Guest Post: Does the Bank of England Worry About The Cantillon Effect?

Tyler Durden's picture

Submitted by John Aziz of Azizonomics,

The empirical data is in. And it turns out that as I have been suggesting for a very long time — yes, shock horror — helicopter dropping cash onto the financial sector does disproportionately favour the rich.

The Guardian:

The richest 10% of households in Britain have seen the value of their assets increase by up to £322,000 as a result of the Bank of England‘s attempts to use electronic money creation to lift the economy out of its deepest post-war slump.

 

Threadneedle Street said that wealthy families had been the biggest beneficiaries of its £375bn quantitative-easing (QE) programme, under which it has been buying government gilts for cash since early 2009.

 

The Bank of England calculated that the value of shares and bonds had risen by 26% – or £600bn – as a result of the policy, equivalent to £10,000 for each household in the UK. It added, however, that 40% of the gains went to the richest 5% of households.

 

Although the Bank said it could not come up with precise figures for the gains from QE, estimates can be produced using wealth distribution data from the Office for National Statistics. These show the average boost to the holdings of financial assets and pensions of the richest 10% of households would have been either £128,000 per household or £322,000 depending on the methodology used.

Here are a few questions for Britain’s monetary overlords at the BoE:

  1. Are you concerned about the long-term social and economic implications of a monetary policy that enriches the rich over and above everyone else?
  2. Are you familiar with the concept of the Cantillon Effect whereby the creation and allocation of new money transfers purchasing power to whoever it is allocated to? Did you consider this effect prior to embarking on a program of quantitative easing to the financial sector?
  3. Given the financial sector’s awful track record in terms of blowing up the economy, fabricating LIBOR data for its own enrichment, and neglecting cash-starved small businesses, is the financial sector an appropriate allocator of new money?
  4. Now that the empirical record shows the policy of helicopter-dropping cash directly to the financial sector disproportionately favours the rich, have you considered changing course and adopting a different monetary policy that doesn’t favour any particular group?

Sadly, I expect to see the announcement of more quantitative easing to the financial sector long before I expect to see answers to any of these questions.