Pumping cash into the economy was meant to make us all better off. Instead the money got locked into stocks and bonds to enrich the wealthy, while austerity made everyone else poorer
The editor of this esteemed publication recently asked me to answer the following two questions: Where has all the QE money gone? And does it matter that government debt is rising?
Let me start with a story. During the depths of the recent economic crisis in Ireland, the village pub was struggling to keep going. As the landlord sat worrying where the money would come from, a German tourist stopped by. He asked if they had accommodation, and the landlord said there were two rooms upstairs. The German gave the landlord a €50 note to reserve a room while he fetched his wife to view them. The landlord was delighted and immediately took the banknote round to the local butcher, to whom he owed €50. The butcher was equally pleased and took the cash round to his builder, to whom he owed €50, who in turn gave it to the undertaker as payment towards his late father’s funeral. The undertaker took it back to the pub and handed it to the landlord to pay his bar tab. The German and his wife came down the stairs, said they didn’t like either room, and the landlord handed them back the €50 note.
That was how quantitative easing was meant to work. The theory held that if you pumped money into the economy through QE, then the money would quickly circulate round the whole economy, making everyone better off. It was printing money, pure and simple. It was legitimised as monetary magic by central banks freeing up money through buying back bonds. At the time, every single economist expected inflation to be the main risk – and central banks said that even that would be a good thing, because inflation would be a sign economies were working again.
What central banks missed was the risk that the money did not circulate but instead got stuck in the system. What would have happened if the Irish landlord hadn’t been able to give the German his €50 back? And that is indeed what happened. Instead of the QE money being circulated, it was quickly sequestered into the financial asset system – locked in and invested in stocks and bonds. Rather than circulate the money, the banks and funds used it to buy more bonds to sell back to central banks – which caused interest rates to tumble and bond prices to rise, making all investors holding bonds wealthier. Low interest rates did not incentivise investment in productive capacity; it simply fuelled investments in stocks and bonds. The owners of financial assets got richer from QE. Economies hardly benefited.
Falling interest rates meant investors could borrow money more cheaply, which they did. Private equity owners saw the opportunity for their companies to borrow loads of money, meaning they could pay themselves higher dividends – which is why Pizza Express is going to default. Company executives in listed companies saw the same opportunity – leveraging their companies up by raising more and more debt to buy back their stock – which is why there will be a massive rise in defaulting companies when rates normalise. The result was that stock prices rose, and senior executives got bigger and bigger bonuses because they were (apparently) such excellent managers that the stock prices of the companies were rising (!).
As interest rates fell, more and more money piled into financial assets: bonds and stocks, on the expectation that lower rates are good for bonds and good for business. The fact that companies were not investing their money in real assets such as infrastructure or new factories or in creating valuable new jobs didn’t seem to matter. With bond yields so low, more and more investors bought equities because although they might have been riskier, they gave higher dividend yields. (If you are wondering where the next financial crisis will come from… take a guess.)
At the same time, governments around the globe started to worry about their debt. They figured investors would panic if they borrowed too much, so they all started austerity programmes, cutting spending on police and other services and slashing state benefits. As the rich owners of capital assets got richer and richer, the workers found themselves paid less and less, forced into gig-economy jobs with fewer rights and protections, and the most vulnerable in society started to fall through the cracks. Government ministers congratulated themselves for their tough counter-cyclical policies – they were generally idiots.
A combination of monetary creation through QE and governments stupid enough to think economies would benefit from austerity is the reason why, ten years after the greatest financial crisis ever, the global economy is still stuck with low growth, low prospects and flirting with deflation. It’s the reason workers earn less and have poorer prospects and why our children will be lucky to have lifestyles anywhere near as good as ours. The next generation will become indentured slaves to student debt and rising rents (because they can’t get on the property ladder) and will suffer all the insecurities of a gig-based economy.
If you want to see this scenario in action, visit any large American city today. San Francisco is beautiful, but stay away – the streets have become sewers as swathes of homeless, drug-addled social fallout victims have literally nowhere to go.
Where has all the QE money gone? Here’s the simple answer: it has gone to the holders of financial assets, making the rich richer, and fuelling income inequality, which is why populist politics have become so popular. QE was supposed to generate inflation. But coupled with austerity it created the opposite danger in the real economy: deflation, the most dangerous and destructive force in the universe.
So, should governments worry about debt? QE and austerity – or, as it should more accurately be named, ‘giving money to the rich while making the poor poorer’ – in the name of monetary policy has been a stunning failure. The only option left is fiscal policy – which everyone thinks they know is a bad thing. Any government spending always goes wrong, say classical economists, because government spending crowds out the financial markets and entrepreneurs, and is wasteful. As wasteful as Softbank’s nearly $50bn valuation of WeWork?
As my story about the Irish village shows, governments can create money at will and they can inflate economies. It just didn’t work doing it via the markets. Perhaps it will work by fiscally reflating economies. What does it matter that Japan’s debt is 300% of GDP – they can print as many yen as they need. When countries default, it’s because they’ve borrowed in someone else’s currencies and their own has devalued – think of Argentina’s repeated defaults. And be worried about eurozone countries – they all use a currency they don’t control, which means they are vulnerable. The US and the UK own the keys to their printing presses and can print money at will.
Perhaps the answer is helicopter money – stop feeding the top 1% and serve the people. Print electronic money and give every householder in the land money for better insulation; pay off all student debt and fund young people to learn skills for a bright future; build houses and give first-time buyers the money for deposits – and while we are at, let’s squeeze the rich until they burst with 99% taxes and jail anyone with a Cayman account… Why not? It’s about time the worm turned.
