Quantitative Easing in a Covid-19 Economy: How the Rich got Richer
What is Quantitative Easing?
In the aftermath of the 2008 financial crisis, governments around the world embarked on a new economic strategy, known as quantitative easing, in an attempt to stabilise the freefalling global economy.
Quantitative easing is the process whereby the central bank of a country electronically ‘prints’ large sums of money and spends the money on assets. By pumping billions of pounds into the economy, it is expected that these funds will circulate, therefore stimulating the economy and “reflating it with new investment and employment.” (Hedrick-Wong, 2015).
In the UK, the assets purchased by the Bank of England came in the form of large amounts of government bonds. Government bonds are a form of investment whereby money is lent by an investor to the government and, in return, the government “promises to pay back a certain sum of money in the future as well as interest in the meantime.” (King, 2020)
The impact of purchasing these bonds is twofold. Primarily, the purchasing of bonds provides bond shareholders with immediate funds to reinvest into productive industries, assets or commodities, “whether that’s a family buying a new car or a company wanting to build a new factory” (Bank of England, 2020). Secondly, when purchasing a large amount of bonds, interest rates go downwards, making it easier for more people to borrow and spend money.
Quantitative easing is therefore fundamentally based on the theory of ‘trickle-down’ economics. In essence, it assumes that by injecting large sums of money into the economy, these funds will then be dispersed throughout society in the form of jobs and investment, thus stabilising the economy and preventing further collapse.
The Consequences of Quantitative Easing
Although quantitative easing has been praised for its role in initially stabilising the downward momentum of the global financial crisis, it has become increasingly apparent that this policy has created long-term consequences for the majority of families in society.
As admitted by the Bank of England, a vast amount of the money pumped into the economy via quantitative easing has found its way into the hands of the wealthiest 5% in Britain and remained there (Bank of England, 2012).
When purchasing bonds, the price of assets – such as properties and shares – is pushed upwards, boosting the value of households’ financial wealth and thus their ability to spend money. However, in the UK, 40% of the holdings on these assets are possessed by the top 5%, meaning the effects of quantitative easing are heavily skewed in their favour. In turn, by 2013, only four years after the financial crisis had emerged, quantitative easing made the richest 5% of households £128,000 better off per head (New Economic Foundation, 2013).
In direct contrast, the vast majority of individuals in the UK – particularly young people who possess very few assets – have seen an increase in job instability, a decrease in real wages and declining levels of social mobility, as the finances injected via quantitative easing have been inadequately dispersed (Thompson, 2017). Fundamentally, the proposed ‘trickle-down effect’ of quantitative easing has failed, and such a policy has instead overseen the “largest transfer of wealth in history” to the wealthiest families in society (Glazebrook, 2017).
Austerity Measures
In order to ‘balance the books’ and to pay for quantitative easing, over the last ten years the Conservative government has embarked on a harsh austerity program which has held back billions in government spending that was previously allocated to public services.
Since 2010, real terms funding for local authorities has been cut by 49%, with the National Audit Office estimating that one in ten local authorities will be exhausted and absolved by 2021 (Maguire and Chakelian, 2018). As a consequence, local services are unable to effectively provide welfare payments, housing subsidies and social services for the most vulnerable residents, leaving thousands of people around the country without sufficient support.
As found in an investigation carried out by Professor Alston – a special rapporteur for extreme poverty and human rights at the United Nations –these austerity measures are guilty of “entrenching high levels of poverty and inflicting misery in one of the richest countries in the world.” (Kingsley, 2018)
In response to the report, rather than acknowledging the hardships that its austerity program had brought upon millions in Britain, the government dismissed the findings as “barely believable” (Booth, 2019). Instead, MP’s claimed that it presented an “inaccurate picture of our approach to tackling poverty” and contested that the UK is amongst the happiest countries in the world.
Quantitative Easing in a Covid-19 Economy
It is important to note that quantitative easing was only ever intended to act as a form of “short-term shock therapy” for the economy in 2008/09 (Darling, 2017). Despite this, over the last decade, the Conservative government has remained committed to quantitative easing as a long term economic strategy.
Since 2009, the Bank of England has purchased a total of £895 billion in government and corporate bonds. In response to the Covid-19 pandemic alone, £450 billion has been allocated thus far, a figure which surpasses all previous quantitative easing programmes combined.
In response to the familiar question regarding how the country is going to pay for this, Rishi Sunak, Chancellor of the Exchequer, stated that the government “will not borrow our way out of a hole”, indicating that further cuts to public services are on the horizon (Goodwin, 2020).
The most likely target for the government’s method of payment comes in the familiar form of austerity measures. The current boosts to Universal Credit are set to end in April 2021, leaving six million households with £1,040 less per year (Singh, 2020). This £8 billion cut will leave job-seeking support at its lowest in real-terms for the last three decades at a time of rising unemployment and job insecurity, leaving the poorest fifth of households with 7% less in annual income. In essence, the poorest in society will once again pay for an economic policy which enriches the elite, whilst simultaneously leaving them without necessary services or opportunities for support.
Conclusion
Although quantitative easing aided in the initial stabilisation of the economy in 2009, former Permanent Secretary to the Treasury, Nicholas Macpherson, has argued that it is “time to move on” from this economic strategy which has become like “heroin” to the government (Partington, 2017). Such a policy requires“ever-increasing fixes to create a high” whilst the “negative side effects” for the majority in Britaincontinue to arise.
As poignantly stated by Adam Curtis, a renowned British journalist, the contrasting economic policies of quantitative easing and austerity “sum up the mood of our time, where nothing makes any coherent sense.” (Curtis, 2014) Whilst quantitative easing allows for the richest in society to increase their substantial wealth reserves, millionsof people are conversely faced with patterns of worsening social conditions, growing wealth inequality and increased job insecurity.
Ultimately, it remains unclear the extent to which the ongoing Covid-19 pandemic will impact British society. However, it is certain that, following this unprecedented injection of funds, the poorest families are set to face the brunt of long-term consequences, whilst a small section of elite individuals will benefit, widening the gap even further between rich and poor in years to come.
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