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Central bankers will tell you that the unprecedented monetary easing of the past several years spared us the pain of costly "haircuts" to the money of a wide swath of asset holders. Pimco's Bill Gross will tell you it's simply not true.
In his latest commentary, the famed founder of Pacific Investment Management Co. LLC – the world's biggest bond investor – said that while near-zero interest rate policies and quantitative easing have succeeded in averting global financial-system and economic meltdown, it has come at a substantial cost. The continuing rescue erodes the real value of the savings of everyday investors with each passing day.
That's because the efforts by most developed-world central banks have pushed interest rates below the rate of inflation, and kept them there. With savings earning lower returns than inflation, the value of those savings in real terms has been dropping.
"These haircuts are hidden forms of taxes that reduce an investor's purchasing power as manipulated interest rates lag inflation. In the process, governments and their central banks theoretically reduce real debt levels as well as the excessive liabilities of levered corporations and households," he wrote. "The government's gain, however, is the saver's loss."
He calculated that "investors are being hair-cutted by at least 200 basis points" (two percentage points) on their annual returns on savings in the U.S., compared with what they would be getting if the Federal Reserve Board didn't have a QE policy in place and the Fed's policy interest rate was close to the rate of inflation.
Mr. Gross's comments echo those raised in a news documentary aired this week on CBC Television, The Monarchs of Money. While this report, as many economic observers have pointed out, was deeply flawed, it did have one strong underlying point that even the central-bank architects of the current easy monetary policies don't deny: To save the world, they sacrificed savings.
On a basic level, that's blindingly obvious. The whole logic behind low interest rates is to discourage savings and encourage spending; that's why it's considered economically stimulative.
But these two reports, coming on the heels of one another, reflect the growing unease among citizens on both sides of the border about the cost they are bearing to sustain these policies, and an impatience over how much longer it will last. Voices are increasingly questioning the wisdom of monetary policies that seem to run counter to the best interests of individual citizens – and, ultimately, the longer-term health of the economy.
Indeed, it's hard not to sense an unhealthy dose of hypocrisy in the Bank of Canada's persistent finger-wagging about Canada's bloated household debts. The central bank has repeatedly scolded Canadians over the debt-fuelled spending and low saving rates that the bank's own monetary policies continue to engender. The bank wants people to spend less and save more, yet its interest rates punish them every time they do. If the people want to wag their fingers in the direction of the central bankers for a change, they've paid for the right.
David Parkinson is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow him on Twitter at @parkinsonglobe.
David Parkinson