'Misguided QE' - Letter published in Financial World Magazine February 2010

by Dr. Ros Altmann

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The dangers of QE have been underplayed. Buying gilts in vast quantities may seem sensible short-term but it is not the best way to stimulate the economy and, apart from the significant damage to pensions, will cost taxpayers heavily in higher financing in years to come.

Gilts are supposed to be the safest of assets, on which other securities are priced, yet the authorities' actions have undermined that safety. The artificial inflation of gilt prices is distorting all other financial asset prices. When the Bank of England stops purchasing mind-boggling billions and gilts are offered for sale alongside the billions required to finance ongoing fiscal deficits, gilt prices are bound to fall sharply, which risks renewed asset price crashes elsewhere.

In any event, buying gilts does not necessarily stimulate the economy, as sellers of gilts will not plough money into the smaller company sector where it is so desperately needed. Many will merely invest abroad instead. Given their mixed remits, with the Government desperate to get bank share prices up, the banks are failing to fill this function as they restore their balance sheets. It would be far better to print money to fund a State banking institution for small businesses. That would be a much wiser way to spend taxpayers' money than relying on banks to operate in the social interest.

Yours faithfully,

Dr. Ros Altmann

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