Forget LIBOR, QE is the real scandal

We ought to hope that the quantiative easing being administered by Mervyn King is a "non-event". If it isn't, we'll all feel the same pinch our savers already are

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Money doesn't grow on...
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John Phelan
On 10 July 2012 10:00

About ten days ago most people wouldn’t have known the LIBOR from an ice sculpture of Vin Diesel. Now the London Interbank Overnight Rate (the rate at which banks lend to each other overnight – not everything in economics is as obtuse as it sounds) is at the centre of a furious political storm and will soon be at the centre of a Parliamentary inquiry.

A flavour of the passion roused by Barclays’ actions came when the normally measured Mervyn King spoke of “the deceitful manipulation of a key interest rate.” This was especially striking coming from him as his job, Governor of the Bank of England, is all about manipulating interest rates.

And it was even more striking as he said this just as he was about to administer another dose of Quantitative Easing, £50 billion, taking the total so far to £375 billion since the scheme started in March 2009. That’s about a quarter of GDP.

QE’s stated purpose is to put money into banks and lower long term interest rates, spurring borrowing, investment, and economic growth. There hasn’t been much sign of this but QE’s defenders tell us that we have to compare what weak growth we do have with the cataclysm which would have befallen us without QE. We’ll never know.

But QE has had a number of definite effects. By handing over £325 billion to banks in return for long term assets QE has boosted the bank’s profitability and, of course, those bonus pots for executives. And it is not just any old long term security that the Bank of England has been buying but British government debt. This has had the handy effect of helping George Osborne keep gilt yields down.

While banks and the Treasury have done rather nicely out of QE, savers, particularly retirees, haven’t. The driving down of long term interest rates by QE has driven down annuity rates, which are linked to long term interest rates, by 27 percent since 2008.

As Simon Rose, from pressure group Save Our Savers says, “QE is government-sanctioned theft from those who are trying to make provision for themselves. It is wreaking havoc on pension funds with the National Association of Pension Funds reckoning QE has cost pension funds a massive £270 billion.”

That’s not to say that all pensioners are suffering. The fall in gilt yields has been accompanied by a rise in gilt prices (the two move in opposite directions) which is great news for anyone whose pension pot is invested in gilts. Like Charlie Bean and Paul Tucker, deputy governors of the Bank of England, who, thanks to the rise in gilt prices they engineered, saw the value of their pension pots rise by £1.04 million and £1.35 million pounds each last year to a total value of £3.56 million and £5 million respectively.

One effect QE hasn’t yet had is inflation. Yes, CPI has been above the Bank of England’s target range for two and a half years, but the inflation figures we have seen are way below what you might expect from an expansion of narrow measures of the money supply by an amount equal to a quarter of GDP.

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