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Gigantic Purple Slug

Households "lost" From Qe

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And, as luck would have it, this analysis of the winners and losers in the era of ultra cheap money has been done and published this morning by the McKinsey Global Institute (it should be taken with a pinch of salt, since it is hard to adjust for what else has been going on in the global economy).

The big winners, to the tune of $1.6 trillion by the end of 2012, were the governments of the US, the UK and eurozone, from the reduced costs of servicing their debts and from the increased profits made by the their respective central banks (who magically create money to buy government debts which pay them interest).

The point is that from 2007 to 2012, the average interest rate paid by the UK government on all its debts fell from 5.1% to 3.2%. That represents a massive saving, at a time when it has been borrowing more and more and more.

The cumulative estimated benefit for the UK government alone, including central bank profits, is $170bn or around £105bn.

The govts aren't the big winners they have merely managed to kick the can, if rates increase the cost of servicing the new debts will cripple these govts triggering off defaults.

All what has been bought is that it's now someone else's problem which is a political success story, unless the global economy finds a new growth paradigm or bubble it's just a matter of time before we end up with an even deeper more destructive recession.

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This is a misleading article from Robert Peston in my view.

What McKinsey actually say is that UK households have been net losers if one focuses on the impact on income and interest expense alone. On this basis they conclude that older households have lost out significantly whereas younger households have gained somewhat.

But they later say in the report:

"If one accepts that house prices and bond prices are higher today than they otherwise would have been as a result of ultra-low interest rates, the increase in household wealth and possible additional consumption it has enabled would far outweigh the income lost to households."

In actual numbers, McKinsey estimate the cumulative income loss to UK households at around $110bn.

Compensating for the income loss:

"In the United Kingdom, household wealth may have increased by $1.1 trillion as a result of ultra-low interest rates, with an estimated 89 percent coming from housing, 10 percent from bonds, and 2 percent from equity."

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This is a misleading article from Robert Peston in my view.

What McKinsey actually say is that UK households have been net losers if one focuses on the impact on income and interest expense alone. On this basis they conclude that older households have lost out significantly whereas younger households have gained somewhat.

But they later say in the report:

"If one accepts that house prices and bond prices are higher today than they otherwise would have been as a result of ultra-low interest rates, the increase in household wealth and possible additional consumption it has enabled would far outweigh the income lost to households."

In actual numbers, McKinsey estimate the cumulative income loss to UK households at around $110bn.

Compensating for the income loss:

"In the United Kingdom, household wealth may have increased by $1.1 trillion as a result of ultra-low interest rates, with an estimated 89 percent coming from housing, 10 percent from bonds, and 2 percent from equity."

TBH most articles like this are a tad misleading, not by choice I don't think but because the real situation is always more complex than a quick summary allows.

For example, he doesn't consider how many households were employed by the public sector, that would have had to be cut drastically if we weren't printing the deficit ?

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