Andy Haldane, chief economist of the Bank of England, says UK interest rates are as likely to go down as up. US financial markets are confident that the Federal Reserve will be very cautious about the pace at which it increases US rates. And in Europe, with the start of the European Central Bank’s plan for quantitative easing, a lot of interest rates are actually negative.
This central-bank policy of ultra-easy money has been widely welcomed, particularly from the political left. Such criticism as there has been, for example of the ECB, has been over the tardiness or limited scale of the programmes, not their excessive size. Governments are delighted by the fact that they can borrow more cheaply than ever before. Employers’ organisations have warned against any premature rise in rates. The TUC has welcomed the continued freeze on rates, too. And the financial markets? Well, they have been thrilled.
On Friday the FTSE 100 index at last went through 7,000, and up 8 per cent this year. About time too, you might think, for the performance has been modest by comparison with some other markets. The German DAX is up 22 per cent this year after the ECB started to move. In the US, the S&P 500 index is up only 3 per cent this year, but nearly 15 per cent on a year ago, and if you factor in the soaring dollar, that is equivalent to about 30 per cent in currency-adjusted terms. Even the French CAC index is up nearly 20 per cent this year, though as with all eurozone indices, you do have to allow for the fall in the euro.
There has been a similar, if slightly more muted, property boom worldwide. According to the Global Property Guide, last year house prices rose in 31 out of 41 countries in real terms. In Ireland they were up nearly 17 per cent, in the UK more than 7 per cent, and in the US nearly 4 per cent.
If easy-money policies have been good for holders of assets, they have been dreadful for equality. Much of the concern about rising inequality has been about incomes, rather than wealth. The latest UK data seem to show that over the past five years there has, if anything, been a slight decrease in income inequality, particularly once you allow for taxation. However, there had certainly been a large increase in inequality in most developed countries over the previous 25 years or so.
What you cannot contest, however, is that there has been a massive increase in inequality of wealth over the past five years just about everywhere. That is largely down to QE. The larger someone’s house and the greater their pension pot or their ISA, the more they will have gained relative to people who don’t own a home, or are just starting out on saving for a pension.
In economic terms you can argue that the policy has been a success, in that it has helped crank up an economic recovery in the US and UK, and may now be helping the eurozone to grow a bit faster. And reasonably strong asset prices are better than collapsing ones. Share-price crashes destroy commercial confidence and undermine investment plans, while house-price crashes can bring misery to home buyers. But a share boom built on rising profits and better prospects is very different to one based on hot money with nowhere else to go. If government bonds offer near zero returns, it’s a bit of a no-brainer to shift money to equities, for at least you get some dividend income. But the more money is shifted over, the more inflated share prices become.
Socially, an asset boom such as we have had is a disaster. We catch glimpses of an awareness of the social costs of QE in our own Government’s response: the help-to-buy plan, the special terms for older savers, and so on. But this is pecking away at the corners of the problem. Better to have reasonable stability in house prices than a raft of special measures that tackle the symptoms rather than the cause.
It gets worse. QE has benefited the sophisticated at the expense of the less so, with those who can pay for good advice doing best of all. Of course billionaires can have bad years, and the share markets may be becoming a bubble that is about to pop, but right now the people who are rich enough to take some risks have done well, while those who have kept their money in the bank have done badly.
What will happen next? The thoughtful, sensible Mr Haldane may just have been seeking to remind everyone, in expressing a personal view, that there are a lot of risks around, risks that the markets have been rather ignoring. Janet Yellen, the Fed’s chair, last week seemed to be even-handed in her outlook for US-rates, leaving the possibility of a rise in June but equally indicating it might come later. But if the more general point stands that central banks will retain very easy money policies for the foreseeable future, then expect wealth inequality to go on rising, not just here but throughout the developed world.Reuse content