A couple of days ago I received my statement from Royal Mail plc, confirming my allocation of 227 shares at the offer price of £3.30 each, therefore costing me £749.10. At the time of writing the share price is at £5.14 (although it was at £5.31 a few hours ago), equivalent to a value for my 227 shares of £1,166.78.

So I am sitting on a paper profit of over £400, and the Government is under fire for undervaluing Royal Mail, from everyone from the trades’ unions, to the Labour Party, to the Commons Business Select Committee to even some stockbrokers and to 51% of the general public. In response, Vince Cable, the Business Secretary, has suggested that everyone calms down a bit and waits to see what the price is in a couple of months.

But what if the issue was not mis-priced at all? What if the short-term profits were intended all along?
Remember that this is a Government still in the business of quantitative easing (QE). A process described by the Bank of England thus:

…the asset purchase programme is not about giving money to banks. Rather, the policy is designed to circumvent the banking system. The Bank of England electronically creates new money and uses it to purchase gilts from private investors such as pension funds and insurance companies. These investors typically do not want to hold on to this money, because it yields a low return. So they tend to use it to purchase other assets, such as corporate bonds and shares. That lowers longer-term borrowing costs and encourages the issuance of new equities and bonds to stimulate spending and keep inflation on track to meet the government’s target.

However, the critics of QE have become increasingly loud. It is untested, no one is quite sure what the long term consequences will be of the amounts that have been invested in this way and many of the short term benefits appear to have been benefitting the wrong people once the initial emergency receded. Perhaps partly as a result of these criticisms, there has been no new QE since July 2012.

Alternatives have increasingly been tossed around between economists and other commentators. One of which is the notion of helicopter money. Drop it from the skies, cut out the banks, and the effects will be more immediate, its supporters say.

If the target of QE is investors, and the aim of the policy is to make them invest in corporate bonds and shares rather than gilts, in order to encourage companies to raise more money in the markets to fund expansion, could the paper profit of £1.7 billion (compared to the £375 billion of QE so far) be a micro-experiment in a different type of QE?

There is other evidence to support this. At the end of 2011, Spencer Dale, the Bank’s chief economist, gave a speech about flaws in the QE approach:

I have considerable sympathy for the argument that the MPC’s asset purchase programme provides relatively limited direct support to SMEs (ie small and medium sized businesses). It will provide indirect support by stimulating spending and activity in our economy. But most SMEs are heavily dependent on bank credit and so not able to benefit directly from the increased demand for corporate debt and equity triggered by our asset purchases. But therein lies the problem. The majority of SMEs do not issue marketable securities that the MPC could purchase…..Instead, we need to find ways to incentivise the banks to lend more to SMEs.

So would a few hundred pounds each help SMEs? Well, some of the owners will have applied for shares and benefitted directly, as they are likely to be in the more financially aware section of the public. This may also explain the decision to set a minimum stake of £750 in the Royal Mail offer. Others may benefit from any increase in consumer spending that results from people spending their winnings. The longer term stimulus effect the Bank is trying to produce will depend more on the actions of the institutional investors who bought 70% of the offering.

One of the other criticisms of QE is the impact on interest rates, although the size of the impact is difficult to determine and those who complain about the implications on annuity rates, for instance, tend to ignore the stoking up of asset prices it is also likely to have achieved. However Charlie Bean, one of the Bank’s deputy governors, gave some support to this criticism in May 2012:

A long period of abnormal monetary policy strains social support for a central bank’s actions. Changes in policy always have distributional consequences, shifting income from savers to borrowers or vice versa. That is an unavoidable by-product, rather than the aim, of policy. Society usually accepts such consequences because they are transitory, and what one loses on the swings today, one may gain on the roundabouts tomorrow. But the sustained period of very low interest rates has, quite reasonably, prompted complaints from savers who feel they are bearing an unfair burden.

So any vehicle for putting money in people’s hands without affecting interest rates would, we assume, at least get a fair hearing at the Bank.

When QE appears to have run out of steam, and the “Help to Buy” home ownership schemes are causing increasing unease about the property bubble they seem almost certain to create, should we expect to see further privatisations on the Royal Mail model if the recovery stalls? It wouldn’t surprise me in the least.

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