Quietly, without much public fuss or discussion, a new ruling class has risen in the richer nations.
These men and women are unelected and tend to shun the publicity hogged by the politicians with whom they co-exist.
They are the world's central bankers. Every six weeks or so, they
gather in Basel, Switzerland, for secret discussions and, to an extent
at least, they act in concert.
The decisions that emerge from those meetings affect the entire
world. And yet the broad public has a dim understanding, if any, of the
job they do.
In fact, these individuals now wield at least as much influence over
the lives of ordinary citizens as prime ministers and presidents.
The tool they have used to change the world so profoundly is one they alone possess: creating money out of thin air.
There is an economic term for this: quantitative easing. More colloquially, it's called printing money.
Since the great economic meltdown in 2008, these central bankers have
probably saved the world's economy from collapse, and dragged it into
the unknown at the same time.
The amounts they have created are so vast as to be almost
incomprehensible — trillions of dollars in pounds and euros, among other
currencies.
At the end of 2012, the balance sheets of the world's largest central
banks, those of the G20 nations and the eurozone, including Sweden and
Switzerland, totalled $17.4 trillion US, according to Bank of Canada
calculations from publicly available data.
That is nearly a quarter of global GDP, and slightly more than double
the $8.5 trillion these same institutions were holding at the end of
2007, before the financial crisis hit.
Stock markets have risen on this tide of cheap money. So has real estate. So, arguably, has everything else.
But there are two big concerns with what this new central banker elite has done.
One is that no one really understands the consequences of pumping
such vast amounts of money into the world economy. It's already
distorted the prices of certain assets, and some fear hyperinflation or
market crashes are inevitable (the subject of tomorrow's column).
The other is that it's caused a massive shift in wealth, from savers
to borrowers, and is taking money out of the pockets of almost everyone
approaching or at retirement age.
A war on savings
Probably the most painful of the consequences of quantitative easing has been borne by the elderly.
Most of that generation grew up believing that if you save and
exercise prudence that you will earn at least a modest return on your
hard-earned money to keep you comfortable in your old age, perhaps along
with a pension.
But the money-printing orgy of the last five years looks to have shot that notion to smithereens.
Very deliberately, the central bankers have punished savers, pushing
interest rates so low that any truly safe investment — and older people
are always advised to play it safe — yields a negative return when
inflation is factored in.
British pensioners Judy White and her husband Alan, at their home in Teddington, south of London: 'I now have 50 per cent less.' (CBC )The policy has savaged pension and savings returns worldwide, but particularly in Britain, a nation of savers and pensioners.
There is more money in British pension funds than in the rest of
Europe combined, and now that money is just sitting, "dead," as some
call it, not working for its owners.
Ask Judy White, a retiree in her late 60s who lives in Teddington, south of London, with her husband, Alan.
This year, the Bank of England shattered her retirement. Her pension benefit was effectively slashed by half.
"I don't understand what quantitative easing is, except that it's
printing money," she says. "But I do understand that I now have 50 per
cent less.
"What they have done is take money from people who have been really careful all their lives."
On the backs of the virtuous
Actually,
by the Bank of England's own reckoning, the £375 billion of
quantitative easing it has carried out since 2008 has cost British
savers and pensioners about £70 billion, roughly $100 billion. (At the
same time, the richest 10 per cent of British households saw the value
of their assets increase over the same period, the bank reported.)
That cost to the elderly is largely because pension payouts in the
U.K. are pegged to the yields on government bonds, and quantitative
easing has forced those yields down to almost nothing.
Speaking for the Bank of England, Paul Fisher acknowledges that the
bank has created a paradox: It does want people to save and be prudent —
just not right now.
"We try," he says, "to get people to do things now to get out of this mess, which in the long run we prefer not to do."
In other words, might we please have some more of the wild consumer
spending and borrowing that helped get us all into this situation, at
least for a while?
Ros Altmann, a governor at the London School of Economics: 'A monumental social experiment.' (CBC)The
plain fact, though, is that central bank- and government-imposed
solutions to disasters caused by irresponsible, greedy, foolish
behaviour are almost always carried out on the backs of the virtuous.
So it was with the bank rescues in 2008, and so it is with quantitative easing.
As Ros Altmann, a longtime pension manager and director of the London
School of Economics, puts it, quantitative easing has amounted to a
"monumental social experiment" — a large-scale transfer of wealth from
older people to younger people.
"Anybody who was a saver and has got some accumulated savings will have had a reduction in their income," she says.
While "anyone who had a big debt, particularly mortgage debts, would
have had improvement in their income because their interest payments
have gone down."
As stupid as it might sound, older people everywhere would probably
be better off if they'd abandoned prudence and borrowed more.
That is obviously not what the central bankers or our political leaders want. But that's the situation they've created.
What's the alternative?
This transfer from savers to borrowers has also been taking place here in the U.S. and in Canada, to varying degrees.
Some U.S. pension funds are in danger of default, at least partially
because of these artificially low interest rates, and Canadian pension
funds that are heavily invested in safer debt have been injured, too.
In an interview in his Ottawa office, Bank of Canada governor Mark
Carney defends quantitative easing elsewhere, and his own low-interest
rate policy, though he does acknowledge that it has been hard on
pensioners and savers.
Like all central bankers, he argues the (impossible to prove)
negative: There have been consequences, yes, but if we hadn't done this,
things would be far, far worse.
As for carrying out these solutions on the backs of the virtuous: "I
don't see a world where the virtuous are rewarded if we suffered a
second Depression," he says. "These are the stakes."
Carney would prefer not to talk about the enormous power central
bankers have gained since 2008, saying only: "We have a tremendous
responsibility … because of a series of mistakes that were made in the
private sector and the public sector."
See
the surge in central bank holdings, the printing of new money,
beginning in the spring of 2008 with the bank bailouts and the
acquistion of long-term securities to keep interest rates down. (International Monetary Fund)As Canada has performed better than most Western nations, Carney has not ordered any new money printing.
But he has kept interest rates down, and that has fed the real estate
booms over the last few years in Vancouver, Toronto, Calgary and
elsewhere.
He scoffs at the suggestion that "the party" will end at some point.
"I am not sure we are having a party right now," he says. "It doesn't
feel like a party."
And, in fact, he has repeatedly expressed concern at the huge debt
levels Canadians are accruing, at least partly because of his low-rate
policies.
But surely he understands the anger of an older person watching their savings being eroded, I ask him.
Carney smiles grimly. That question is clearly a sore point. He gets a lot of mail on the topic.
Canadians, he says, must understand that the alternative is massive
unemployment and thousands of businesses going under, and "my experience
with Canadians is that they tend to think about their neighbours and
their children and more broadly … they care a little bit more than just
about themselves."
Asked whether central bankers are not in fact enabling irresponsible
behaviour by speculators enamoured of cheap money, not to mention
politicians who can't curb their borrowing and spending, Carney merely
remarks that voters in a democracy get the governments they choose.
