Some people interpret last week’s decision by the Bank of England to print more money as an attack upon savers and pensioners. In the Spectator, Bill Jamieson says QE “transfers wealth from savers to borrowers.” Ros Altman, Director-General of Saga, says QE “will have disastrous side-effects” because it reduces gilt yields and hence annuity rates. And the National Association of Pension Funds adds that, in cutting gilt yields, QE “pushes [final salary pension schemes] further into the red.”
I’m not convinced by these complaints, for three reasons.
First, the low gilt yields that give us low annuity rates are not just the result of QE. They also reflect investors’ desire for a safe haven in the face of the euro area’s debt crisis; the weak global economy; and the Chancellor’s fiscal tightening – which has put the onus for supporting the economy onto the Bank, as well as increased the attractiveness of gilts by reducing the chance of a debt crisis.
In this sense, you might as well blame low annuity rates upon European governments, companies’ reluctance to spend, and upon George Osborne. It’s invidious to single out the Bank of England. And it’s rather inconsistent to complain about low annuity rates if you support a government whose policy is to keep interest rates low and which celebrates “borrowing money more cheaply than Germany.”
Secondly, QE is intended to stimulate the economy. Granted, it does so to only a quite modest extent, relative to the scale of our troubles. But to the extent that it does so, QE brings forward the time when real interest rates rise. In this sense, it’s good for savers – because without it, we’d face a longer period of negative real interest rates.
Thirdly, the aim of QE is not merely to raise gilt prices. The Bank hopes that, in printing money, it will raise the prices of shares and corporate bonds as well, and weaken the pound, thus increasing the sterling value of our foreign assets. And there’s some evidence that QE had just such an effect, at least to some extent. The All-share index is more than 50 per cent higher than at the end of March 2009, and it’s likely that part of this rise is due to the increased confidence and money stock which the Bank has given investors.
If we hadn’t had QE, prospective pensioners might be enjoying higher annuity rates now – but they would be buying their annuities with a smaller pension pot because share and bond prices would be lower. It’s not at all obvious whether they would be better off. Similarly, pension funds would have lower asset values so they might still have deficits, but for a different reason.
Let’s do the numbers. The Bank estimates that the first £200bn of QE cut gilt yields by a percentage point. So let’s say that the £325bn of QE it now plans is reducing yields and annuity rates proportionately to that. This implies that, without QE, a 60-year-old man would have an annuity rate of 6.9 rather than 5.3 per cent. But if his pension fund is 24 per cent greater because of QE, he’s actually better off. Now, because we don’t know how the economy and asset prices would look without QE we can’t say this for sure – but there might not be much in it.
To disagree with all this, you have to believe that QE is reducing gilt yields without any other significant effects. This means you must disagree with George Osborne’s claim that low interest rates are stimulating the economy – because if he’s right, prices of shares and corporate bonds would be higher to reflect the stronger economy than we’d have without low gilt yields. It also means you must disagree with the Bank, which believes that QE has raised asset prices and economic activity. And you must disagree with those who think QE is inflationary, because inflation arises either from excess money and/or because QE stimulates the real economy – either of which would raise asset prices.
Let’s be clear. I doubt that QE has very big effects. However, to deny such effects altogether, and to claim that QE is "disastrous" for savers, is to exaggerate the case. Yes, QE, net, might be slightly bad for them – relative to the alternative – but there might not be much in it, and it might not be bad at all.