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14 November 2013 By Peter Thal Larsen

Central bank money-printing has produced winners and losers. The biggest beneficiaries may be taxpayers. That’s the conclusion of the McKinsey Global Institute’s new study of who’s up and who’s down after five years of ultra-low interest rates. Though the exercise has its limitations, it’s a welcome antidote to the common idea that quantitative easing has only benefitted the rich.

The institute calculated that governments were the biggest winners from low interest rates. Reduced interest expense and profit remitted by central banks were worth $1.6 trillion for the exchequers of the United States, United Kingdom and euro zone between 2007 and 2012. That allowed governments to spend more and tax less. Companies are also net winners: cheaper borrowing costs outweighed lower income on cash balances to the tune of $710 billion.

Households have been the losers. Over the five-year period, missing income on savings and investments exceeded the gains from lower borrowing costs by $630 billion. The burden fell mostly on the old, who tend to have more assets, rather than the relatively indebted young.

While useful, the exercise has two major shortcomings. First, as McKinsey acknowledges, it’s impossible to know what would have happened if central banks had not slashed rates and bought bonds. If aggressive monetary policy averted depression and deflation, as many economists believe, then the overall economic gains far outweigh any losses.

Second, it is difficult to analyse the impact of quantitative easing on asset values. It definitely boosted bonds, probably lifted property, and may have helped stock markets. Paper wealth has increased; McKinsey thinks western households gained around $9 trillion in 2012 alone. The trickier bit, however, is gauging the impact on spending. If households spent 3 percent of last year’s paper profit, they would have more than compensated for their lost interest income.

The many critics of QE often point to rising asset values as evidence that it only benefits the rich. The McKinsey study shows the calculation is far from straightforward. But central banks’ roles in redistributing wealth should not be underestimated – especially if the effects are reversed once the printing presses are switched off.


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