Was the millennial dream killed by QE?
Image copyright Getty Images What do quantitative easing, sexting and unfriending have in common?
All are terms that have been added to the common lexicon over the past decade.
But it’s the first of those terms that has dictated fortunes over that time – and for 30-somethings, not necessarily for the better.
It’s exactly 10 years since the Bank of England triggered quantitative easing (or QE), as part of its drastic rescue plan in the depths of the financial crisis.
What is QE and what effect did it have?
Like several other central banks, the Bank created digital money that it used to buy assets such as government bonds (the forms of loans used to fund public borrowing) from financial institutions.
Therefore, these institutions had more funds.
And by increasing the demand for government bonds, the rate of return on these relative to their price (roughly speaking the interest rate paid – or their yield) fell.
That should lead to lower interest rates across the system.
So in theory, banks have more funds to lend, at a low rate of interest, encouraging households and businesses to borrow.
The Bank threw £435bn of funds at QE – an unconventional and hugely experimental measure at a time of unprecedented crisis.
Did QE help people in work?
Ten years on, the effects are still playing out.
The Bank of England estimates that ultra-low interest rates and QE meant that the average household’s income was £9,000 higher than it would have been by 2018.
It argued that younger people actually benefitted most, as they were more likely to be in work and reliant on wages for income.
By contrast, savers, who tend to be older, received negligible return on their money.
£1 put into an instant access account in 2009 would have earned a total of 8p in interest over the past decade.
Once inflation is taken into account, say fund managers Hargreaves Lansdown, that £1 would be worth just 87p now.
Did QE boost house prices?
But the starkest impact of QE has been on wealth, the value of assets, from housing to pensions.
The money received by financial institutions in return for bonds sometimes got diverted into other investments – bulking up the prices of the value of shares or property, benefiting those already at the top of the tree the most.
In addition, cheap loans further boosted demand in the housing market – for those buyers who could afford to cobble together deposits.
The upshot was that property prices have risen by 43% over the past decade – far more than they would have done in the absence of the emergency injection of funds.
So they’ve vastly outpaced earnings growth; buying your first property and moving up has got even harder.
A 30-something today is less likely to own property than their great grandparents.
And the rise in house prices actually looks quite modest compared with the boost to shares.
Shares in the FTSE 100 index have, on average, more than doubled in value over the past decade.
The main beneficiaries of these rising values would have been investors – both individuals and those holding shares in pension funds etc.
They of course tend to be older – not just baby boomers but the lesser-mentioned Generation X.
Snowflakes or victims?
Quantitative easing may well have saved us from a bigger drop in prosperity after the financial crisis.
But its spoils have been less than equally shared.
It’s easy to dismiss millennials as oversensitive “snowflakes”, but the growing sense of intergenerational unfairness is rooted in events in which they played no part.
In the aftermath of the financial crisis, politicians advocated austerity as a means of avoiding saddling future generations with excessive interest payments on public debt.
But instead, those barely able to remember the financial crisis are likely to be saddled with the fallout of QE.
It is they who may be paying the price of a measure originally implemented to limit the damage caused by profligate financiers.
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