Dangers of Quantitative Easing - Ros Altmann

    Ros is a leading authority on later life issues, including pensions,
    social care and retirement policy. Numerous major awards have recognised
    her work to demystify finance and make pensions work better for people.
    She was the UK Pensions Minister from 2015 – 16 and is a member
    of the House of Lords where she sits as Baroness Altmann of Tottenham.

  • Ros Altmann

    Ros Altmann

    Dangers of Quantitative Easing

    Dangers of Quantitative Easing

    Another Mistake – More Rate Cuts, Printing Money, No Solution

    by Dr. Ros Altmann

    (All material on this page is subject to copyright and must not be reproduced without the author’s permission.)

    5 March 2009

    • Today’s moves are another grave error of policy judgment
    • We have not given past measures time to work
    • Inflation is still above official 2% target (cpi over 3%) – policy easing irresponsible, inflation crisis will be next
    • Don’t be fooled – Quantitative Easing is the same as ‘printing money’ – and it will not work as velocity has plunged and banking mechanism is blocked
    • It seems Government is determined to save the banks at any price, but is undermining the rest of the private sector in the process
    • Banks may be ‘too big to save’, not ‘too big to fail’!
    • Government should be ensuring money is lent to businesses directly, not relying on failed banks which are soaking up more and more taxpayers’ funds
    • Saving bankers pay and full pensions at taxpayers’ expense is morally indefensible when the rest of the economy is seeing jobs and pensions disappear

    Today’s Bank of England announcement is a grave mistake for three reasons.

    1. Inflation is still well above the 2% target – cpi is still over 3%. To embark on the biggest expansion of monetary policy under these circumstances is dangerous.
    2. Cutting rates to 0.5% will damage the mortgage market and hurt savers and pensioners yet again
    3. Printing money will not work if the banking system mechanisms are blocked. Velocity has fallen sharply so Government needs to take over direct lending to businesses. Saving the banks at all costs could bankrupt the whole country!

    It seems there is no end to the pain the Government is willing to inflict on the rest of the economy in its attempts to save the banks. The Bank of England has cut rates again – now to 0.5% – and has embarked on the modern-day equivalent of printing money. This policy debases our money. Just calling it ‘quantitative easing’ and claiming that it is not being done via printing presses, should not hide the fact that this has the same effect as ‘printing money’.

    Inflation, not deflation, is the greatest risk

    The excuses about needing to fight ‘deflation’ are a smokescreen. We should look at reality. Inflation is the real danger and will wipe out savings and economic prosperity if we continue on the current unprecedented path. The consumer price index is the official inflation target and it continues to run way above the 2% target, even with the economy in freefall. The retail prices index is falling faster, but that is not the official target measure and is distorted by falling mortgage rates.

    We should all be extremely worried that the Bank of England appears to have abandoned its core remit, which is to safeguard the nation against inflation. By providing massive monetary stimulus while inflation is still way above the 2% target, the Bank of England is flying blind. Make no mistake, this will most likely mean a massive inflationary problem in years to come.

    Cutting to 0.5% is another mistake – rates are far too low.

    Once again, pensioners and savers will be the innocent victims. They have lost the income on their savings today and, as inflation remains high, they are struggling to afford to live. Food and other basic costs are still rising well over 3%, so savers have suffered a substantial cut in their real incomes.

    Even building societies have criticised these rate cuts as they worry that they cannot issue new mortgages unless they have savers’ money coming in, but with interest rates so low the savers are deserting in droves. So the lower rates may help borrowers and people with tracker mortgages (which is only a minority of mortgage holders) but they will inflict further damage on savers and pensioners and may well actually make the availability of mortgages for new borrowers worse, not better!

    Quantitative Easing is the posh name for ‘printing money’ – it has similar consequences and is really all about saving the banks

    This ‘QE’ is a giant gamble, a leap in the dark, with taxpayers’ hard-earned money. In the Government’s absolute desperation to shore up the banks, it seems to believe anything goes. The authorities have no idea if this policy will even work. Yet they are determined to keep pumping money into the banks, in the apparent hope that the money will then filter out of the banking system into the rest of the economy. But the banking mechanisms are blocked by past bad debts and velocity has plummeted, so it may just stay inside the banks. If we want to get money to businesses, I think the Government will have to do this directly. Of course that takes time. But waiting and hoping for the banks to do it has proved fruitless. Government must take over and stop being guided in its thinking by leaders of the banks that have caused this mess in the first place.

    What is it about the banks that means they deserve such special treatment? The sums of money and the gambles being taken here are so vast that I believe the authorities are showing a lack of considered judgment. For one sector of the economy to be given such precedence over all others is hugely dangerous. We are told that the banks are too big to fail, but one has to now wonder whether, in fact, they are really ‘too big to save’.

    Policy is being driven by banks and bankers, desperate to save themselves. What about the rest of us? Lower interest rates help the financial sector but are damaging savers, pensioners – and even building societies now. Government printing money by increasing balances at the banks is not necessarily going to stimulate the economy anyway. The velocity of money has plummeted, which would mean that, as has happened consistently with each policy easing so far, money is just getting stuck in the banks and not going out to businesses and consumers.

    Longer term dangers are being ignored

    But, of course, the vast monetary easing of recent months will eventually feed through and the outlook for inflation when that happens is dire. Once the banks have soaked up enough taxpayers’ money, they will start to lend to other areas of the economy, but we have no idea how long that will take or what will be left. What we do know is that policy operates with a lag, so the authorities will not be able to unwind today’s moves fast enough to fight inflation effectively.

    Today’s policy announcements are another nail in the coffin for the long term prosperity of our nation. All savers, pensioners and all our children will suffer as a result of what is being done today to save failed banks. We will lurch from one crisis to the next crisis – from credit starvation to inflation – and still not end up with a sustainable future.

    What worries me most is that there seems to be no ‘Plan B’. However much money it takes, however many other areas of the private sector economy are damaged, whatever the longer-term consequences, the Government seems to be saying it will keep on throwing more good money after bad in its determination to avoid facing up to the reality that our financial system has imploded. Bankers pay and pensions are in tact while everyone else’s are put at risk. Yes bankers are powerful and have a strong lobby, but when will the authorities stand back and either wait for past policies to take effect, or change their approach?

    Dr. Ros Altmann
    07799 404747


    The official statistics show that inflation is still well above the Bank of England’s 2% target. Bank analysts often point to the retail price index (rpi) to make the case for deflation, but it is the consumer price index (cpi) that is the official target and which is still overshooting. Don’t be fooled by rpi distortions. The real cost of living for most people is way above the rpi level.

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