The news of the day is the latest bout of quantitative easing (printing money) by the Bank of England (BoE). The BoE has the following to say:
The Bank of England’s Monetary Policy Committee today voted to maintain the official Bank Rate paid on commercial bank reserves at 0.5%. The Committee also voted to increase the size of its asset purchase programme, financed by the issuance of central bank reserves, by £50 billion to a total of £325 billion.We are now in a situation in which we can see the following; record lows of interest rates over a sustained period, record government deficit spending and bout after bout of money printing:
In the United Kingdom, the underlying pace of recovery slowed during 2011, with activity falling slightly during the final quarter. Some recent business surveys have painted a more positive picture and asset prices have risen. But the pace of expansion in the United Kingdom’s main export markets has also slowed and concerns remain about the indebtedness and competitiveness of some euro-area countries. A gradual strengthening of output growth later this year should be supported by a gentle recovery in household real incomes as inflation falls, together with the continued stimulus from monetary policy. But the drag from tight credit conditions and the fiscal consolidation together present a headwind. The correspondingly weak outlook for near-term output growth means that a significant margin of economic slack is likely to persist.
CPI inflation has fallen back from its September peak, declining to 4.2% in December. Inflation should continue to fall sharply in the near term, as the increase in VAT in January 2011 drops out of the twelve-month comparison. Inflation is then likely to decline further as the contribution of energy and import prices diminishes, while downward pressure from unemployment and spare capacity continues to restrain domestically generated inflation.
In the light of its most recent economic projections, the Committee judged that the weak near-term growth outlook and associated downward pressure from economic slack meant that, without further monetary stimulus, it was more likely than not that inflation would undershoot the 2% target in the medium term. The Committee therefore voted to increase the size of its programme of asset purchases, financed by the issuance of central bank reserves, by £50 billion to a total of £325 billion. The Committee also voted to maintain Bank Rate at 0.5%. The Committee expects the announced programme of asset purchases to take three months to complete. The scale of the programme will be kept under review.
For money printing, I cannot find a graphical representation to illustrate the scale, but you can find an interactive chart here. In summary, macro-economic tools have been deployed in unprecedented ways to support the UK economy. But....and here is the rub, they are just not working. The end result of this macro-economic stimuli?
Inflation, bouts of recession, a current account balance firmly in the red, and the highest rate of unemployment for 17 years.
Labour Force Estimates
So, all of the macroeconomic measures are really working? The picture overall is pretty clear. The UK has relatively high inflation, rising unemployment, a struggling economy and relatively high unemployment. In any normal world, this might suggest that the policy that has been enacted is just plain wrong. However, like a gambler who is on a losing streak, the policy makers just keep on throwing the dice in the hope that the situation will turn around. Maybe one more big bet, and I'll make up for the losses......
And the latest bout of QE hits the pensioners who have been sensible enough to save:
Further QE is likely to spell bad news for people set to retire this year as annuity rates plummet, leaving pensioners facing high living costs and low returns on their savings.
Research from financial services company Hargreaves Lansdown found that a 65-year-old man with £100,000 could have bought a level income of £7,855 in July 2008, but someone in the same situation today would only receive an income of £5,923, a drop of just under 25pc.Of course, it is not just pensions that are being hit by this latest bout of QE, but savers in general have been hit by high inflation and low interest rates. On the other side of the balance sheet, the debtors and profligate are given an easy ride, with high inflation eroding the value of debt, and low interest rates allowing lower repayment rates.What we have in current policy is a major failure. It is built upon an assumption that stimulating consumer demand through reduction in debt servicing costs and providing low interest rates to companies to allow for expansion will actually help the economy recover. It is apparent that it is not working. In fact, consumers and non-financial companies are reluctant to take on more debt (from Steve Keen):
Dr Ros Altmann, director-general of Saga, said the "short-term stimulus" of QE has "very dangerous long-term consequences".
She said: "Buying gilts is not the best way to stimulate growth - it does, of course, help the banks, but it actually has side-effects that directly damage the economic outlook.
"Having more and more poorer pensioners and forcing companies to put money into their pension schemes, rather than their business operations, is a drag on growth, not a boost."
She said tumbling annuity rates mean that "over a million pensioners will be permanently poorer for the rest of their lives, as they have bought an annuity at rates that have been artificially depressed by the Bank of England".
"The impact of QE on pensions and pensioners will lead to lower growth, so we urge the Bank to consider different ways of using newly created money to try to boost the economy."