Investments: Quantitative Easing Could Explain The Wealth Gap

Adam Posen Advocates Quantitative Easing

Adam Posen Advocates Quantitative Easing

A report has been revealed that discusses the consequences of quantitative easing—the Bank of England’s policy to buy billions of pounds of government bonds to boost the economy. One economist suggests that the recent unrest in the UK may have been caused in part by movements such as quantitative easing.

Dhaval Joshi, from BCA Research, believes that this approach pushes up the costs of shares and profits for businesses but that it does not come down to income. He maintains that it exacerbates the already magnified social divisions that come from a gap in wealth. “The evidence suggests that QE cash ends up overwhelmingly in profits, thereby exacerbating already extreme income inequality and the consequent social tensions that arise from it,” he says.

Wages Not Affected by QE
In both the US and the UK, income after inflation has decreased—also in both countries quantitative easing has been used to help stimulate economic production. Real wages, or those that take account of inflation, have risen in Germany, which has not used quantitative easing.

The prices of shares and other assets, such as oil, have gone up after the £200 billion that was pumped into the markets. This helped businesses increase finances, but according to Joshi, employees have not seen any gain. He says, “The shocking thing is, two years into an ostensible recovery, workers are actually earning less than at the depth of the recession. Real wages and salaries have fallen by £4bn. Profits are up by £11bn. The spoils of the recovery have been shared in the most unequal of ways.”

He offers this as an explanation for the rising sales of luxuries even though most taxpayers have had to make severe cutbacks. He adds, “High-income earners are more exposed to profits as owners of businesses or shareholders. Low-income earners are dependent on wages.”

A Larger Debate
This latest argument has come in a series of debates from economists over the benefits of quantitative easing. Danny Gabay, from the company Fathom, has been one of the experts who maintained that the creating of money electronically should have been invested in the property sector instead of the banks. Others, such as Adam Posen, the US economist involved with the MPC, has advocated another round of the policy, which will spend another £50 billion investing in the economy.

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