Quantitative Easing

[Quantum Windbag]

Is anyone surprised that the biggest beneficiary of QE is the government? Did you know that it is eating into your pension and life insurance?

A new report from the McKinsey Global Institute examines the distributional effects of these ultra-low rates. It finds that there have been significant effects on different sectors in the economy in terms of income interest and expense. From 2007 to 2012, governments in the eurozone, the United Kingdom, and the United States collectively benefited by $1.6 trillion both through reduced debt-service costs and increased profits remitted from central banks (exhibit). Nonfinancial corporations—large borrowers such as governments—benefited by $710 billion as the interest rates on debt fell. Although ultra-low interest rates boosted corporate profits in the United Kingdom and the United States by 5 percent in 2012, this has not translated into higher investment, possibly as a result of uncertainty about the strength of the economic recovery, as well as tighter lending standards. Meanwhile, households in these countries together lost $630 billion in net interest income, although the impact varies across groups. Younger households that are net borrowers have benefited, while older households with significant interest-bearing assets have lost income.
The impact that ultra-low interest rates have had on banks has been mixed. They have eroded the profitability of eurozone banks, resulting in a cumulative loss of net interest income of $230 billion between 2007 and 2012. But banks in the United States experienced an increase in effective net interest margins and a cumulative increase in net interest income of $150 billion. The experience of UK banks falls between these two extremes.
Life-insurance companies, particularly in several European countries, are being squeezed by ultra-low interest rates, so much so that if this environment were to continue many of these insurers would find their survival threatened.
Theoretically, ultra-low interest rates may have resulted in higher asset prices, and this effect may have offset lost interest income for households and other investors. But we find a mixed picture.

QE and ultra-low interest rates: Distributional effects and risks | McKinsey & Company

 

[oldfart]

Is anyone surprised that the biggest beneficiary of QE is the government? Did you know that it is eating into your pension and life insurance?

A new report from the McKinsey Global Institute examines the distributional effects of these ultra-low rates. It finds that there have been significant effects on different sectors in the economy in terms of income interest and expense. From 2007 to 2012, governments in the eurozone, the United Kingdom, and the United States collectively benefited by $1.6 trillion both through reduced debt-service costs and increased profits remitted from central banks (exhibit). Nonfinancial corporations—large borrowers such as governments—benefited by $710 billion as the interest rates on debt fell. Although ultra-low interest rates boosted corporate profits in the United Kingdom and the United States by 5 percent in 2012, this has not translated into higher investment, possibly as a result of uncertainty about the strength of the economic recovery, as well as tighter lending standards. Meanwhile, households in these countries together lost $630 billion in net interest income, although the impact varies across groups. Younger households that are net borrowers have benefited, while older households with significant interest-bearing assets have lost income.
The impact that ultra-low interest rates have had on banks has been mixed. They have eroded the profitability of eurozone banks, resulting in a cumulative loss of net interest income of $230 billion between 2007 and 2012. But banks in the United States experienced an increase in effective net interest margins and a cumulative increase in net interest income of $150 billion. The experience of UK banks falls between these two extremes.
Life-insurance companies, particularly in several European countries, are being squeezed by ultra-low interest rates, so much so that if this environment were to continue many of these insurers would find their survival threatened.
Theoretically, ultra-low interest rates may have resulted in higher asset prices, and this effect may have offset lost interest income for households and other investors. But we find a mixed picture.

QE and ultra-low interest rates: Distributional effects and risks | McKinsey & Company

So an investment firm reports that low interest rates favor borrowers like governments and businesses over savers.

1. This is news how?

2. And the problem is?

 

[Quantum Windbag]

Is anyone surprised that the biggest beneficiary of QE is the government? Did you know that it is eating into your pension and life insurance?

A new report from the McKinsey Global Institute examines the distributional effects of these ultra-low rates. It finds that there have been significant effects on different sectors in the economy in terms of income interest and expense. From 2007 to 2012, governments in the eurozone, the United Kingdom, and the United States collectively benefited by $1.6 trillion both through reduced debt-service costs and increased profits remitted from central banks (exhibit). Nonfinancial corporations—large borrowers such as governments—benefited by $710 billion as the interest rates on debt fell. Although ultra-low interest rates boosted corporate profits in the United Kingdom and the United States by 5 percent in 2012, this has not translated into higher investment, possibly as a result of uncertainty about the strength of the economic recovery, as well as tighter lending standards. Meanwhile, households in these countries together lost $630 billion in net interest income, although the impact varies across groups. Younger households that are net borrowers have benefited, while older households with significant interest-bearing assets have lost income.
The impact that ultra-low interest rates have had on banks has been mixed. They have eroded the profitability of eurozone banks, resulting in a cumulative loss of net interest income of $230 billion between 2007 and 2012. But banks in the United States experienced an increase in effective net interest margins and a cumulative increase in net interest income of $150 billion. The experience of UK banks falls between these two extremes.
Life-insurance companies, particularly in several European countries, are being squeezed by ultra-low interest rates, so much so that if this environment were to continue many of these insurers would find their survival threatened.
Theoretically, ultra-low interest rates may have resulted in higher asset prices, and this effect may have offset lost interest income for households and other investors. But we find a mixed picture.

QE and ultra-low interest rates: Distributional effects and risks | McKinsey & Company

So an investment firm reports that low interest rates favor borrowers like governments and businesses over savers.

1. This is news how?

2. And the problem is?

Funny, I could have sworn that they pointed out that household investment income, aka retirement savings, plummeted. I guess that fact escaped your pro government, anti capitalist, perusal of the article.

 

[oldfart]

Funny, I could have sworn that they pointed out that household investment income, aka retirement savings, plummeted. I guess that fact escaped your pro government, anti capitalist, perusal of the article.

OK, let me take it in a bit more detail this time. Investment income from equities, including unrealized capital gains, was fantastic last year, so I assume that you are referring to something else. As the article mentioned, low borrowing costs favor businesses and therefore one could conclude were at least partially responsible for the recent equity gains. Do you agree?

The "something else" would be fixed return investments. Historically these have yielded about 2.5--3% above the rate of inflation at best. The current yield on Treasury Inflation Protected Securities (TIPS) is about that range for ten year and longer maturities.

So I'll park the snide rejoinder I was about to quip and ask you, what is wrong with real rates of return being at their historic levels? Are you disturbed by the low rate of inflation making the nominal rates seem low?

 

[boedicca]

Is really surprising that the beneficiaries are Big Government and Big Government Cronies...at the expense of self-sufficient responsible people who live below their means in order to save for the future.

Hopenchange!

 

[Quantum Windbag]

Funny, I could have sworn that they pointed out that household investment income, aka retirement savings, plummeted. I guess that fact escaped your pro government, anti capitalist, perusal of the article.

OK, let me take it in a bit more detail this time. Investment income from equities, including unrealized capital gains, was fantastic last year, so I assume that you are referring to something else. As the article mentioned, low borrowing costs favor businesses and therefore one could conclude were at least partially responsible for the recent equity gains. Do you agree?

The "something else" would be fixed return investments. Historically these have yielded about 2.5--3% above the rate of inflation at best. The current yield on Treasury Inflation Protected Securities (TIPS) is about that range for ten year and longer maturities.

So I'll park the snide rejoinder I was about to quip and ask you, what is wrong with real rates of return being at their historic levels? Are you disturbed by the low rate of inflation making the nominal rates seem low?

What would the numbers have been like without QE? Do you think they might be different, and favor smaller investors, ie the middle class?

 

[Kimura]

Funny, I could have sworn that they pointed out that household investment income, aka retirement savings, plummeted. I guess that fact escaped your pro government, anti capitalist, perusal of the article.

OK, let me take it in a bit more detail this time. Investment income from equities, including unrealized capital gains, was fantastic last year, so I assume that you are referring to something else. As the article mentioned, low borrowing costs favor businesses and therefore one could conclude were at least partially responsible for the recent equity gains. Do you agree?

The "something else" would be fixed return investments. Historically these have yielded about 2.5--3% above the rate of inflation at best. The current yield on Treasury Inflation Protected Securities (TIPS) is about that range for ten year and longer maturities.

So I'll park the snide rejoinder I was about to quip and ask you, what is wrong with real rates of return being at their historic levels? Are you disturbed by the low rate of inflation making the nominal rates seem low?

What would the numbers have been like without QE? Do you think they might be different, and favor smaller investors, ie the middle class?

QE simply shifts total asset composition and the term structure of government sector liabilities so to speak. The reserves used to buy bonds just get recycled into the the general economy, similar to moving from a time to demand deposit.

This policy didn't work as intended, it actually was an EPIC FAIL, but it created a ton of intellectual masturbating among economists.

Here's what QE accomplished: holders of these assets saw a total increase in net worth as these assets doubled, but incomes have been reduced as the total amount of assets yields have been reduced. The total stock of wealth has risen, but income flows have been reduced, which is what's transpired with QE.

The whole concept was based around the idea that QE should stimulate investments and employment, but none of it ever worked for basic reasons. This should be a perfect realization for all that any recovery MUST be based around demand, not lower rates or an expansion of the monetary base. We need to have a better fiscal policy, not a monetary adjustment, which we should have learned with Japan and over two decades of ZIRP, deflation, and macro limbo. If the public doesn't consume, firms simply will not hire or invest.

 

[oldfart]

Funny, I could have sworn that they pointed out that household investment income, aka retirement savings, plummeted. I guess that fact escaped your pro government, anti capitalist, perusal of the article.

OK, let me take it in a bit more detail this time. Investment income from equities, including unrealized capital gains, was fantastic last year, so I assume that you are referring to something else. As the article mentioned, low borrowing costs favor businesses and therefore one could conclude were at least partially responsible for the recent equity gains. Do you agree?

The "something else" would be fixed return investments. Historically these have yielded about 2.5--3% above the rate of inflation at best. The current yield on Treasury Inflation Protected Securities (TIPS) is about that range for ten year and longer maturities.

So I'll park the snide rejoinder I was about to quip and ask you, what is wrong with real rates of return being at their historic levels? Are you disturbed by the low rate of inflation making the nominal rates seem low?

What would the numbers have been like without QE? Do you think they might be different, and favor smaller investors, ie the middle class?

I think QE was tried because monetary policy was up against the zero lower bound already (i.e. without QE, interest rates for savers would not have been significantly higher) and fiscal stimulus was off the table politically. And it's hard to effect expectations when you have no policy tools and are shooting blanks.

So in short, QE has not had any real impact on interest rates and only second order effects on growth. What it did do was flood a shaky financial system with enough liquidity to keep it from freezing up and provide an opportunity (which was not exploited) to provide loans to business.

There is a debate now about whether QE might encourage a bubble. I really don't see it. The premise is that a banking system that won't lend to good business customers will happily lend to speculators. While I believe that the greed and intelligence of Wall Street is such that this certainly could happen, the Fed has better tools to deal with it (and I think Janet Yellin is smart enough to use them) such as margin requirements.

As I commented, small savers are actually in a pretty good position. They can get an inflation-adjusted yield of 2%+ on a highly liquid and riskless investment. Their money in real terms will double about every 30 years. There are very few long periods in American economic history where better yields were experienced on fixed return investments.