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Fed Policies Turn the Wealth Gap Into a Chasm

Published 05/01/2024, 05:31 AM

In an op-ed for the Washington Post on November 5, 2010, Ben Bernanke did a victory lap, praising the Fed’s efforts in stemming the financial crisis. In the article, he discusses how QE and other Fed policies eased financial conditions, bolstering investor confidence. He wrote:

And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.

If Bernanke wants credit for his Fed policies that boosted stock prices, he should also take responsibility for the costs. Those same monetary policies, which have been repeated many times since 2008, have played an important role in exacerbating the wealth gap in America. Accordingly, we should question his use of the term “virtuous circle” to describe how modern monetary policy works.

Graphing The Wealth Gap

Inspiration for this article comes from in a recent article.

Before discussing the Fed’s role in widening the wealth gap, we put context to the problem. The graphs and quotes below are from the article.

Wealth Distribution

Percentage Of Americans With No Savings

Why Americans Cant Save Money

For 80% of Americans, the end game of too much debt, an aging demographic, and the push for “socialistic policies” is the continued extraction of wealth from the “middle class” to the “rich.”

Trickledown Economics and Monetary Policy

Trickledown economics” was coined by John Kenneth Galbreth in 1982 and made famous by President Ronald Reagan. The expression is another name for supply-side economic policy. The policy theorizes that the populace benefits when government interference in the economy is minimal. For example, lower taxes and reduced regulations should promote economic activity and prosperity for the entire populace.

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The theory is logical, but politicians have done a poor job enacting it.

In 2008, the Fed took a page from the supply-side economic playbook to stem the financial crisis. From that point forward, the Fed’s modus operandi has been trickle-down monetary policies.

Does QE Trickle Down?

Ben Bernanke wasn’t the first Fed Chair or central banker to use QE. But he did make it a household name and seemingly a permanent tool in the Fed’s toolbox.

QE has two significant impacts on the financial markets and the banking system.

First, removing assets from financial markets alters the supply-demand balance in favor of higher prices. Additionally, when investors believe QE is positive for asset prices, as is the case, demand increases, which provides even more impetus for higher asset prices.

Second, the Fed buys bonds from the banks with reserves. Reserves are a form of money that is only viable in transactions between banks or with the Fed. Reserves support bank loans and asset purchases. Therefore, when more reserves are available, banks can more easily make loans and buy assets. Further, some bank loans, specifically margin or repo loans, generate additional demand for assets.

The scatter plot below shows the positive correlation between the one-year percentage change in margin debt and the Fed’s balance sheet.Fed Balance Sheet And Change In Margin-Debt

Higher stock and asset prices coupled with more leverage is a winning combination for investors.

The Graph of All Graphs

With that explanation of how trickledown monetary policy bolsters asset prices to accomplish the Fed’s goals, we share a graph explaining why the Fed’s policies widen the wealth gap.The-S&P 500 Handily Beats Inflation

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Since 1990, the dollar’s purchasing power has declined by over 50%. At the same time, the S&P 500 has risen by over 1,300%. Those with a sufficient portfolio of stocks could more than offset the decline in the dollar’s purchasing power. Those without stocks are left behind.

Further, it doesn’t help that real household income for the lowest 20% has been unchanged since 1990. Over the same period, they have risen by about 50% for those in the upper 20% of incomes.Real Change To Household IncomeAverage Salary For College Graduates

Decline In Purchasing Powera

Share Of Wealth

The wealthier have seen their wages and the value of their financial assets rise much more than inflation. At the same time, the lower wealth and income classes have seen marginal real income gains at best and little in the way of benefits from rising stock prices.

The two graphs below show how the percentage of the wealth owned by the top 1% and the change in the S&P 500 are well correlated.Percentage Of Wealth-Top-1% vs S&P 500Change In Wealth of Top 1% and S&P 500

On the contrary, the aggregate wealth of much of the bottom half of the nation, as a percentage of total wealth, has a negative relationship with the S&P 500. Change In Wealth For Lower 10-50% Vs S&P 5001-Yr Change in Wealth of Lower 10-50% vs S&P 500

There is a straightforward explanation as to why the correlation between the share of the wealth of the rich versus that of the rest of the population has opposing correlations to the S&P 500. 10% of the population holds nearly 90% of the stocks.Share Of Stock Holdings By Wealth

Trickledown Monetary Policy Handicaps Capitalism

QE and other Fed policies may help the economy on the margin and save some jobs. However, there is little evidence that, over the longer term, the economic benefits increase the prosperity of most of the populace. Further, as we share, there is compelling evidence it further exacerbates the wealth gap.

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Capitalism has proven to be the best economic system for growing the wealth of the entire population. A key tenant of capitalism promises financial incentives for those who work hard and have unique skill sets. That incentive results in productivity gains, which benefit economic growth and allow for higher wages and a broad distribution of wealth.

Unfortunately, when financial incentives are not only a function of capitalism but also an offshoot of government and Fed policies, the benefits of capitalism are reduced.

For example, Elon Musk is extraordinarily wealthy and should be rewarded handsomely for everything he has accomplished. However, how much of his wealth is based on his hard work and ingenuity, and how much was gifted to him by the Fed via their stock-boosting monetary policies. While slightly off-topic, we should also question how much of his wealth is attributable to government subsidies for electric vehicles.

Summary

President Biden’s poll numbers on economic confidence are poor despite robust economic growth and a historically low unemployment rate. While there are many reasons for the odd divergence, we think it’s fair to say that the benefits of the post-pandemic growth spurt have disproportionately accrued to those in higher-income classes and those with stocks. Those left behind, representing a large majority of the population, are not confident in Biden’s handling of the economy and suffer from higher prices.

Most Americans continue to see wages that cannot combat inflation and have little to no wealth invested in the stock market. Can you blame them for lacking confidence?

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QE may have served as an emergency way to add bank reserves to the system and boost confidence. However, its continued use, even during economic prosperity periods, only makes the wealth gap wider.

Latest comments

Fed is printing money for the rich. Literally. And they don't even have to pay taxes on it.
Preach it
Probably every currency ever created lost purchasing power, because people who sell stuff, like corporations these days, add their losses back to the consumer, when they can get away with it anyway. That makes sure they never lose money, and most other people never make money. They raise the minimum wage, and the corporations charge that right back to the consumers. It has zero to do with the President or the government. Sometimes, it is necessary for corporations to do this. Other times, they think people are making more money, so they raise prices because they think people can pay it. When a recession starts, normally, they can't really do this, as they don't want to cause the entire system to implode in on itself. If there is an extraordinary event, like oil goes up by 1000 percent, like back between 1965 to 1980, they may be forced to keep doing it even when the economy is bad, which could cause what everyone talks about these days, stagflation. Economists these days are just going for the tweets, and don't really know anything about economics, so they like to spout stupid stuff that doesn't make any sense, stagflation, bla, bla, bla. This has never changed. Prices have been doubling every 20 to 30 years, forever. Purchasing power decreases for the currency. Assets are priced in the currency, so their value must rise. John D. Rockefeller was much richer than the rich these days from an inflationary standpoint. People think the rich poor gap is worse these days because the returns compound. In 20 to 30 years, the most rich guy will like have, guess what... 100 trillion dollars. Yes, that is correct. That is the likely outcome anyway. Minimum wage will likely be around 35 dollars and hour, and they will be scraping by barely with enough to eat. Sounds just like today...
Bernanke's policies started out as what was learned from Fed policies during the "Great Contraction 1929 - 1933" The Fed believing that the depression of the time was the result of over stimulation of the economy by the Benjamin Strong New York branch of the Fed. The Fed started in 1927 to pull money out of the economy. After the 1929 crash kept the stringent monetary policy enforce. What the criticism should be is that through extremely low interest rates and a policy goal of 2% inflation has caused the above wealth gap of the middle class.
Great analysis!
I hate powell. pump the market, dump the market. pick one because I'm tired of the double talk.
no wonder we have more enemies overseas as our QE exports inflation via the US$.
Hi
the fed? they mean inflation and bidenomics
you can only say you're economically illiterate in so many ways.
1
Yamaha
Trickle Down was popularized by comedic journalist Will Rogers in 1930: . Here’s the full quote: This election was lost four and six years ago, not this year. They [Republicans] didn’t start thinking of the old common fellow till just as they started out on the election tour. The money was all appropriated for the top in the hopes that it would trickle down to the needy. Mr. Hoover was an engineer. He knew that water trickles down. Put it uphill and let it go and it will reach the driest little spot. But he didn’t know that money trickled up. Give it to the people at the bottom and the people at the top will have it before night, anyhow. But it will at least have passed through the poor fellows hands. They saved the big banks, but the little ones went up the flue. Here’s the full quote: This election was lost four and six years ago, not this year. They [Republicans] didn’t start thinking of the old common fellow till just as they started out on the election tour. ....
Salut
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