She says the issue is that as QE is a policy that increases asset prices, asset owners tend to already be wealthier and older, and wealthier and older people tend to spend less of any extra wealth they receive than younger people and those less financially well-off.
She says, in this way, policy decisions that focus on increasing asset prices may actually have hindered growth over the past decade by boosting the wealth of those less likely to spend it.
According to this analysis, the wealth effect does not generate extra growth, as any gains go to those least likely to spend them.
Andy Haldane, chief economist at the Bank of England, says the policy of QE does the opposite of this, as it keeps interest rates low and so rewards those who need to borrow and penalises those who are savers, and as such, diverts resources to the less well-off and away from the wealthier, who have the ability to save.
Reducing borrowing rates may make borrowing more affordable for those who need to borrow, and so boost economic growth.
Bruce Stout, who runs the £1.6bn Murray International investment trust, has countered Haldane’s view with the argument that “while you can take a horse to water, you cannot make it drink"; meaning that while you can reduce interest rates to make borrowing cheaper, you cannot guarantee that individuals or companies will want to borrow.
QE increases the quantity of money in the economy, but may not increase the speed at which that money moves through the economy.
Speed demon
Stout says a hugely significant driver of economic growth since the dawn of time is “household formation”.
This is the process every generation goes through of buying and furnishing a succession of properties to live in. It is not just the purchasing of a home, but the furnishing and extension of the home, and indeed the creation of and expansion of a family unit.
While low interest rates benefit the creation of a household, the increase in house prices hinders the creation.
Put simply, higher house prices mean that people have to save more to buy a property from a person who is older.
This extra saving from the younger person reduces the total level of spending in the economy, while the extra wealth is transferred to the older person; but an older person is much less likely to spend, so the total of economic activity is reduced, even though the total supply of money has increased.
If people are older before they buy their first property, then they will likely purchase fewer houses in their lifetimes, reducing the impact of the household formation effect on the wider economy, as it happens fewer times.
