How Quantitative Easing is Just Subsidy For The Rich

In last week’s missive we described the policy widely employed by governments of both left and right known as ‘kicking the can’.

Today, as promised, with the European Central Bank having just announced €1.1 trillion of it, we consider one of the most in vogue forms of can-kicking –quantitative easing (QE).

“The great enemy of clear language is insincerity,” as our friend, George Orwell, once said. “When there is a gap between one’s real and one’s declared aims, one turns as it were instinctively to long words and exhausted idioms, like a cuttlefish squirting out ink”.

And so we have ‘quantitative easing’. Long words which sound terribly important, scientific even. But do they actually mean?

My computer’s thesaurus suggests ‘numerical facilitation’ as a synonym. That doesn’t really help us. Neither does the next suggestion – ‘measurable relieving’.

Like most of the utterances of glorious rulers, the expression was, I fear, deliberately opaque – because they were pulling a fast one.

Explaining QE using words that normal people actually use.

With QE, a central bank creates money.

Once upon a time this would have meant the printing of paper notes, but now, perhaps with the best interests of the environment in mind, the central bank cut out the printing press from the process and now just enters digits into a computer somewhere.

In the UK, £375bn was created through QE. Divide that number by our 64 million population and we realize that works out at £5,859 each (including kids). The money wasn’t earned through hard work or bold endeavour. It was created, as Tommy Cooper used to say, ‘just like that’.

That the Bank of England and its Chancellor overlord should have such power will cause understandable outrage among some readers, but that is how our woeful modern system of money works. I am merely messenger in all this.

In Europe, Mario Draghi has announced that €1.1 trillion will be created over the next 20 months. This is a relatively meagre €2,186 for each of the EU’s 503 million inhabitants.

But just as you didn’t see any of that £5,859, nor will many EU citizens see any of that €2,186. The money wasn’t intended for you or me. We didn’t need bailing out. In fact, we’re the ones who’re paying.

The great switcheroo that nobody saw

If you are selling something and a central bank suddenly prints a load of money to buy it, you can put your prices up.

That’s just what has happened with government bonds – the money that was created was used to buy them, as well as certain other financial assets. So the price of government bonds rose – and thus the cost to the government of its debt fell.

Here’s the really sneaky bit.

With debt now so cheap to service, governments in the UK and US, and now Europe, can actually take on more if it. Rather than face the music that they have been spending more than they earn, they have manipulated a situation whereby they are able to borrow a load more at less cost.

If I owe you money, convention is that I pay you interest on the money I owe you and then at some point I pay it back. Or I don’t pay you back and you either let it go or press charges, via court or fist.

But if I am the issuer the money I owe you, I can devalue it by printing more of it, I can lower the cost of the interest I have to pay on it. And so I don’t have to face the music. Rather I can defer it – otherwise known as kicking the can.

Proponents of QE will argue that this money was created to stimulate the economy. But what actually happened is that the prices of certain assets (and thus the earnings of those that are involved in these sectors) got boosted.

Bond prices soared, stock markets soared, financial markets soared, the London houses in which those who work in finance live have soared, the antiques, the wine and fine art they own have soared.

That’s why they should have called it ‘subsidy for the rich’, because that’s the effect it’s had. At least it would be calling a spade a spade.

Who gets shafted by all this?

Those with debt have seen the cost of their debt fall, while many of the assets against which they hold the debt have increased in value.

But the saver, of course, he/she got shafted. His savings paid no interest. And the value of his money is diluted by all the new money that was QEd into existence. His prudence was not rewarded.

Global debt cannot be repaid. Seven years since the financial crisis – a problem of too much debt – global debt has increased by $57trn, government debt alone by $25trn. This is because a decision was made back then to, yes, kick the can rather than face the music.

(To put the meaningless number a trillion into some kind of perspective: if you spent a million dollars every day since the birth of our Lord Jesus Christ, assuming he was born in the year 0, you would still not have spent a trillion dollars. I repeat global debt has increased by $57 trillion in the last seven years).

The plan to pay the debt that can never be repaid is with a little bit of cutting – so-called austerity (but for all the noise that hasn’t actually happened); with a little bit of growth (that’s sort of happened a little bit) and with a lot of debt devaluation (that has happened and will continue happen)

But as long as money remains the issuance of governments, they can carry on finding ways to kick the can, rather than face the music. It really is one rule for them and another for us.

And, by the way, this whole rigmarole of fiscal can-kicking via monetary manipulation (rather than default, jubilee or repayment) is precisely the reason why the youth across the entire Western world are so hopelessly priced out. Cans have been kicked and left for them to deal with.

Dominic Frisby is author of Life After The State and Bitcoin: the Future of Money.