Quantitative easing: Counting the cost
The government’s losses from Black Wednesday are legion, but already quantitative easing has cost us more than that doomed attempt to save sterling in 1992. The QE losses have reached £8bn and the Bank of England hasn’t yet started to unwind the programme.
Qunatitative Easing – printing money – was introduced in March 2009. It involves the Bank of England inventing money that it uses to buy government gilt-edged stocks, hopefully from commercial banks that then have the liquidity to increase lending and stimulate the economy. When deflation looked like the danger to the economy, QE helps boost inflation.
The amount of money the Bank is allowed to invent has been gradually increased from £75bn to £200bn in less than a year. But all those gilts have to be sold sometime and the book loss has reached £8bn even though the Bank has not quite spent the whole £200bn.
If buying gilts boosted stock process and reduced yields, helping keep interest rates low, then unwinding the QE programme will mean gilt prices fall as the bank sells and yields will rise, taking interest rates with them. Remember that the government has a record amount of new stock to sell in competition with the bank dumping existing gilts.
The scope for that £8bn loss to increase are thus considerable – not to mention causing higher borrowing costs for consumers and industry and pushing inflation higher.
There is a £4.4bn offset from the interest payments received by the Bank on the gilts it has bought, but that is one arm of government paying money to another arm. And that still leaves a net loss so far higher than the £3.4bn cost of Black Wednesday.
The test of whether quantitative easing was worth it is not the loss on the programme, however, but the benefit to the economy. If QE grew gross domestic product by half a per cent, then the loss has paid for itself. Unfortunately, whether the economic stimulus has been that large is debatable: the lack of definitive data allows supporters to claim success and detractors to deny the effect.
But with hindsight, while the billions lost on Black Wednesday was money down a black hole – sterling collapsed anyway – the subsequent boost to the economy from the devaluation more than made up the cost of trying to unsuccessfully support the pound. Perhaps hindsight will be as kind to QE?
