Households 'lost' from quantitative easing


History will decide whether our era of unprecedented money creation and low interest rates - in the US, UK, eurozone and Japan - has taken us back from the brink of economic ruin, or has pumped up dangerous new bubbles, or has been a bit of both.

The final verdict may well be that it was a dangerous price worth paying, to avoid even deeper recessions than those we suffered as a consequence of the financial crisis of 2007-8.

But we will not know the price until all that exceptional monetary stimulus has been unwound.

Perhaps we will experience a massive blow to our prosperity as economic activity, flows of funds and asset prices adjust to more normal levels of interest rates in an overwhelming avalanche.

Or possibly and more benignly, the underlying momentum of economic activity will offset the headwinds from money becoming more expensive again.

Central bankers' stated ambition - including Mark Carney in the UK, and President Obama's nominee to be chairman of the US Federal Reserve, Janet Yellen - is not to apply even a touch to the monetary brakes until the locomotive of economic growth is hurtling down the tracks. This is what they've both been saying in the last few hours.

Goodness only knows if they'll have that ability to freewheel. As they look down the track, they see no sign of dangerous incipient inflation, which would force them to slow the train down. But there are some who fear they see only what they want to see.

Which is probably a slightly unsettling thought for this time of the morning. Sorry.

But at this juncture, we can take stock of what economists would call the distributional impact of quantitative easing - or money creation through the purchase by central banks of debt - and of policy interest rates being as close to zero as they've ever been.

And, as luck would have it, this analysis of the winners and losers in the era of ultra cheap money has been done and published this morning by the McKinsey Global Institute (it should be taken with a pinch of salt, since it is hard to adjust for what else has been going on in the global economy).

The big winners, to the tune of $1.6 trillion by the end of 2012, were the governments of the US, the UK and eurozone, from the reduced costs of servicing their debts and from the increased profits made by the their respective central banks (who magically create money to buy government debts which pay them interest).

The point is that from 2007 to 2012, the average interest rate paid by the UK government on all its debts fell from 5.1% to 3.2%. That represents a massive saving, at a time when it has been borrowing more and more and more.

The cumulative estimated benefit for the UK government alone, including central bank profits, is $170bn or around £105bn.

Perhaps more surprising is that McKinsey believes that households have been significant losers from cheap money. I say that may be surprising because one motive for quantitative easing was to ease the pain and financial stress for those millions of people who had borrowed far more than was prudent in the boom years.

However McKinsey looks at the whole picture of household financial assets, including pension fund savings, life policies, and other forms of long-term savings. And on this basis, households in the US and Europe are net savers, rather then net borrowers. So when interest rates fall to exceptionally low levels, in the round they are losers.

How much have they lost? Well McKinsey says that from 2007 to 2012, the cumulative net loss of interest income for American households was $360bn, compared with a cumulative net loss of $160bn for eurozone citizens and $110bn (£70bn) for British people.

It is important to stress, however, that these bald numbers gloss over some very important differences for different categories of people.

The young have been beneficiaries of quantitative easing, because they tend to be net borrowers.

And some would say that's only fair, given that the impact of an economic disaster caused by the older generation has been felt most acutely by younger people unable to get jobs.

What is also striking is that if you strip out the impact of lower interest rates on pension funds and insurance reserves, the impact on households shrinks dramatically. So the cost for UK households excluding those long-term savings would be just $15bn over the past five years.

In other words, quantitative easing raided the savings of those who had been prudently putting money aside for decades to tide us over a short-term disaster - which may or may not have been sensible.

There are three other striking McKinsey conclusions:

  1. Big companies have gained to the tune of $710bn in the US, UK and eurozone from a cut in the cost of servicing their debts.
  2. US banks have been winners, as they have been able to widen the gap between what they charge for loans and what they pay to borrow. But eurozone banks have seen a shrinking in that gap, and have therefore been losers from cheap money. UK banks have been modest net losers, on McKinsey's analysis.
  3. Possibly the biggest losers have been insurance companies, which have been unable to earn as much on their investments as they are obliged to pay to long-term savers. McKinsey worries that many of these would be driven out of business, that "their survival would be threatened", if the epoch of low interest rates continues for several more years.

Now all of that is to focus on the impact of low interest rates on the net income of households, governments and businesses. But there has also, of course, been an effect on the price of assets.

McKinsey estimates that the value of sovereign and corporate bonds in the US, UK and eurozone has been boosted by $16 trillion between 2007-12, and that house prices in just the US and UK may have been 15% higher than would otherwise have been the case.

By contrast, it doesn't think stock markets have benefited from quantitative easing (although not everyone would agree).

So here's an interesting question - is the important effect today on households' spending decisions the increase in their perceived wealth caused by quantitative easing's boost to house prices and other assets?


Which is why an abrupt end to quantitative easing is so troubling for those who fear the economic recovery is a long way from being entrenched.

PS: McKinsey confirms the fears of governments of some emerging economies that a sharp return to pricier money in the US and Europe would be painful for them.

It points out that, in a search for better returns, international investors invested $264bn in the bonds of emerging markets in 2012, up from $92bn in 2007.

So, if those investors started to see better rates of return in the old world, some of these emerging economies would struggle to borrow and refinance their debts.

McKinsey highlights Turkey, South Africa, Indonesia and several Eastern European economies as vulnerable.

Robert Peston, economics editor Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 44.

    following on from 31, the practical effect of QE should be to reduce the gap between base rate & the rate banks charge borrowers -If base rate is at rock bottom the BoE can't lower it any more to reduce borrowers rates. Yet I still hear many complain about the rates being charged relative to BR so one could argue its not been very sucessful, accepting we don't know what the gap would be without

  • rate this

    Comment number 43.

    ◾Gave huge bailouts to foreign banks, including Gaddafi’s Libyan bank.
    ◾Bailed out hedge funds, e.g. Harley-Davidson
    ◾Threw money at “billionaires", e.g. Christy Mack (wife of Morgan Stanley’s John Mack). QE is full-service laundry. It cleans banks’ balance sheets to stop inflation. There are much better ways to stimulate economy, but Fed is only interested elite maintenance.

  • rate this

    Comment number 42.

    You make a terrible error...just don't get saver psychology.

    I don't agree. You are right that someone with a 'saver mindset', will (by definition) be more inclined to save a greater proportion of any additional income than the average person.
    But how many times have you heard the phrase "you may as well spend it, let's face it you aren't going to get any interest on it"?

  • rate this

    Comment number 41.

    Peston's next exclusive: Pope revealed to have Catholic leanings...
    Is there not some doubt about that already, if media reports are to be believed?


  • rate this

    Comment number 40.

    Reasons are:
    1. No one lived to pension age
    2. A tiny fraction of the population went to university
    3. Healthcare was rationed then and people didnt use the NHS for operations like b00b jobs.
    4. Unemployment was low as people worked in inefficient state companies. Also, people werent slathered in costly tax credits.

  • rate this

    Comment number 39.

    I'm sorry Mr Peston but you did not really need to spout all of this economics mumbo jumbo to tell us that Prudent savers have been robbed to pay for the overindulgence of the greedy bankers,grasping overstretched borrowers and assorted debt merchants.
    To most averagely intelligent types this has been obvious since 2008.

  • rate this

    Comment number 38.

    The moment I see politicians, and the 1% mega-rich elite suffering as we are, I will believe the government's and BOE's policies to be working! Until that time (I'm not holding my breath), I will continue to believe, as always, the poor majority are acting as a 'crutch' for the ruling and rich elites in hard times!

  • rate this

    Comment number 37.

    "it doesn't think stock markets have benefited from quantitative easing" What? The smallest hint of economic growth, a tiny rumour the money printing will end and the markets fall back.

    The stock markets are at record highs and continuing to climb because of QE, all of that printed money has to go somewhere.

    Surely no one believes the markets are so high because of strong economic fundamentals?

  • rate this

    Comment number 36.

    While the financial press pretends quantitative easing is a “liberal”, stimulating economic policy, nothing could be further from the truth.
    Quantitative easing is a bailout for the super-rich, at the expense of the little guy. It increases inequality. It fails to stimulate the economy (while it eats at the savings of retirees.)

  • rate this

    Comment number 35.

    We all knew there were winners and losers.
    As the Government or the Exchequer is one of the biggest winners because of the low interest rate it pays on Government debt that means that the British taxpayer is also one of the biggest winners.

  • rate this

    Comment number 34.

    Winner and losers in the UK also depend on whether you owe property but we may all pay in the long term if QE has shifted gain in house prices forward resulting in a sluggish property market in the future. For more, see

  • rate this

    Comment number 33.

    When I was a nipper, rent was affordable. I could move out and live independently on a salary that paid the bills without state subsidy.

    Education wasn't an expensive luxury either, and consequently I am productively paying back into society.

    I had the safety net of benefits, healthcare and so on, though I rarely needed them.

    Now, apparently, what was affordable then is unaffordable now.

  • rate this

    Comment number 32.

    IF QE has maintained house prices or even increased them than how have the young benefitted?

    It's unlikely that in the main they have the proverbial foot on the ladder, more likely they live under a roof owned by someone older.

  • rate this

    Comment number 31.

    I haven't seen the detail of the report, but I'm not convinced that the young have been net beneficiaries of QE

    The effect of low interest rates & QE have been lumped in together which is a bit of a con. A way of viewing QE is a fine tuning control on rates. The portfolio composition of investments is changed which affects yields + returns applying downward pressure to rates

  • rate this

    Comment number 30.

    We have, and have had, various "measures" to either stimulate or fix the economy; QE, high house prices, low interest rates. Why? To protect the financial sector and the 5% extra-wealthy individuals against losses

    Meanwhile the other 95% are having to grin and bear it

    Raise interest rates and let the housing bubble burst. THEN I'll believe things are getting better

  • rate this

    Comment number 29.

    I would debate the notion that QE benefits the young insofar as significantly underpricing money just leads to levels of borrowing that will become unsustainable as monetary policy moves from the current "absolute panic, man the lifeboats" state to one of merely being, by historical standards, merely very loose.

  • rate this

    Comment number 28.

    'The young have been beneficiaries of quantitative easing, because they tend to be net borrowers.' - is this good though? I've had to pay through the nose for my own roof (with the other option to pay even harder for a roof to live under that isn't mine) due to over-inflated house prices. Yes, the interest rate is low compared to historic rates, but prices are too high and we HAVE to borrow.

  • rate this

    Comment number 27.


    "presuming they haven't been so stupid to re-mortgage it for equity release"


    John. Where I live the place is full of new cars. Almost all bought on remortgage equity release. And not just on old mortgage-free property, but on the mortgaged, as appreciation release.

    Do you get the psychology of the conspicuous spender?

  • rate this

    Comment number 26.

    The biggest benefits have gone to governmebts at the expense of their citizens. Who would have thought that when govts designed the policy to begin with??

    The ECB is the only CB that got this right. Provide liquidity to solvent banks but don't encourage govt irresponsibility by buying their bonds. If the BoE had not done QE do you think the UK govt would still have a 100 BILLION deficit?

  • rate this

    Comment number 25.

    I still prefer to have taken one hit in 2007, without financial engineering!
    This alternative of 30 years of depression, and shuffling the problem under the carpet, is holding every one back.

    The real world has changed dramatically, economic thinking is way behind.

    We can not borrow to infinity, this applies to USA and UK as well as households.

    Long term QE destroys!


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