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QE — the ultimate subsidy for the rich

23 August 2012

It’s official: Quantitative Easing has marked the biggest transfer of wealth to the rich of any government policy in recent documented history. The Bank of England released an analysis today, which was rejected as being an underestimate by the former government pensions adviser Ros Altman. But it was shocking enough, and the strongest point was made by the brilliant Ed Conway, economics editor of Sky News, who put it into a graph who would benefit from a QE-inspired boom in asset prices described by the Bank of England  today. “10th” means the richest tenth of the population, and so on.

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This is our new graph system: hover your mouse over each line, and the value should come up. And do not adjust your sets: the data shows negative £779 for the poorest tenth, so they lose out. The richest tenth do rather well.

Last December I interviewed Nassim Taleb, the Black Swan author who is well heeded in Cameroon circles. I’ve looked again at the transcript, and this is what he had to say about QE:

Quantitative Eeasing is a transfer of wealth to the rich. It brings up the housing prices.  The state is subsidising the rich, it is the top 1 per cent that benefit from quantitative easing, not the 99 per cent.  Quantitative easing really is flooding banks with money so they pay themselves bonuses with it.  Banks have money and assets so now they can borrow easily.  The poor guy here who is unemployed and can’t borrow is not going to benefit from QE.

Look at the Germans, or every single country [that has printed money]. The trap is you ease, you ease, you ease, you don’t see inflation and then suddenly – puff! –  you have a huge amount of inflation coming.  Like you try to pour money out of the ketchup bottle and nothing comes out, nothing comes out and then everything splashes, this is how inflation comes.  Inflation doesn’t come in a pretty nice way so don’t mess with inflation. Every single person who has done quantitative easing or a form of printing money has effectively lost the argument.

PS I should add that, while I’m prepared to believe that QE is regressive, the Bank of England’s figures strike me as a stab in the dark. Money can’t be created out of thin air, so what one guy gains another has to lose: now, or in the future. The distributional effects of QE would have to take in inflation, the effect on pension schemes, a guess at which income group is most exposed to share prices and in which sectors etc. My greatest concern about QE is that no one really knows what we’re doing, what the effect will be or what will happen when it is unwound.

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Show comments
  • Paul Marks

    If they (the “monetary stimulus” people) really were sincere in their (utterly false) belief that producing more money (from NOTHING) was good for the economy, they would “throw money from helecopters” or from buildings.Or send it out to each person – Major Douglas style.
    Why do “monetary stimulus” via government and the banks?
    To subsidise wealthy (and poltically connected) groups – it really is as bad as that. Indeed that such credit money bubbles subsidise the rich and the expense of the poor has been known since the time of Richard Cantillon – John Law’s partner in “legal” crime, back in the 1700s.
    During the credit-money “boom” the economy seems to prosper – during the “bust” the illusion of the gains (of the malinvestments) is exposed. But things do NOT just return to what they would have been – some people are better off than they would have been (if there had been no credit money expansion) and some people are worse off.
    And, generally speaking, the people who are better off than they would have been are wealthy and politically connected – and the people who are worse off than they would have been are poor.
    The intellectual error behind “monetary stimulus” may be sincere – but the METHOD is corrupt, utterly corrupt.
    I oppose the theory (the theory that producing more money from nothing is a good thing) and the method.
    But everyone should at least oppose the method – the method of doing it via the banks and other such.

  • TonyB58

    Are you surprised? There has been a massive transfer of wealth to the rich, deserving or otherwise, by all British governments since 1979. What is surprising is the lack of public outrage at the truly obscene levels of unfairness we see in British society today.

  • Eddie

    House prices tripled between the mid-90s and 2008 – so let them fall back and reduce by half, at least. This would enable people to afford homes.
    I would not be against blocking foreigners from buying either – or from reintroducing rent limits (or new taxes on property profits for babyboomers; or second home taxes that make people sell their second homes at a loss). The buy to let market is keeping property prices high – or rather, government and BoE policies which are desperately trying to stop house prices falling.
    There will be paid, of course, and repossessions – but so what? Plenty are hurting now.
    The fact somewhere to live costs so damn much – 15 times a decent professional salary in London – is obscene.
    Roll on the house price bubble bursting.

    • Archimedes

      I really disagree that there is a huge property bubble. Between the mid 90s and 2008, average wages doubled. Then, if you consider immigration and it’s effect on demand for housing, the tripling is probably justified – or at least not a bubble. Secondly, if you discount London, which is in a world of it’s own, you’ll probably find that house prices, relative to wages, in the rest of the UK is pretty much OK. The bubble is probably pretty small.

      The Economist reckons UK property is about 17% overvalued, which is not all that bad compared to other parts of the world. If you adjust for London, where there are a lot of foreign purchases, that will come down.

      • Eddie

        Look at the ratio of average earnings to house price: now it is insane, with the average London property £360,000 and the average salary a tenth of that.
        I think property should halve in price really – as in Ireland and Spain – and if the govt and BoE stopped propping the whole house of cards up, subsidising buy-to-let landlors, and letting any foreigner who wants to keep his Euros safe into property here, then it would reach its true price.
        Between 1997 and 2008 wages did not double – not with anyone I know. Property inflation has been insane and is damaging our society and people, and making riots inevitable.
        I would argue that The Economist is well-used to using stats to ‘prove’ its theses – no doubt they use mean averages for salaries and not median averages (and thus include the super-rich), for example.
        Property should crash – if we stop propping it up.

    • ButcombeMan

      In much of the country the house price bubble HAS burst. Nothing is moving, for it move mortgages need to get more available and more people need to invite negative equity. Neither situation is very likely. This is therefore going to be a very long haul. The commercial property especially retail property boom and the over gearing there, has yet to unwind. Things are much worse than many understand.

      For those sitting on paid for property, with money well placed in the stock market (rather than in cash) QE is certainly boosting their wealth.

      • Eddie

        Yep, and with over half a million people in arrears on mortgages, and millions on interest-only mortgages, and the entire system propped by the the government (though the opposition would do the same) and the Bank of England, one has to say this: it can’t go on forever.
        Sadly, it seems mass immigration will keep going on forever, pushing prices in the south-east especially up to levels which damage the fabric and wellbeing of our society. More riots to come, for sure.
        But why on earth, in these recessionary times, are we paying rich property-owning yummy mummys billions on maternity ‘pay’ (ie benefit); child benefit, free hours of childcare per week – when they’re sitting in £2 million mansions! These are the real benefit cheats.

  • Ian Walker

    Fraser, fiat money can, in fact, be created out of thin air. That’s pretty much the pessimistic definition of it.

    Wealth, of course, cannot. Which is exactly why printing fiat money, no matter how well disguised, increases the ratio of money supply to wealth, e.g. causes inflation.

    • Charlie the Chump


    • ScaryBiscuits

      I think that was Fraser’s point.

  • ScaryBiscuits

    Fraser, in response to your PS, it is possible to have net gainers from QE, at least domestically as shown on your graph. The real losers are the holders of government debt, who are mostly abroad, and this is why it is so attractive to our politicians.

    What caused the German inflation to explode so suddenly was when the foreign investors lost confidence in the ability of the Germans to pay back their debts. All the imaginary money that had been sent abroad suddenly came home at any price.

    QE is a steath default. In some ways it is worse than the overt one – at least when you negotiate with your creditors you are admitting you have a problem. George Osborne, by contrast, is boasting about how low government gilts are, because he has bought them, wrongly assuming this is a testament to his wisdom.

    It is the worst possible argument for keeping the pound: that we have been allowed to lie to our creditors, unlike Southern Europe which has been forced to confront reality. This argument will come back with a vengence and the Eurosceptic position will, alas, be severely weakened.

    With the debt share of each Briton at about £40k, not counting their personal debt, and average earnings at £25k it is arguable that we are already insolvent and that it is only a matter of time before history repeats itself. Everybody in the City knows this; they are just making hay while the sun shines.

    • Publius

      Well said, ScaryBiscuits. I hope that readers take in your last 2 paragraphs in particular.

      More generally, I’d add that (as with everything else), if one strips out the jargon and use straightforward words for what is going on, the truth has a habit of revealing itself.

      • rosie

        But if people in public life do that they are sacked for making “gaffes”.

  • Bob Dixon

    It is time to bring our forces back to the UK, as there is more important work for them here.
    Horse Guards Parade is the ideal place for the firing squads to rid us of all those who have brought us to our knees.

  • Kevin

    Every single person who has done quantitative easing or a form of printing money has effectively lost the argument.

    I am sure they cry all the way to the bank.

  • DavidH

    Depends what you mean by rich, doesn’t it? Who’s richer, the family with the Jag, the Porsche and the multi-million pound house all bought on debt, or the family spending just about what they earn each month and perhaps saving for a holiday each year?

  • Archimedes

    Fraser – regarding your PS. QE will not be unwound until the principal payment is so small, relative to GDP, that it can easily be refinanced on the private market – think 20 years of inflation and growth. Even in normal circumstances, though, money is created out of thin air by private banks leveraging to finance capital investments. The difference with QE is that we are not financing capital investment, but rather increased debt maintenance costs and a temporary hike in unemployment benefits while unemployment is high.

    That would be a problem if the private sector were continuing to leverage itself further, in which case the expansion of the money supply would be so great that we would feel large inflationary effects at some point in the future. As it happens, though, the private sector is de-leveraging and ceasing to invest in capital projects that would boost growth – so we will pay for it in the mid to long term with growth being negative while inflation remains constant. In other words, because of the current makeup, we are inflating away future wage increases and priming a second recession.

    That’s important, because if capital investment at the private level does not pick up in time to bear the brunt of reduced growth in the future, then we end up looking like Japan.

  • 2truelbue

    Well it is hardly going to improve our standard of living is it? If you believe that it helps the richest they they must be carrying the largest amount of debt. That does not make sense. The more money and assets you actually have will be devalued so I do not understand where you are coming from.
    I have little faith that it will be truthfully unwound in our time. The true facts of how it all happened have as yet to be unwound. It all seems like a spiral and no one seems to have any idea how it can be resolved. Governments worldwide have no real politicians who have a handle on it, the economists did not see it coming and as yet no one seems to have a sound answer to it.
    Printing money devalues real money. At some point we have to tough it out, or will we leave that to our children, or their chldren?

  • Derek

    Bolllocks. There is no way of proving the effect on stock markets. It has benefited holders of debt more than debtors. But the single biggest beneficiaries are recipients of state largesse who otherwise would be exposed to the reality of an unrigged bond market.

  • Derek

    Bolllocks. There is no way of proving the effect on stock markets. It has benefited holders of debt more than debtors. But the single biggest beneficiaries are recipients of state largesse who otherwise would be exposed to the reality of an unrigged bond market.

    • Mike Barnes

      State largesse? Yes that was Nassim Taleb’s point, it benefits bankers most, the biggest group of spongers in the country. They cry to the government (first red, now blue) who then turn on the money taps and give banks free money.

      • Derek

        Can you actually demonstrate how we has fed o bankers bonuses. Surly they’d be at all time highs rather than 17 yr lows?

      • telemachus

        Mike Barnes
        When we had the Bob Diamond Lying and Fraud affair only a few weeks ago many commentators said enough is enough, we do not want the gambling banking divisions in the City.
        We are better honourable and poor
        These buggers distort the economy such that our children who work in the real economy cannot buy property or have a decent quality of life.
        We should outlaw the bonuses(tax them at 100%) and enforce banking salary equivalence with the Civil Service and Las Vegas would move out

    • Frank P

      Exactly! Give that man a lollipop.

  • Theo Clifford

    Full employment: the ultimate subsidy for the rich!

    • tele_machus

      It is a truism that everything that this government has done is to benefit the rich and screw the pensioner
      Most have been trumpeted- like the granny tax and the 5% pay increase given in readjusting the top tax band
      But this is sneaky and underhand
      Still there is a bright side- there are more poor and more pensioners than filthy rich.
      And the last time I looked it was still one man one vote

      • grumpy old git

        erm. QE was first done under labour…..

      • 2trueblue

        QE is a decision made by the B of E not the government, and has been executed under both Labour and the Coalition governments. Labour did their very best to ruin our pensions and QE under both governments does not help us.

      • The Crunge

        QE was introduced during the Labour government by a Bank of England made independent by Gordon Brown. Thus the appended cartoon features Mervyn King rather than George Osborne. The facts, I am afraid, do not tally with your prognosis. A 50% tax rate was introduced by Gordon Brown to discomfit The Conservative party and in the full knowledge that it would raise no extra revenue for the exchequer thus placing an additional burden on the less well off. A 50%+ tax rate inevitably encourages tax avoidance and I have no intention of wasting my time trying to explain Lafer curves to you. The truly frightening comment in your posting however evokes the realisation that you have a vote.

  • Daniel Maris

    Well, let me ask the pertinent question that never gets asked – or answered. Who is benefitting from the commission on these “sales” (= handouts) from the Bank of England? Someone must be getting very, very rich creaming off the commission on these sales that just fall in their lap.

    This QE policy is all wrong. I’ve nothing against printing money, but let’s print it to create a green energy infrastructure that will continue to save us billions in the future (green energy has v. low operational costs – it is only the upfront capital costs that are high).
    It could include free insulation of properties (including factories and offices, as well as domestic properties) for everyone.

    • Archimedes

      print. money. for. green. energy? Shall we print money to investigate the phenomenon of the third tit, as well?

      • Daniel Maris

        I think a lot of families would be very happy to have a green energy infrastructure that saved them maybe £500 per annum on energy bills for the next 20 years.

        What we have is highly dubious – I suspect a lot of the QE is simply finding its way into the bank shareholders, government accounts (the government is a bank shareholder), bankers’ bonuses, commissions and loans to businesses who don’t really need them (probably using them to shore up their profits/share price).

        • Archimedes

          I’m sure they would, but as we already discussed some time ago, green energy is not saving anyone any money right now, and I doubt that it will anytime in the near future. Also, what you say about it just being upfront capital costs is incorrect. With the exception of biofuel, perhaps, all of those green energy sources require maintenance which is costly – it’s a just a case of replacing consumption of one commodity for another, when it comes down to it.

          Seeing as though Germany are investing so heavily in this, we might as well let them continue, and once they’ve figured it out we’ll just copy them, because that’s the way the real world works.

          Do bear in mind that, while I’m no fan of QE, the money being printed is going directly to the government to finance our deficit – it is being used to pay for peoples healthcare, pensions and social securities. At the bank level, it is being used to de-leverage – not to pay bonuses. QE does not generate a profit for a bank unless the additional money supply is used to increase leverage, by forcing them to use the money that they would otherwise have invested in Gilts for some other purpose in the private market.

          • dalai guevara


            Tried that with Wind, before that with Solar, before that with condensing boiler technology, before that with proper sanitary systems.

            Did it work?

            • Archimedes

              Fair point – but then we’ll stick to what we’re good at and just import some Germans instead.

              Anyway: ssh…trying to convince Danny Boy here…

          • Daniel Maris

            I never said “just” upfront capital costs. But tidal, hydro, wind, and solar all have very low operational costs.

            Green energy IS most deifnitely saving people money around the world – hydro and tidal schemes that were built 30 years are now paid for and the operational costs are low. The La Rance tidal energy facility in France produces the cheapest energy in Europe.

            It will be too late to “copy” Germany in 20 years’ time. You can’t put a green energy infrastructure in place in a year or two.

            I don’t think you’re right about QE. My understanding is that the government creates the money to buy bonds etc from banks and other financial institutions. That then means they have money to lend. But I don’t think it’s being lent to the government to pay for pensions, healthcare and so on…that wouldn’t make any sense.

            • Archimedes

              Well…I disagree with you on green energy, but it’s an abstract argument. I do however think it’s considerably easier, and cheaper, to put in place infrastructure for things like this once you know how it needs to be done – at present it’s a bit like stabbing in the dark. Such is investment.

              The way QE works is that the BoE creates money to buy bonds from the government at issue, reducing the amount of government bonds that private banks can buy.

              The idea is that as banks are cut off from buying government bonds – which they traditionally flock to in a recession because they are safe – they instead have to use the capital they have to invest in higher risk assets, thus getting the economy moving again.

              A collapse of confidence causes investors to flock to safe assets, the idea of QE is to make that impossible, or at least more difficult. QE is financing the deficit, so it is being used for those things.

              The BoE can’t buy bonds from private banks because it theoretically has to recover all the money it prints as a result of QE, because the BoE can’t run the risk of losing any money (the idea is to ‘unprint it’, if you like, eventually) or the taxpayer would have to pick up the cost directly, and that cost, or the liability, would then go on top of the government debt already outstanding.

            • Archimedes

              Oh, and by the way – no, you’re right, it doesn’t make any sense, it’s just a clean mathematical formula which supposedly forces people to behave, economically, the way we would like them to.

    • rosie

      I agree with Daniel and I’d like a proper transport system too – clean and efficient. When the Japanese did this they gave themselves a superb infrastructure that they still have. As a big population they need it. So do we. What will we be left with after our ten years of non-growth, and QE? Inflation and a huge – and in all too many cases unemployed and unemployable – population.

      • rosie

        And the Japanese still save.

  • Archimedes

    Yay! The images are clickable…they still go through to a pretty small image though. (These people…they come onto CoffeeHouse — FOR FREE — and then do nothing but complain…)

    It’s not necessarily true that inflation is going to hit us all of a sudden, if banks are having capital ratios imposed that cause them to substantially reduce leverage, and consequently money supply. However, it does mean that it will do bugger-all to increase money supply, so yes, it is just a transfer of liabilities. Of course, it also means that banks are de-leveraging out of theoretically safe assets (Gilts), which really kinda increases the financial risk if a large systemic event were to take place…say — a default in a neighbouring economy or something.

    P.S That Merv picture you have at the top really makes QE look like a much sophisticated program than it is.

    • Archimedes

      Graph: Well…I’m impressed – you’ve outdone yourselves…

  • Ian Walker

    nice bit of begging the question, Fraser, by conflating ‘rich’ with ‘has a mortgage’

    People with mortgages are usually of negative net worth, until the mortgage is paid off. Pensioners, of course, are usually of positive net worth, having paid theirs off, so by most measures they are considerably ‘richer’

    • Michael990

      Wasn’t the thrust of the BofE report that QE had sustained the value of stocks and bonds? Mind you, doesn’t seem to have worked for me so far really…

      • Archimedes

        I think the thrust of the report was “it could have been worse”.

    • rosie

      On the contrary, this is a transfer of wealth from prudent small savers to profligate big borrowers.
      The young men in the Treasury want to squeeze the small old savers into spending their savings, as well as benfiting themselves (the young men) from rock bottom mortgages. As such a person will often say, when “over-leveraged”: ‘What I need now is a nice burst of inflation to cancel my mortgage.’ Such a person is usually on an index-linked salary, and looking forward to an index-linked pension. Such a person, unfortunately, is typical of the people who rule us – and they go on about the baby boomers having taken everything from the young!
      Ros is right.

      • Michael990

        Savings are dead money as far as economists are concerned. It’s this view that’s the problem at the heart of the issue. Prudence and rainy days can go hang…

        • rosie

          How about stashing the savings in a solar panel and getting a return of about 8%? No good if you have to move because you can’t pay the ever rising council tax though.

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