How Quantitative Easing made the wealthy wealthier

My calculations this morning of the benefits from the Bank of England’s Quantitative Easing flowing to the wealthiest 10 per cent of society are at the top end of the estimates made by other media outlets, so I thought it would be appropriate to show my workings.

First some background. The Bank of England released a research paper in September 2011 which estimated that £200bn of asset purchases had raised asset prices across the economy by 16%.

Here’s a snapshot of the effect on equities and corporate bond prices:

The Bank has now purchased another £150bn of Gilts, taking the total to £350bn.

If £200bn buys a general asset price boost of 16%, we would expect £350bn to buy an asset price boost of around 28%, assuming of course that QE has not become less effective.

Then I went to the Office for National Statistics’ most recent wealth survey, released in July, which showed national wealth levels in 2010 by decile of household population (ie putting every household in the country into a line ordered by asset wealth levels and dividing them into ten groups). The relevent assets as far as the Bank’s original calculation were concerned were private pension wealth and financial wealth.

Then I inflated the total value of these assets held by each decile by 28% to estimate the impact of QE.

That enables you to see the impact of QE on each decile in cash terms.

Finally, there’s the calculation to get to the cash benefit of QE per household. There are roughly 25 million households in the UK, which means in each decile of the population there are 2.5 million households. So I divided the cash benefit for each decile by 2.5 million to get to the result.

And as I wrote in the paper, this showed that the wealthiest 10 per cent of households got wealthier to the tune of aruond £348,000 on average.

Note in the table below that the poorest had negative net financial wealth in 2010. I assumed that their net financial situation improved by 28% because of QE. This gave households in the poorest decile an average boost of £1,400.

As I wrote in my comment this morning, the fact that QE made the asset rich wealthier is no great surprise given that one of the main objectives of the progamme has been to boost asset prices. But then again it’s surely no bad thing to attempt to see how monetary policy impacts on different sections of the population – nor to make clear what huge disaparities in wealth already existed in Britain.

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• Pacificweather

  It would be more useful if you explained why QE increases asset values and why the government would want to do that. It would also be useful to know why asset value rises of 28% are not included in the measure for inflation. 28% sounds like hyper inflation.

• andyholmes

  Quite a few false assumptions here.

  Firstly is the assumption that QE continues to be equally effective how ever long it continues, which is almost universally accepted to be a falsehood. QE becomes less effective each time it’s used, just like any stimulus, as the secondary psychological confidence effect is severly diluted during repetition.

  Secondly the assumption that this effect is permanent. Once the effects of QE work it’s way through the economy, as they inevitably will in any open economy like the UK, asset values will start to fall back to pre stimulated levels.

  Finally, there is no “cash benefit” unless those assets are sold.