It's an odd wind that blows nobody any badMar 19th, 2009 | By Ian Poulton | Category: International
“Quantitative easing.” The term has a lovely feel about it. It conjures up pictures of taking off one’s shoes at the end of a hard day and sitting in the armchair with a glass of wine, eyes closed, listening to music.
Quantitative easing suggests something over which one has full control. It sounds healthy and wholesome. It sounds like something that can only be a good thing.
Perhaps, in retrospect, it will be seen as a vital component of the 21st Century’s answer to the New Deal in the America of the 1930s. But I bet most people listening to Morning Ireland on RTE had not a clue what the reporter was talking about.
Quantitative easing includes the American government buying back its own bonds in order to put money into the economy. Surely a good thing? Isn’t clearing debt always good? Is it always so?
The people who buy the government bonds are often pension funds and savers. Government bonds are considered safe and secure, they have a guaranteed interest rate for years, sometimes many years, to come. The reduction in the number of bonds available means that pension funds and others who are searching for secure investments have less choice. The demand for the remaining bonds is pushed up, which raises their price, which means that the yield on the bond is less. Imagine a $100 bond that pays $5 a year, a yield of 5%. If the number of bonds are reduced and more investors try to buy these $100 bonds, their price rises. So a $100 bond might actually cost you $125 to buy and the $5 annual payment on the bond is yield of just 4% on the money you have invested in buying the bond. Not that you could get a yield of 4% on most bonds, the yield on a 10 year American bond yesterday fell to just 2.5%
Quantitative easing may be great in stimulating the economy, but for those who need to make long-term, secure and stable investments, like people who must buy an annuity to pay their pension for years to come, it represents a bleak future.
Pension funds that already have massive gaps in their finances have one of the few remaining lifelines, one of the few places where an income is guaranteed, being pulled away from them. The debts faced by pension funds may dwarf the debts incurred by the banks. Governments under pressure to try to compensate for the shortfall are hamstrung by the fall in tax revenues; pensioners caught in the double whammy of private pensions being squeezed and governments having no cash with which to ease the situation.
In Ireland, the further reduction of US interest rates means a shift away from the dollar in the international money markets (with lower interest rates, it is less attractive to hold), and a rise in the value of the Euro against the dollar, making Irish exports that bit harder to sell and threatening more Irish jobs.
Sometimes the truth seems almost too horrible to contemplate. Pictures of taking off one’s shoes are much more easing.