Tuesday, 22 September 2015

Does QE make the rich richer?

The popular answer is “yes”. However there’s a problem with that answer as follows.

QE (i.e. having the state print money and buy government debt) clearly tends to boost asset prices, since those in receipt of that freshly printed money will tend to spend it on purchasing other assets.

However, government debt would not exist if government had not first borrowed. That raises the obvious question as to whether it makes any sense to consider QE in isolation. Arguably to do so is a bit like talking about a human being with no lungs, heart or brain: such a “human being” just ain’t a functioning human being in the normal sense of the phrase.

The fact of government borrowing actually makes the rich poorer because it reduces spending on other assets. All QE does is to reverse that “impoverishment” effect.

So all in all, the enrichment of the rich caused by QE is nothing to shout about. I suggest a more important point here (one that I’ve been drawing attention to for years) is this. “Borrow and spend” is a daft method of imparting stimulus in that the borrow part of that exercise has a deflationary or impoverishing effect.

Put another way, if you’re trying to effect stimulus, what’s the point of doing something, part of which has an anti-stimulatory effect? You might as well throw dirt over your car before washing it.

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