Now that the Bank of England has upped the QE ante by another £50 billion yet again (but what's a few tens of billions of pounds between good friends, right?), I got to wondering who exactly it is that is benefitting from all of the actions by the world's central bankers? We know who it isn't:
1.) It isn't the economy; with the world standing on the precipice of the next recession because economic growth rates have been falling steadily since their 2010 post-recessional peak, no one is benefitting from a robust import or export market.
2.) It isn't Main Street's pension plans; with many pension plans, both private and public, seriously underfunded because of a prolonged period of near-zero interest rates, we'll be lucky to collect anything reasonable when we hit the magic age. Corporations are being forced to top-up their pension shortfalls or, like General Motors, are forcing pension recipients to take the risk by changing their pension schemes from defined benefit to defined contribution.
3.) It isn't the unemployed; with unemployment in the Eurozone hitting a new record of 11.1 percent and the American unemployment rate stuck firmly over 8 percent, we certainly cannot say that QE has impacted the employment picture.
So, if it's not these three groups that are benefitting, who is? Fortunately, I think I may have found the answer!
Let's open with the rogues gallery:
It's always nice to put a face to a name, isn't it? In case you weren't aware, these three gentlemen head the Bank of England, one of the world's most influential central banks.
Here is a chart from the 2012 Annual Report of the Bank of England that tells us the tale of who benefits from the easing fun'n'games:
Deputy Governor Mr. Bean (and again, not THAT Mr. Bean) saw the size of his pension cash equivalent rise by £1,035,200 from the end of February 2011 to the end of February 2012, an increase of 41.1 percent on a year-over-year basis. Not bad for a one year rate of return, is it? The cash equivalent value of of his pension is now £3,555,600 ($5.582 million) and he will collect an annual pension of £101,900 ($159,983) upon his retirement. Mr. Tucker saw the size of his pension cash equivalent rise by £1,350,000 over the same time frame, an increase of "only" 36.9 percent on a year-over-year basis. Poor sod. The cash equivalent of his pension now sits at £5,006,600 ($7.86 million) and he will collect an annual pension of £142,000 ($222,940) upon his retirement.
How did the Bank's pension plan get such a good rate of return on behalf of these two gentlemen? The plan is nearly 100 percent invested in gilts (the equivalent of Treasuries). As yields drop (due to all of that easing), the price of gilts rises, pushing up the asset value of the Bank's pension plan. Sources at the Bank of England told the Telegraph that the largest part of the increase in the value of the pension plan was due to the sharp fall in gilt yields and the resulting rise in the price of said gilts. Isn't that just a wonderful side benefit of being a central banker? Your actions can impact the ultimate value of your pension! How cool is that?
I know that some of you will ask, why, if the pension plans at the Bank of England have risen in value as bond prices rose, do we find that pension plans in the private sector are finding themselves seriously underfunded? There's a very simple answer; private sector pension plans are almost never fully invested in government bonds of any type, rather, over recent years, they tended to invest more heavily in equities in a desperate search for a reasonable yield that would enable them to balance their liabilities with their assets.
I hope that you enjoyed reading this posting as much as I enjoyed typing it! I know that I will sleep so much better tonight finally knowing that there are at least two people in the world that have directly benefitted from QE. And, just in case you had forgotten, it was the infamous Mr. Bean that admonished whinging seniors back in 2010 that they "...shouldn't necessarily expect to be able to live just off their incomes in times when interest rates are low. It may make sense for them to eat into their capital a bit." Well spoken, sir. After all, how can we expect the economy to grow if consumers don't spend, spend, spend until we pass out in pain.