Don’t rejoice too soon about US QE2

Allister Heath
IT now looks as if the US will embark on another round of quantitative easing (QE), sooner rather than later. Last night’s minutes could hardly have been any clearer. While an important minority of Fed decision-makers remains opposed, or (sensibly) wants to wait for additional information, “many participants” think that unless growth accelerates, unemployment fall or inflation increases, it would be appropriate to provide additional monetary stimulus.

There is a great danger here. QE should only be used to prevent a collapse in the money supply and the economy, of the kind which turned a recession into a depression during the 1930s. Yet the US is not in recession and is probably set to grow by 1.5-2 per cent over the next few quarters. Bad, yes; but not catastrophic and natural given that the private sector is deleveraging and capital is being reallocated from bubble-time investments to more appropriate uses

QE’s aim should not be to “create” yet more unsustainable “growth”, or to boost employment, and especially not just before a key mid-term election. Constant small-scale interventions would soon lose their utility; a muddled, half-hearted attempt at QE2 born out of internal compromises would help nobody. The markets were being far too short-sighted when they rejoiced yesterday.


It is a terrible time to be a saver, especially here in Britain. Low interest rates, higher tax and rampant inflation are wiping out those with the fortitude and self-control to put some of their income aside for a rainy day. Given how desperately the British banking system needs greater funds, as it seeks to wean itself from the money markets, and the looming retirement crisis, this has all the signs of a disaster in the making.

Inflation figures out yesterday showed that the consumer price index, the government’s favourite measure of inflation, remained at 3.1 per cent. The retail price index remained extremely high at 4.6 per cent. Even assuming that the CPI is the best measure, just to maintain the purchasing power of their savings, a basic rate taxpayer needs to find a savings account paying 3.88 per cent per annum, while a higher rate taxpayer at 40 per cent needs to find an account paying 5.17 per cent. Only 55 accounts are available to 40 per cent band taxpayers, all of which bar two are ISAs, according to MoneyFacts.

It’s pretty hopeless for 50 per cent taxpayers, needless to say, who have zero incentive to save in cash-style instruments, even though rates have started to rise slowly in recent weeks. Savers hardest hit by the rise in inflation are those who rely on their savings to supplement their income, many of whom are pensioners. The ultra-low, zero or even negative cash savings rate – and the growing worries about equity and credit markets – is one reason why so many people are repaying their mortgages as fast as they can. The Bank of England reported that there was a net housing equity injection of £6.2bn in the second quarter. This was up from £5.3bn in the first quarter, was the largest net injection of equity since the first quarter of 2009, and the ninth successive quarterly net injection of housing equity.

The political and media discourse is fixated on the benefits of low interest rates and the need to make credit easier. But those who provide the funds to allow the lending are getting a truly raw deal.