Hamish McRae: Inequality is price we pay for easy money

If you look at property worldwide, there has been a similar if slightly more muted boom. According to the Global Property Guide, prices last year rose in 31 out of 41 countries in real terms. In Ireland, they were up nearly 17%, in the UK more than 7% and in the US almost 4%.

You can rarely prove direct cause and consequence in economics but the main driver of this asset boom must be cheap money.

The central banks have printed industrial quantities of the stuff, which has not been mopped up (as many predicted) by higher consumer prices.

These have been held down by weak demand across much of the developed world and most recently by the fall in the oil price. Instead the money has gone into assets.

And it seems easy money will continue. Bank of England chief economist Andy Haldane said last week that UK interest rates were as likely to go down as up.

US financial markets were buoyed by the signal from Federal Reserve chairman Janet Yellen that the Fed would be very cautious about the pace at which it increases rates.

In Europe, with the start of the ECB’s quantitative easing, a lot of interest rates have actually gone negative.

This policy of ultra-easy money has been widely welcomed from the political Left as well as the Right. Governments are naturally delighted by the fact they can borrow more cheaply than ever before.

Employers’ organisations have warned against any premature rise in rates. The TUC has welcomed the continued freeze on rates.

If easy money policies have been good for holders of assets, they have been dreadful for equality.

Much of the concern about rising inequality has been about incomes rather than wealth. Figures are contested, as you might expect given that this is a political hot potato.

The latest UK data seem to show that over the past five years there has, if anything, been a slight decrease in income inequality, particularly once you allow for taxation.

What you cannot contest, however, is that there has been a massive increase in inequality of wealth over the past five years just about everywhere.

The larger someone’s house and the greater their pension pot or their Isa, the more they will have gained relative to people who don’t yet own a home or are just starting out on saving for a pension.

In economic terms, you can argue that the policy has been a success in that it has helped crank up a recovery in the US and UK and may now be helping the eurozone to grow a bit faster.

It is true, too, that reasonably strong asset prices are better than collapsing ones. Share-price crashes destroy commercial confidence and undermine investment plans while house-price crashes can bring misery to homebuyers.

But a share boom built on rising profits and better prospects is very different to one based on hot money that has nowhere else to go.

Our present share and house booms have both elements, and the positive aspects should be welcomed.

But socially the booms are a disaster. We catch glimpses of an awareness of the social costs in our own Government’s response — the help-to-buy plan, the special terms for older savers and so on.

But this is pecking away at the corners of the problem. Better to have reasonable stability in house prices than a raft of special measures that tackle the symptoms rather than the cause.

What will happen next? Haldane, who is one of the most thoughtful and sensible people in the world of economics, may just have been seeking to remind everyone that there are a lot of risks around — risks that the markets have been rather ignoring.

He stressed this was an individual view rather than that of the monetary policy committee.

Yellen last week sought to be even-handed in her outlook for US rates, leaving open the possibility of a rise in June but equally indicating that it might come later.

But the more general point stands that if central banks retain ultra-easy money policies for the foreseeable future, expect wealth inequality to go on rising not just here but throughout the developed world.