Readers of the Spectator will know George Trefgarne’s work, and today he delivered an important report on the dangers of Quantitative Easing. I urge Coffee Housers to read the speech. It provides an interesting and relevant insight into historical precedents for the policy and how to manage it, and gives a balanced analysis of the current policy’s pros and cons.
Trefgarne concurs with Mark Bathgate’s critique. There is little evidence that QE has stimulated money supply, as banks are using the cash to re-balance their lop-sided books. QE is funding the government’s debt habit. The IMF estimates that QE has reduced the benchmark 10-year interest rate on government debt by up to 1%, currently standing at 3.5%. Regrettably, Gordon Brown now has the opportunity to borrow at a cheaper rate than any other British Prime Minister. Oh for the virtue of thrift because the probable costs of this policy are enormous.
An effect of QE is the reduction of interest and gilt yields, which have, theoretically, augmented pension deficits. Considering the scale of deficits prior to the crash, we will awake with a stinking pensions hangover somewhere down the line. More strain will be put on grievously overstretched public finances as the government funds the gap in public pensions; private pensions will have to fend for themselves. Other side-effects include a probable run on the pound – always a consequence of what is effectively currency debasement – and a likely hike in long-term interest rates. The risks are great and will escalate as the policy extends, especially as Brown seems intent on playing Micawber until the bitter end.
What can be done? Very little, as things currently stand, is Trefgarne’s answer, because QE was introduced without any parliamentary scrutiny. Incredibly, the only piece of legislation on QE is a statutory instrument exempting it from FSA authorisation. In other words, the executive introduced the policy arbitrarily and denied the need to regulate – hence why so little is known about its effects. If the policy turns out to be ruinous, you know who to blame.
The Bank of England has complete control of an aspect of fiscal policy worth £175bn. Parliament is by-passed and the policy and the Bank are not scrutinised. Trefgarne argues that this has enabled the government to hide the extent of the damage being done to the public finances, and therefore an indication of the success of its strategy. Truly, the mind does boggle – how much worse could it be? And, more importantly, why aren’t our elected representatives entitled to know? The current status quo is unacceptable. A Select Committee must be established immediately to assess this extremely risky financial policy.
Comments