Quantitative easing: Plan A isn't working

By Scott McCulloch on Feb 10, 12 11:57 AM in Banking

The Bank of England has agreed to pump another £50 billion of made up money into the flagging UK economy in an effort to kick-start economic growth.

UK interest rates have also been held at a record low of 0.5 per cent - the rate it has been since March 2009.

This, of course, is terrible news for savers, and indeed pensioners, as the buying up of gilts - UK government bonds - artificially depresses annuity rates.

Quantitative easing is basically the creation of new money - literally out of thin air.

The Bank of England creates this new money by way of a sale of Treasury investment bonds - basically a promise to pay later for cash now.

Those bonds, backed by a guarantee from the taxpayer, are then 'sold' on the London Stock Exchange to investors, insurance firms and banks.

They in turn swap this promise to pay in the future for cash now, which the government agrees to pay back over a set period, at a hefty rate of interest.

The Bank of England then buys those bonds from banks, which is supposed to free up cash for the banks so they can lend again.

That's the plan at least.

However, a report published by economist Dhaval Joshi in 2011, suggests quantitative easing is really a way of paying the rich at the expense of the poor.

Joshi argued real wages in the UK and United States - where quantitative easing is being used to boost economic growth - have fallen in real terms.

The sudden influx of newly created money also pushes up the price of commodities, and food and oil prices have risen as a result.

Joshi said: "Real wages and salaries have fallen by £4 billion. Profits are up by £11 billion.

"The spoils of the recovery have been shared in the most unequal of ways."

And there is evidence of this profiteering, with the six biggest energy suppliers reported to have increased their profit margins by 733 per cent in just three months of last year.

The announcement by the Bank of England's Monetary Policy Committee (MPC) to increase the size of this stimulus programme by another £50 billion on Thursday takes the value of the programme since its 2009 launch to £325 billion.

To look at it more simply, quantitative easing is a grand scale version of the consumer credit cycle - its akin to using a new credit card to pay the interest on a card which has reached its credit limit.

Of course, engaging in this type of debt management - sorry fiscal stimulus - doesn't address the principal debt.

In simple casino terms - because that's what the markets have degenerated into - it's essentially creating new money to fund another spin of the wheel in the hope you win. If not, just create more until you do win, seems to be the policy being promoted by the Bank of England.

The belief is the injection of new capital will encourage the banks to lend again, but it doesn't force them to. There is nothing to stop the banks hoarding this cash to bolster their own battered balance sheets.

However, the only way the UK Government can keep the many plates of debt spinning and have any hope of paying back the huge public debt in the meantime is to raise more in taxes.

That won't be easy given a Tax Justice Network report, published in November 2011 estimates UK tax evasion is somewhere in the region of £70 billion a year.

Of course, both the UK Government and HM Revenue and Customs contests these figures, believing the total figure for tax evasion and avoidance runs at around £35 billion a year.

To put this into context, the UK will have to pay £43 billion in interest on its current debt this year, which works out at around £1,800 in tax for every household - just to pay the interest, not the principal debt owed.

However, some high profile so-called 'sweetheart deals' HMRC has struck with big business recently suggest the playing field is far from level.

Mobile phone giant Vodafone secured a £5 billion tax write off from HMRC in what was one of the largest ever tax avoidance investigations it had conducted.

HMRC permanent secretary Dave Hartnett dismissed HMRC's own lawyers from the case and brought in tax consultant David Cruickshank of Deloitte to broker an agreement with Vodafone.

Vodafone eventually agreed to pay £800 million of an estimated £6 billion tax bill, with a further £450 million to be paid over five years.

Investment bank Goldman Sachs was also reported to have brokered a deal with HMRC which let it off with a reported £10 million in interest payments on a failed tax avoidance scheme it had set up for its employees.

Details also emerged last year of a truly audacious plan to give a tax exemption on profits made by the overseas branches of UK-based companies, meaning big business - and of course banks - will benefit to the tune of billions of pounds a year.

How? Because those same UK-based companies will be allowed to claim the cost of running their overseas operations against the tax they pay in the UK.

How necessary are such measures, given Barclays Bank's stunning admission it paid just £113 million in corporation tax in 2009 in a year it made profits of £11.6 billion?

Lloyds Banking Group, which is 41 per cent taxpayer-owned, paid no corporation tax at all on its £2.2 billion of profits.

Likewise, 83 per cent taxpayer-owned Royal Bank of Scotland paid no corporation tax last year, and because the bank has posted losses of £38 billion and counting since 2008, won't be paying any tax for years to come, even if it returns to profit.

UK national debt is now standing at £1.02 trillion pounds, not including bank bailouts.

If we add in all of the taxpayer-backed bailouts and guarantees of bank assets, the debt figure is more than double at £2.26 trillion as of December 2011.

That means UK debt, not including bank bailouts and guarantees, is running at 64 per cent of UK GDP - the sum our economy generates from all economic activity.

Add in the bank bailouts and guarantees, and the debt levels - known as the unadjusted measure of public sector net debt - is currently running at 148 per cent of GDP.

And if we add bond debt and pension liabilities, known as the Whole of Government Accounts, the true level of debt reportedly exceeds £5 trillion.

Simply put, we're spending far more than the country produces to break even.

If you earn £100 a week and spend £148 a week without making a dent in your existing debts you are, quite simply, on the way to bankruptcy.

The government's answer is to create more debt in the form of new money in an effort to stimulate the economy, despite the fact there is little evidence on the ground to show the £275 billion already created in stimulus money has had any positive effect.

Now the programme has swelled to £325 billion - the Chancellor's insistence on sticking to his plan A is looking increasingly desperate, and looks increasingly like present and future generations of taxpayers will be footing the bill.

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