FacebookTwitterGoogle+RedditEmail

Quantitative Easing: the Most Opaque Transfer of Wealth in History

It appears that the massive, almost decade-long, transfer of wealth to the rich known as ‘quantitative easing’ is coming to an end. Of the world’s four major central banks – the US federal reserve, the Bank of England, the European Central Bank and the Bank of Japan – two have already ended their policy of buying up financial assets (the Fed and the BoE) and the ECB plans to stop doing so in December. Indeed, the Fed is expected to start selling off the $3.5trillion of assets it purchased during three rounds of QE within the next two months.

Given that, judged by its official aims, QE has been a total failure, this makes perfect sense. QE, by ‘injecting’ money into the economy, was supposed to get banks lending again, boosting investment and driving up economic growth. But overall bank lending in fact fell following the introduction of QE in the UK, whilst lending to small and medium sized enterprises (SMEs) – responsible for 60% of employment – plummeted. As Laith Khalaf, a senior analyst at Hargreaves Lansdown, has noted: “Central banks have flooded the global economy with cheap money since the financial crisis, yet global growth is still in the doldrums, particularly in Europe and Japan, which have both seen colossal stimulus packages thrown at the problem.” Even Forbes admits that QE has “largely failed in reviving economic growth”.

This is, or should be, unsurprising. QE was always bound to fail in terms of its stated aims, because the reason banks were not funnelling money into productive investment was not because they were short of cash – on the contrary, by 2013, well before the final rounds of QE, UK corporations were sitting on almost £1/2trillion of cash reserves – but rather because the global economy was (and is) in a deep overproduction crisis. Put simply, markets were (and are) glutted and there is no point investing in producing for glutted markets.

This meant that the new money created by QE and ‘injected’ into financial institutions such as pension funds and insurance companies was not invested into productive industry, but rather went into stock markets and real estate, driving up prices of shares and houses, but generating nothing in terms of real wealth or employment.

Holders of assets such as stocks and houses, therefore, have done very well out of QE, which has increased the wealth of the richest 5% of the UK population by an average of £128,000 per head.

How can this be? Where does this additional wealth come from? After all, whilst money – contrary to Tory sloganeering – can indeed be created ‘out of thin air’, which is precisely what QE has done, real wealth cannot. And QE has not produced any real wealth. Yet the richest 5% now have an extra £128,000 to spend on yachts, mansions, diamonds, caviar and so on – so where has it come from?

The answer is simple. The wealth which QE has passed to asset-holders has come, first of all, directly out of workers’ wages. QE, by effectively devaluing the currency, has reduced the buying power of money, leading to an effective decrease in real wages, which, in the UK, still remain 6% below their pre-QE levels. The money taken out of workers’ wages therefore forms part of that £128,000 divided. But it has also come from new entrants to the markets inflated by QE – primarily, first time buyers and those just reaching pension age. Those buying a house which QE has made more expensive, for example, will likely have to work thousands of additional hours over the course of their mortgage in order to pay this increased cost. It is those extra hours that are creating the wealth which subsidises the yachts and diamonds for the richest 5%. Of course, these increased house prices are paid by anyone purchasing a house, not only first time buyers – but the additional cost for existing homeowners is compensated for by the rise in price of their existing house (or by their shares for those wealthy enough to hold them).

QE also means that newly retiring pensioners are forced to subsidise the 5%. New retirees use their pension pot to purchase an ‘annuity’ – a bundle of stocks and shares generating dividends which serve as an income. However, as QE has inflated share prices, the number of shares they can buy with this pot is reduced. And, as share price increases do not increase dividends, this means reduced pension payments.

In truth, the story that QE was about encouraging investment and boosting employment and growth was always a fantastical yarn designed to disguise what was really going on – a massive transfer of wealth to the rich. As economist Dhaval Joshi put it in 2011: “The shocking thing is, two years into an ostensible recovery, [UK] workers are actually earning less than at the depth of the recession. Real wages and salaries have fallen by £4bn. Profits are up by £11bn. The spoils of the recovery have been shared in the most unequal of ways.” In March this year, the Financial Times noted that whilst Britain’s GDP had recovered to pre-crisis levels by 2014, real wages were still 10% lower than they had been in 2008. “The contraction of UK real wages was reversed in 2015,” they added, “but it is not going to last”. They were right. The same month the article was published, real wages began to fall again, and have been doing so ever since.

It is the same story in Japan, where, notes Forbes, “household income actually contracted since the implementation of QE”.

QE has had a similar effect on the global South: enriching the holders of assets at the expense of the ‘asset-poor’. Just as the influx of new money created bubbles in the housing and stock markets, it also created commodity price bubbles as speculators rushed to buy up stocks of, for example, oil and food. For some oil producing countries this has had a positive effect, providing them a windfall of cash to spend on social programmes, as was initially the case in, for example, Venezuela, Libya and Iran. In all three cases, the empire has had to resort to various levels of militarism to counter these unintended consequences. But oil price hikes are, of course, detrimental to non-oil-producing countries – and food price hikes are always devastating. In 2011, the UK’s Daily Telegraph highlighted “the correlation between the prices of food and the Fed’s purchase of US Treasuries (i.e. its quantitative easing programmes)…We see how the food price index broadly stabilised through late 2009 and early 2010, then rose again from mid-2010 as quantitative easing was re-started …with prices rising about 40% over an eight month period.” These price hikes pushed 44 million people into poverty in 2010 alone – leading, argued the Telegraph, to the unrest behind the so-called Arab Spring. Former World Bank president Robert Zoellick commented at the time that “Food price inflation is the biggest threat today to the world’s poor…one weather event and you start to push people over the edge.” Such are the costs of quantitative easing.

The BRICS economies were also critical of QE for another reason: they saw it as an underhand method of competitive currency devaluation. By reducing the value of their own currencies, the ‘imperial triad’ of the US, Europe and Japan were effectively causing everyone else’s currencies to appreciate, damaging their exports. This is exactly what happened: wrote Forbes in 2015, “The effects are already being felt in the most dynamic exporter in the world, the East Asian economies. Their exports in US dollar terms moved dramatically from 10% year-on-year growth to a contraction of 12% in the first half of this year; and the results are the same whether China is excluded or not.”

The main benefit of QE to the developing world is supposed to have been the huge inflows of capital it triggered. It has been estimated that around 40% of the money generated by the Fed’s first QE credit expansion (‘QE1’) went abroad – mostly to the so-called ‘emerging markets’ of the global South – and around one third from QE2. However, this is not necessarily the great boon it seems. Much of the money went, as we have seen, into buying up commodity stocks (making basic items such as food unaffordable for the poor) rather than investing in new production, and much also went into buying up stocks of currency, again causing an export-damaging appreciation. Worse than this, an influx of so-called ‘hot money’ (footloose speculative capital, as opposed to long term investment capital) makes currencies particularly volatile and vulnerable to, for example, rises in interest rates abroad. Should interest rates rise again in the US and Europe, for example, this is likely to trigger a mass exodus of capital from the emerging markets, potentially prefigurng a currency collapse. Indeed, it was an influx of ‘hot money’ into Asian currency markets very similar to that seen during QE which preceded the Asian currency crisis of 1997. It is precisely this vulnerability which is likely to be tested – if not outright exploited – by the coming end of QE and accompanying rise of interest rates.

This article originally appeared on RT.com

More articles by:

Dan Glazebrook is currently crowdfunding to finance his second book; you can order an advance copy here: http://fundrazr.com/c1CSnd

Weekend Edition
June 22, 2018
Friday - Sunday
Karl Grossman
Star Wars Redux: Trump’s Space Force
Andrew Levine
Strange Bedfellows
Jeffrey St. Clair
Intolerable Opinions in an Intolerant Time
Paul Street
None of Us are Free, One of Us is Chained
Edward Curtin
Slow Suicide and the Abandonment of the World
Celina Stien-della Croce
The ‘Soft Coup’ and the Attack on the Brazilian People 
James Bovard
Pro-War Media Deserve Slamming, Not Sainthood
Louisa Willcox
My Friend Margot Kidder: Sharing a Love of Dogs, the Wild, and Speaking Truth to Power
David Rosen
Trump’s War on Sex
Mir Alikhan
Trump, North Korea, and the Death of IR Theory
Christopher Jones
Neoliberalism, Pipelines, and Canadian Political Economy
Barbara Nimri Aziz
Why is Tariq Ramadan Imprisoned?
Robert Fantina
MAGA, Trump Style
Linn Washington Jr.
Justice System Abuses Mothers with No Apologies
Martha Rosenberg
Questions About a Popular Antibiotic Class
Ida Audeh
A Watershed Moment in Palestinian History: Interview with Jamal Juma’
Edward Hunt
The Afghan War is Killing More People Than Ever
Geoff Dutton
Electrocuting Oral Tradition
Don Fitz
When Cuban Polyclinics Were Born
Ramzy Baroud
End the Wars to Halt the Refugee Crisis
Ralph Nader
The Unsurpassed Power trip by an Insuperable Control Freak
Lara Merling
The Pain of Puerto Ricans is a Profit Source for Creditors
James Jordan
Struggle and Defiance at Colombia’s Feast of Pestilence
Tamara Pearson
Indifference to a Hellish World
Kathy Kelly
Hungering for Nuclear Disarmament
Jessicah Pierre
Celebrating the End of Slavery, With One Big Asterisk
Rohullah Naderi
The Ever-Shrinking Space for Hazara Ethnic Group
Binoy Kampmark
Leaving the UN Human Rights Council
Nomi Prins 
How Trump’s Trade Wars Could Lead to a Great Depression
Robert Fisk
Can Former Lebanese MP Mustafa Alloush Turn Even the Coldest of Middle Eastern Sceptics into an Optimist?
Franklin Lamb
Could “Tough Love” Salvage Lebanon?
George Ochenski
Why Wild Horse Island is Still Wild
Ann Garrison
Nikki Haley: Damn the UNHRC and the Rest of You Too
Jonah Raskin
What’s Hippie Food? A Culinary Quest for the Real Deal
Raouf Halaby
Give It Up, Ya Mahmoud
Brian Wakamo
We Subsidize the Wrong Kind of Agriculture
Patrick Higgins
Children in Cages Create Glimmers of the Moral Reserve
Patrick Bobilin
What Does Optimism Look Like Now?
Don Qaswa
A Reduction of Economic Warfare and Bombing Might Help 
Robin Carver
Why We Still Need Pride Parades
Jill Richardson
Immigrant Kids are Suffering From Trauma That Will Last for Years
Thomas Mountain
USA’s “Soft” Coup in Ethiopia?
Jim Hightower
Big Oil’s Man in Foreign Policy
Louis Proyect
Civilization and Its Absence
David Yearsley
Midsummer Music Even the Nazis Couldn’t Stamp Out
FacebookTwitterGoogle+RedditEmail