Cooking the Books 1

QE didn’t work

Quantitative Easing (QE) was originally introduced by the Bank of England in 2009 with the aim of stimulating a revival of the economy after the Crash of 2008. The Bank bought government bonds, so increasing cash in the hands of the sellers. Depending on who they were, the idea was that they would either invest the money in their business or deposit it in their bank which would then have more money to lend.

It hasn’t worked like that, as a recent House of Lords report confirmed:

‘We conclude, on balance, that the evidence shows quantitative easing has had limited impact on growth and aggregate demand over the last decade. To stimulate economic growth and aggregate demand, quantitative easing is reliant on a series of transmission mechanisms that operate primarily in and through financial markets. There is limited evidence to suggest that these increase bank lending or investment, or boost consumer spending by wealthy asset holders’ (parliament.uk, paragraph 50 – bit.ly/3lOqDcG).

The Report did make the lesser claim that if QE didn’t make things better at least it stopped them getting worse, by helping to prevent ‘a reoccurrence of the Great Depression’ of the 1930s. This is pure speculation as there is no way of proving it since that might not have happened anyway, whereas that QE didn’t stimulate the economy is self-evident.

However, QE benefited some people:

‘the mechanisms through which quantitative easing effectively stabilised the financial system following the global financial crisis have benefited wealthy asset holders disproportionately by artificially inflating asset prices. On balance, we conclude that the evidence shows that quantitative easing has exacerbated wealth inequalities’ (paragraph 68).

By ‘asset prices’ their lordships did not mean the prices of the physical assets used in production such as plant and machinery but the prices of bonds and shares.

This is also the opinion of Catherine Mann, who has just been appointed to the committee that fixes the Bank Rate. She told the Houses of Commons Treasury Select Committee that financial markets:

‘have pocketed much of the recent stimulus (taking QE to £895 billion and rates to a record low of 0.1 percent) and left the real economy a few coins in loose change. Financial markets have absorbed monetary stimulus in “higher asset prices and greater financial stability risks … rather than transmitting [it] to the real economy” since QE became the Bank’s active policy, she said’ (Times, 27 July).

If she is suggesting that ‘wealthy asset holders’ deliberately refused to invest in producing more real wealth then she has got the wrong end of the stick. The reason the extra, cheap money made available by the Bank of England hasn’t found its way into productive investment is because it couldn’t all be invested at a sufficient profit. That is why it has been used instead on stock market gambling and speculation. As long as it is not profitable to invest the extra money, this situation won’t change. The capitalist economy is driven by business investment with a view to profit, not by abundant money or low interest rates.

Even if the government had spent the money directly into the real economy that would not have stimulated a revival but would have caused stagflation as in the 1970s. QE must have seemed a good idea as it avoided that, but it hasn’t worked as intended and has had the effect of enriching ‘wealthy asset holders’. That’s how it is. Governments can’t make capitalism work the way they want. They propose, but capitalism disposes.