Income Inequality and Monetary Policy

Discussion in 'Economy' started by pinkwaxfish, Dec 1, 2012.

  1. pinkwaxfish
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    pinkwaxfish Rookie

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    Something that I don't think gets enough attention. The huge spike in income inequality in the US closely corresponds to a huge shift in US monetary policy.

    Starting with Greenspan, the Federal Reserve underwent a much more expansionist monetary policy in the 80s, and got really aggressive after the 1987 crash. They never really stopped. Things got absurd following the 2001 recession (0% and negative interest rates made their first appearance then). Easy money slowed a bit in 2003-2004 but then went full force when the housing bubble burst, and now, with quantitative easing, the Fed is creating so much new money we are in uncharted waters.

    What I've noticed is that the big spike in income inequality matches this easy money policy quite closely. And it makes sense that it would. When the Fed creates new money, they do so through the banks, who then can either:
    a) invest the new money in assets
    b) loan out the new money

    Either a or b results in greater income inequality. If you are an asset holder, the value of your assets increases when new money gets created. If you are not an asset holder, the only way you can become one is through credit, and new credit enriches those who have the money to lend.

    With all this hubbub about the 1% these past few years, I'm surprised this has never come up. Could it be the reason the rich are getting richer is because the Fed is enriching them and nobody else? I'd be curious to know what others think.
     
  2. Wiseacre
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    Wiseacre Retired USAF Chief Supporting Member

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    I think you are mistaken, when new money is created the value of your assets goes down, not up. What really drives income inequality is spurts in economic growth, that's when the rich really get richer. Conversely, when downturns hit that's when the rich guys take the biggest hit financially.
     
  3. pinkwaxfish
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    pinkwaxfish Rookie

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    I suppose the value of some assets (like dollars you own) goes down, but the value of most assets (stocks, bonds, a house, your car, your business, other real estate, commodities) all go up when new money enters the economy and causes inflation.
     
  4. akelch
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    akelch Senior Member

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    Your exactly right about the banking system. Though when new money is pumped into the system it takes about 2 to 5 years for it to effect inflation. And vs versa, it takes about 2 to 5 years to devalue currency when money is removed from the system.
    The banks know this and they are at the top of the food chain so it never effect them. So they take the easy money and "invest it" into assets...thus they are protected from inflation...and they make some good money off of it.

    On the down turn...when you remove money from the system it is done through the banking system ...the Fed to be precise. They raise the interest rate and call in their loans. So the rich (if they pay off their loans before hand) are protected.

    Sad part....the little guy at the end (us) is always screwed.
     
  5. Wiseacre
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    Wiseacre Retired USAF Chief Supporting Member

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    We've been printing money out the gazoo for over 3 years, with not much appreciation in bonds, houses, cars, or real estate. Stocks go up for other reasons, the market likes QE but I wouldn't say that's the only reason. Haven't had any inflation either since the Fed has been printing gobs of money.
     
  6. pinkwaxfish
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    pinkwaxfish Rookie

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    Yes, this is all true, and I think it has to do with equivalent forces in the opposite direction, namely, destruction of credit. When someone defaults on a mortgage or a credit card, or a business goes under and leaves bondholders in the lurch, or anyone else who owes money can't repay it, then money is removed from the system. The Fed has been aggressive in all its actions in attempts to counteract all this because most economists agree that the shrinking money supply that results from credit destruction is bad for economic growth.

    And I think the resulting declines in asset prices that would accompany all this destruction of credit would have brought the net worths of many at the very top back down from the stratosphere. But the Fed's intervention protected those who owned the most stuff.

    In other words, the bad economy we've had since 2007 would have brought down everybody, including the super rich, but the Fed's actions helped the super rich stay that way.
     
  7. Wiseacre
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    Wiseacre Retired USAF Chief Supporting Member

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    Dunno about that, a lot of that new money is sitting on the sidelines, has been for 3 years. What's helped the super rich is the ability of American businesses to adapt to changing conditions and turn a profit by downsizing everything, including jobs. Which woulda happened anyway, with or without QE.
     
  8. akelch
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    akelch Senior Member

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    Enjoying the civil debate......a welcome relief from other discussions.
     
  9. akelch
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    akelch Senior Member

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    Question:
    Most wealthy individuals diversify their assets by investing overseas and into precious metals like gold and silver. Would this not allow them to retain or increase their wealth regardless which way the US economy goes?
     
    Last edited: Dec 1, 2012
  10. pinkwaxfish
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    pinkwaxfish Rookie

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    "a lot of that new money is sitting on the sidelines, has been for 3 years."

    Agreed, and I think that, as was the case in 2005-2006, at even the slightest hint of economic good health, there's a chance that asset prices go bonkers. I remember in those years everyone was freaked out about the skyrocketing cost of gas and the increasing cost of food, and were blaming demand and weather and wars on both, without noticing that copper, gold, silver, cotton, steel, lumber, and everything else had also blown up. I speculate that the Fed's activities have held asset prices from falling, and that there is a perpetual chance on the horizon for speculators to cause havoc in all the markets because there's lots of loose cash.


    What's helped the super rich is the ability of American businesses to adapt to changing conditions and turn a profit by downsizing everything, including jobs. Which woulda happened anyway, with or without QE.

    I can agree that that has happened, but it doesn't make sense to me that it would result in such a surge in the net worth of those at the very top relative to everyone else. Some of the super-rich, like Jeff Bezos, got their money through clear, easily seen business growth. But what about the hedge funds and private equity companies we hear about that make so much money for their managers and their clients? When I hear about how Mitt Romney made $250 million by purchasing companies, leveraging them to the hilt with debt, and letting them sink or swim, either growing to match the debt or going into default, I can't help but think that it's a bunch of nonsense that wouldn't happen unless there was lots of loose money being lent and making it possible.
     

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