The Sunday Times rich list is out and – big surprise – the rich have got richer (or in the case of the Russians, better at hiding their wealth). In the rest of the news, rampant inflation in food and fuel prices is making the poor poorer. These stories are connected, not by some grand critique of capitalism, but by the pursuit of easy money. Central banks repressing interest rates through zero interest rate policy (ZIRP) have impacted the rich and poor very differently. ZIRP is an ugly acronym that hides an ugly secret. The Bank of England is operating a policy that is driving wealth inequality.
Most debt is held by governments, companies and property owners. Low interest rates suit these three groups, as it means that they can respectively spend more, increase returns to shareholders and buy larger properties. Low interest rates increase the level of borrowing by these groups – effectively increasing the level of debt in the economy.
The rate at which the level of debt increases is important because the act of a commercial bank making a loan is generally how new money is created. The more debt, the more money in the economy. If the amount of money grows faster than economic activity, we start to see inflation. Moreover, the Bank has engaged in direct money creation through Quantitative Easing, further increasing the money supply. We have had two generations of inflation in property prices and rents. We are now seeing inflation drive up are the price of the other essentials in life. The wealthy are protected as their assets go up in value, their rents increase and essentials make up only a small proportion of their expenditure. The government is protected because tax receipts increase and the expenditure can be held below the real level of inflation.
Debt and inflation work very differently for those who are not wealthy. Try borrowing money if you don’t have any assets. Being able to borrow small amounts is a key part of the safety net for many families. That short delay in receiving benefits or that unexpected bill, can be punished by high interest rates and sometimes lead to the debt spiral of interest on unpaid interest. Payday lenders don’t operate ZIRP. At the same time, all the inflation created by central banks is eroding the real value of wages.
Recent graduates are currently paying 12% on their student loans and simultaneously receiving 1% interest on their deposits for a first home. A first home that the Bank of England is helping push further out of reach. Many graduates are struggling to save anything given the level of rent, utility bills and food costs. This is going to cause anger.
This is not capitalism; it is a corruption of capitalism. There are millions of lending transactions to enable the market to set interest rates. There is no need for the Bank of England to engage in the market manipulation that is ZIRP. We have a simple choice – end easy money or create a polarised and angry society. The Bank of England’s remit of creating inflation and artificially lowering interest rates needs to end. The Bank should focus on safeguarding our monetary and financial system. If governments want to spend more, they should raise money through taxation or borrow on the open market. That rich list includes some amazing entrepreneurs who don’t need the Bank’s help and nor do the land and property owners.
Sebastian Chambers is the author of The A-Z of Inequality, published by White Fox, priced at £10 and available at Amazon.co.uk