Neil Macdonald
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.
Who are the world's central bankers?
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.
About The Author
Neil Macdonald is the senior Washington
correspondent for CBC News, which he joined in
1988 following 12 years in newspapers. Before
taking up this post in 2003, Macdonald reported
from the Middle East for five years. He speaks
English and French fluently, and some Arabic.
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.
Who are the world's central bankers?
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.
About The Author
Neil Macdonald is the senior Washington
correspondent for CBC News, which he joined in
1988 following 12 years in newspapers. Before
taking up this post in 2003, Macdonald reported
from the Middle East for five years. He speaks
English and French fluently, and some Arabic.
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