bank report, barely making a ripple. Compare this to the political outcry which surrounded the 2.5 percentage point rise in VAT last January. Every household had to pay considerably more for shopping due to QE, too, and, as with VAT, it has hit the poorest households hardest.

Now that Britain is about to get another massive dose of QE, we have little choice but to take on trust the Bank's forecast that inflation will rapidly tumble back towards its target rate. …

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