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 Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 584.


    Surely foodstuffs and crop output and amongst the most volatile of markets? In respect of the US market wouldn't other factors (biofuels, futures speculation, a fast growing population...) dwarf any such effect?

  • rate this

    Comment number 583.

    @582 Ray
    I understand your confusion, but low interest rates and QE do not give rich nations additional buying power in international markets. They are inflationary (locally) precisely because more (devalued) currency is required to acquire the same amount of resources. Outside the rich nations, you pay less for US crops than you would otherwise, which is why more QE reduced the food price index.

  • rate this

    Comment number 582.

    QE1 was used to rebuild banks dodgy balance sheets.
    QE2/3 are creating inflation in all asset and commodities, inc food.
    The rich west is 'printing' money that will never be removed from the system, is therefore effectively theft, used to 'steal' resources. To the most vulnerable this means food prices inflated. Prices tailed off as bankers kept new QE in their back pockets.

  • rate this

    Comment number 581.

    @580 Ray
    US QE started in November 2008, reaching $1.75 trillion by March 2009 and $2.1 trillion by June 2010, when it paused. The food price index rose every year from 89.6 in 2002 to 201.4 in 2008, but it fell 20% from 2008 to 2009, exactly when QE was most rapid, before rising 10% in 2010, as QE slowed down. Steadily increasing QE from September 2012, and FPI decreases from 217.3 to 203.1.

  • rate this

    Comment number 580.

    FAO Food index in 2009 - 160.6 (Pre QE, true level as the bubbles had burst)
    Now - 205.8 (Post QE when bubbles re-inflated)
    Doesn't that equate to 20%+ ?
    For people who spend most of their money on food this can mean starvation!

  • rate this

    Comment number 579.

    @578 Grounder
    Yes, the demand is set to sky-rocket and supply will struggle to keep up. This will probably lead to some commodities becoming unaffordable for many and this will lead to other alternatives coming into prominence.
    Perhaps coffee and chocolate prices will go through the roof. Perhaps bread will be sources from other grains.

  • rate this

    Comment number 578.

    576. plotinus
    "the underlying fundamentals are likely to be supply and demand."

    I'd like to think so... I think. But with world population likely to peak at over 10,000,000,000 and increasing affluence to be expected for over 80% of us, there had better be some significant improvements on the supply side!

    @577 Ray "Hope this helps!" Sorry, your analysis is plain wrong.

  • rate this

    Comment number 577.

    Leading up to the crash the 'QE' nations were living beyond their means with food prices inflated to match. QE has re-inflated this so the UK population can continue to afford to buy too much food and then bin a high proportion of it. Food prices are clearly too high as a result. This is an odious situation. Hope this helps!

  • rate this

    Comment number 576.

    @575 Grounder
    No link between QE and food price increases
    Whilst future commodity price rises will doubtlessly be fed with "hot money" (from whatever source) the underlying fundamentals are likely to be supply and demand.

  • rate this

    Comment number 575.

    @574. plotinus
    "However surely demand will outstrip supply and the only way is back up again.
    These are markets which will not remain flat for long."

    I'm sure you're right. This additional demand will be genuine demand created by billions of slightly more affluent people in nations where there has been no QE. Linking QE to food price increases is an odious falsehood, as far as I can see.

  • rate this

    Comment number 574.

    @573 Grounder
    World food prices only slightly higher, doubled before crash
    Yes the run up in commodity prices prior to the crash was a key element in the risk trade then.
    This time around the commodity trades don't seem to have participated.
    However surely demand will outstrip supply and the only way is back up again.
    These are markets which will not remain flat for long.

  • rate this

    Comment number 573.

    @572. Ray "World food prices have been pushed higher as a result of this deception and people have died as a result."

    Based on the United Nations FAO index, world food prices more than doubled in the five years before the crash; they now stand only slightly higher (about 2%).

  • rate this

    Comment number 572.

    The poorest people in the world have lost out from quantitative easing. Any country that has performed this market destroying act has committed an act of mass murder. World food prices have been pushed higher as a result of this deception and people have died as a result. UK, US, and Japan governments in particular should hang their heads in shame.

  • rate this

    Comment number 571.

    570 "Some people have benefited, mainly but not exclusively, Bankers !" - so wearying when people just parrot the Huffington Post. What bankers? Who exactly? How much did they make? You froth about "action" but you have no idea what action, against who or how. You'll only be happy it prints a picture of the hammer and sickle with the headline "we won". Even then you'll have no idea how or why.

  • rate this

    Comment number 570.

    Some people have benefited, mainly but not exclusively, Bankers !

  • rate this

    Comment number 569.

    "Our nation has benefited, that means you have too"

    Err, no, it doesnt.

    Unless you'd care to explain exactly how.

  • rate this

    Comment number 568.

    563. FauxGeordie

    It's not stolen because we all know that our money decreases in worth with deflation. UK banks have been "modest losers", the biggest benefactor is the UK government and that represents everyone. Our nation has benefited, that means you have too.

  • rate this

    Comment number 567.

    Well, low interest rates lowered rates of repossession.
    But this was lost with the Pay freezes and indeed pay cuts.
    Bankers kept their bonuses. So thats alright then.
    Red Pill or Blue Pill, when will you leave the Matrix ?

  • rate this

    Comment number 566.

    The wrong people have benefited from QE. QE should have been used to revamp the NHS, increase the minimum wage and push forward the renewables revolution. Instrad, it has been given to bankers and corporate CEs (who created this mess in the first place). The banks should have been allowed to fail with baiiouts rescuing depositors (not shareholders or directors).

  • rate this

    Comment number 565.

    @564 "The gap between the pay from highest to lowest continues to widen"

    So people keep saying. they may be right, but I await the evidence. Median pay increases in the first half of 2013 were between 2% and 3% (between 3% and 4% this month). That obviously excludes nil increases, but the smaller increase in median earnings is meaningless in this context. By how much are most people worse off?


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