Quantitative Easing Anonymous

Quantitative easing (EQ) hit the headlines during the 2007-2008 financial crisis. According to Investopedia, ‘QE is a form of unconventional monetary policy in which a central bank purchases longer-term securities from the open market in order to increase the money supply and encourage lending and investment. Buying these securities adds new money to the economy, and also serves to lower interest rates by bidding up fixed-income securities.’

QE is considered unconventional because essentially the central bank prints money to get the country out of trouble, but which may cause economy crippling stagflation. It can also devalue the domestic currency. In other words it is a form of medicine with many potentially dangerous side effects. Because of the risks involved, it was meant to be a one-off. But just 12 years later, we are at it again under COVID. Granted, a pandemic is thankfully unusual, but instead of exploring alternatives, we reach straight for the old needle i.e. we have formed a habit.

Now, technically QE is not same as printing money. Central bankers will tell you that QE is about governments increasing money supply to buy up government and corporate bonds. Tempting to think that if stagflation can be avoided, then QE works well! But what about the currency devaluation? The idea is that when the economy improves, the bonds are sold and created money is destroyed i.e. in the long term, money supply is net-zero i.e. no devaluation. 

And here is the kicker - long term. It could be 25 years or more before the bonds are sold and money is destroyed. So what happens during those 25 years? Well, imagine the economy is made up of just 100 apples and 100 pounds i.e. each 1 apple costs 1 pound. Now, the government prints an extra 100 pounds i.e. each 1 apple costs 2 pounds. But not everyone gets the new pounds. It is the government that decides whose bonds they buy, under what conditions, and if they are quietly written off in the future as bad dept. Read about Brittany Ferries, and decide if you are still feeling re-assured that the right decisions will be made by the government.

Furthermore, if not everyone gets an equal share of newly printed pounds, it means those that were not chosen, now can only buy half an apple with the money they have! Granted, in 25 years, they are promised that they will be able to buy a full apple again with the 1 pound they have. But the thing is, they need the apple now, not in 25 years - you’ve got to eat after all. So they never regain the value of their original pound as they have to spend it now, not in the future. And even if they can hold off, many may no longer be alive to spend the money in 25 years.

What all this means is that QE can be seen in a different light - as a form of wealth redistribution i.e. a bit like taxation. Some level of value is transferred by the government from one group of people to another. However, alternative tax systems like income tax are progressive i.e. you pay a higher percentage rate if you are wealthier. QE on the other hand is a flat tax system, since everyone is de-valued at the same rate, which is preferable over income tax if you are wealthy. You are also more likely to be working for organisations whose debt is purchased by the government - double win! On the other end of the spectrum, if you are poor, you have no wealth to dilute anyway, so QE is not an issue either. 

This means that QE is most punitive on the middle income families, but since they are less likely to riot, nor do they have sufficient lobbying resources, QE is a an easy tax system to implement by the government. It has other advantages. People protest more when you take something away from them now, rather than in the future. Just how our brains evolved. As QE erodes future spending capacity, but does not force people to pay income tax straight away, it is an easier sell, even though it equates to roughly the same. Go figure humans! And it is complex, so some people will not have the education to even realise what is happening to their wealth.

Now, do not get me wrong. I do not think QE is inherently bad or good. It is a tool with specific characteristics, available in fiat currencies like GBP, USD and EUR. You may be a fan, or not, of them. Horses for courses. But if you are using fiat, and happen to be in the middle income bracket, be aware, that QE taxation carries a heavier burden on you than income tax does, and the government re-allocated wealth is subject to far less scrutiny than income tax revenue. If you think that’s good, keep going, if not, consider alternative currencies like BTC, whose money supply cannot be manipulated in the same way :)