Charlie Bean of the Bank of England (deputy governor, monetary policy) has been brave enough to visit Glasgow, telling the Scottish Council for Development and Industry about his quantitative and the economic outlook.
Beyond the colour of explaining how the same man who founded the Bank itself (William Paterson, in 1694) managed to half-ruin Scotland through a madcap Panamanian trade scheme and help force it into union with England, Bean touches on the oh-so-raw modern issue of British pensioners and other conservative savers having to pay a painfully direct price for the antics of our bankers.
Or, in Bank-speak, the distributional consequences of the asset purchases…
Turning to the distributional consequences of the asset purchases, attention has focussed on the downward impact on annuity rates, which have fallen about a percentage point over the past three years since we started our purchases. That means someone with a £100,000 pension pot, who could have expected that to yield an annual pension of a little under £7,000 three years ago, would now get just under £6,000. That is a rather substantial income loss. But it is only part of the story. Those pension funds will typically have been invested in a mix of bonds and equities, with perhaps a bit of cash too. The rise in asset prices as a result of quantitative easing consequently also raises the value of the pension pot, providing an offset to the fall in annuity rates. The impact of quantitative easing on those approaching retirement is thus more complex than it seems at first blush.
(Note to Bean – pension funds switch from equities to gilts as a person approaches retirement; your point is specious.)
More generally, the current extended period of rock-bottom interest rates has impacted heavily on those holding most of their savings in deposit or short-term savings accounts, who have seen negative real returns. Savers have every right to feel aggrieved at losing out; after all, they did nothing to cause the financial crisis. But neither did most of those in work, who have also seen a substantial squeeze in their real incomes. And unemployment, particularly among the young, has risen as output has fallen. This is all a reflection of the hit to output from the financial crisis. Output is still some 4% below its previous peak and more than 10% below where it would have been if the economy had simply continued growing at its pre-crisis historical trend. There have been few winners over the past few years.
(So just kill the old?)
Treating serious medical conditions often has unwanted side effects. But, unpleasant as those side effects sometimes are, treatment is invariably better than the alternative. So it is with the economic medicine of low interest rates and quantitative easing. The immediate consequences may be unpalatable, but the sooner we can get the economy on the mend, the sooner we can return policy to more normal settings and the better it will be for all of us – savers, businesses and employees alike.
(That’s it. Go on. Just patronise the old dears.)