King’s gambit

No one who knows Sir Mervyn King would describe him as a radical. The Bank of England governor looks every inch the owlish academic, yet he is midway through what is possibly the greatest gamble in Britain’s economic history. Under the frosted-glass term of ‘quantitative easing’, he may soon have the Bank artificially create £600 billion of credit to its own account, the bulk of which would be used to buy government debt. Other countries have attempted quantitative easing, but never on this scale. Sir Mervyn is boldly going where no central banker has gone before — yet with the minimum of debate over the policy’s costs, its consequences and its victims.

The problem is clear enough. Britain seems to be stalled in a Zero Era with flat consumer spending, next to no pay rises, a slump in investment, no-growth economy — and ultra-low interest rates. And this is no coincidence. The digital banknote printing which Sir Mervyn has conducted so far — about £275 billion — has kept interest rates low. This is QE’s first and most powerful effect. The idea is that investors, dismayed by the low return from government debt notes, will instead buy other assets more likely to help with the economic recovery.

Low rates of interest are, of course, great news for a government which needs to borrow £4,000 a second — but not for savers who see the value of their nest egg destroyed by inflation. It hurts pension funds, so what we think we’re putting towards retirement will be worth far less. Companies see the value of their pension fund plunge — and have to top it up. This is what QE does: transfers wealth from savers to borrowers. If the Chancellor stood up and admitted as much, it would cause uproar. But because QE is a complex Bank of England mechanism with a boring name, no one much cares.