Hamish McRae: We can't carry on living off all this free money from QE

Economic Life: Because this policy has been around for three years we have come to think of it as normal

It is three years since interest rates were cut to 0.5 per cent and the bank of England's programme of quantitative easing was announced: 5 March 2009. What was introduced as an emergency policy of monetary stimulus has become the norm. Do not expect any change in it today. Indeed there has been some discussion that there may be yet another bout of QE in May. Market expectations would suggest that the Bank's official rates will be only a little above 1 per cent in another three years' time, way below expectations for inflation. Capital Economics, among others, thinks that there may be another three years of 0.5 per cent Bank rate.

Because this policy has been around for three years we have come to think of it as normal. Actually it is highly abnormal for we are in effect using a wartime policy in peacetime. The only similar periods over the past two centuries have been during the 1930s after the depression (for a large extent a delayed consequence of the chaos of the First World War) and the 1940s and 1950s after the Second World War.

Once something that is sold as temporary becomes permanent you would expect two things to start to happen. It would become less effective as people adjusted their behaviour to it; and the costs of the policy would become more evident. We are getting increasing signs of both, though the evidence, as you would expect, is still uneven.

The effectiveness first. We have had time to look at the consequences of the two complete bouts of QE and there are two bits of evidence that suggest the first had more effect than the second. One is the fall in gilt yields was smaller around the second bout than the first. The other was the impact on house prices was much smaller too, for the first bout coincided with a turn in the market whereas the second does not seem to be associated with any substantial change in the market.

What about the costs? The problem here is that the lags are so long and the other factors so large that is hard to be sure about what costs should be directly attributed to QE and what negative effects would have occurred anyway. As far as the impact on inflation is concerned the Bank and others have crawled over the numbers and there is not much point in adding to that bit of the debate here except to make one point. Simon Ward of Henderson, among others, has argued that successive rounds of QE may result in a deterioration in the split between real growth and inflation: we get more inflation and less real growth as successive QE rounds increase long-term inflation expectations.

What is, however, beyond dispute is that the policy has had an immediate impact on pension funds, as a result of the lower yield on gilts. That is the result of the mechanical link between bond yields and annuity rates. The National Association of Pension Funds says it supports QE but adds: "the latest bout of £125bn of money printing has blown a £90bn hole" in the industry's side. You could say QE has resulted in a transfer from companies and pensioners to taxpayers.

But it is the long-term change of behaviour that interests me most. If something is free there is a temptation to waste it, raising the obvious concern that money is being wasted. Matthew Lynn at Strategy Economics argues just this. He notes that the surge in public borrowing (top graph) has more than offset the modest decline in personal borrowing (green line on the bottom graph).

"Near-zero interest rates in the UK, the US and the eurozone," he writes, "have moved from being a temporary response to an extraordinary collapse in economic confidence to being a permanent policy tool, just as they have in Japan. Slowly but inevitably, that is starting to change the way that investors, borrowers and savers behave. It has created an economy in which money is effectively free, and in which cash has no appeal. Over the medium term, whilst presenting opportunities for investors, that will distort the real economy."

You can start to see this happening. Savers are moving money out of bank deposits and putting them into anything that will give a real yield, such as equities, or give them some protection against inflation, such as gold. The scramble for deposits has led to the two semi-nationalised British banks, Royal Bank of Scotland and the Halifax arm of Lloyds, increasing their mortgage rates. So in a way the market is doing what the Bank ought to be doing: tightening monetary policy. Or rather it is somewhat offsetting the effect of printing money.

But if I am worried about the long-term effects of QE I am even more worried about what happens when QE is reversed. We have these huge public debts, still rising through to 2015. We have household debts that are huge too, certainly by comparison with the US and even Japan (blue and red lines in the bottom graph). The safe-haven status of the UK, coupled with all the money being printed, has enabled us to scramble along. But we are doing so by undermining the position of savers. This cannot be sensible or indeed moral.

Now you could say that all this is a response to a past policy failure, and those two graphs do highlight two massive policy errors. The first was that the national debt was allowed to rise even in the boom years of 2005-07; the second, that personal debt was allowed to surge from 2002 onwards. But that does not excuse the uncritical attitude to QE.

I sense this is starting to change. There is still a strong "let's just print more money" lobby and the present balance of the Bank's monetary policy committee reflects that. But as we become aware that a temporary policy is becoming a permanent one, the voices of concern will sound louder.

Meanwhile, we must change our habits, for the more ineffective we can make the QE policy, the quicker we will force the Bank to change it.

Suggested Topics
Start your day with The Independent, sign up for daily news emails
Voices
Homeless Veterans charity auction: Cook with Angela Hartnett and Neil Borthwick at Merchants Tavern
charity appealTime is running out to secure your favourite lot as our auction closes at 2pm tomorrow
Arts and Entertainment
J Jefferson Farjeon at home in 1953
booksBooksellers say readers are turning away from modern thrillers and back to golden age of crime writing
Sport
Amir Khan is engaged in a broader battle than attempting to win a fight with Floyd Mayweather
boxing Exclusive: Amir Khan reveals plans to travel to Pakistan
News
Stacey Dooley was the only woman to be nominated in last month’s Grierson awards
mediaClare Balding and Davina McCall among those overlooked for Grierson awards
PROMOTED VIDEO
Voices
Joseph Kynaston Reeves arguing with Russell Brand outside the RBS’s London offices on Friday
voicesDJ Taylor: The great tradition of St Paul and Zola reached its nadir with a worker's rant to Russell Brand
News
Twitchers see things differently, depending on their gender
scienceNew study shows that birdwatching men have a lot in common with their feathered friends...
News
i100
Arts and Entertainment
Caroline Flack became the tenth winner of Strictly Come Dancing
tvReview: 'Absolutely phenomenal' Xtra Factor presenter wins Strictly Come Dancing final
Life and Style
A still from the 1939 film version of Margaret Mitchell's 'Gone with the Wind'
life
News
Xander van der Burgt, at the Royal Botanic Gardens, Kew
scienceA Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there
Arts and Entertainment
British actor Idris Elba is also a DJ and rapper who played Ibiza last summer
film
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Carlton Senior Appointments: Private Banking Manager - Intl Bank - Los Angeles

$200 - $350 per annum: Carlton Senior Appointments: Managing Producer – Office...

Carlton Senior Appointments: San Fran - Investment Advisor – Ind Advisory Firm

$125 - $225 per annum: Carlton Senior Appointments: San Fran - Investment Advi...

Sheridan Maine: Commercial Finance Manager

Up to £70,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

Sheridan Maine: Regulatory Reporting Accountant

Up to £65,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

Day In a Page

The week Hollywood got scared and had to grow up a bit

The week Hollywood got scared and had to grow up a bit

Sony suffered a chorus of disapproval after it withdrew 'The Interview', but it's not too late for it to take a stand, says Joan Smith
From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?

Panto dames: before and after

From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?
Thirties murder mystery novel is surprise runaway Christmas hit

Thirties murder mystery novel is surprise runaway Christmas hit

Booksellers say readers are turning away from dark modern thrillers and back to the golden age of crime writing
Anne-Marie Huby: 'Charities deserve the best,' says founder of JustGiving

Anne-Marie Huby: 'Charities deserve the best'

Ten million of us have used the JustGiving website to donate to good causes. Its co-founder says that being dynamic is as important as being kind
The botanist who hunts for giant trees at Kew Gardens

The man who hunts giants

A Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there
The 12 ways of Christmas: Spare a thought for those who will be working to keep others safe during the festive season

The 12 ways of Christmas

We speak to a dozen people who will be working to keep others safe, happy and healthy over the holidays
Birdwatching men have a lot in common with their feathered friends, new study shows

The male exhibits strange behaviour

A new study shows that birdwatching men have a lot in common with their feathered friends...
Diaries of Evelyn Waugh, Virginia Woolf and Noël Coward reveal how they coped with the December blues

Famous diaries: Christmas week in history

Noël Coward parties into the night, Alan Clark bemoans the cost of servants, Evelyn Waugh ponders his drinking…
From noble to narky, the fall of the open letter

From noble to narky, the fall of the open letter

The great tradition of St Paul and Zola reached its nadir with a hungry worker's rant to Russell Brand, says DJ Taylor
A Christmas ghost story by Alison Moore: A prodigal daughter has a breakthrough

A Christmas ghost story by Alison Moore

The story was published earlier this month in 'Poor Souls' Light: Seven Curious Tales'
Marian Keyes: The author on her pre-approved Christmas, true love's parking implications and living in the moment

Marian Keyes

The author on her pre-approved Christmas, true love's parking implications and living in the moment
Bill Granger recipes: Our chef creates an Italian-inspired fish feast for Christmas Eve

Bill Granger's Christmas Eve fish feast

Bill's Italian friends introduced him to the Roman Catholic custom of a lavish fish supper on Christmas Eve. Here, he gives the tradition his own spin…
Liverpool vs Arsenal: Brendan Rodgers is fighting for his reputation

Rodgers fights for his reputation

Liverpool manager tries to stay on his feet despite waves of criticism
Amir Khan: 'The Taliban can threaten me but I must speak out... innocent kids, killed over nothing. It’s sick in the mind'

Amir Khan attacks the Taliban

'They can threaten me but I must speak out... innocent kids, killed over nothing. It’s sick in the mind'
Michael Calvin: Sepp Blatter is my man of the year in sport. Bring on 2015, quick

Michael Calvin's Last Word

Sepp Blatter is my man of the year in sport. Bring on 2015, quick