Income Inequality and Monetary Policy

[pinkwaxfish]

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.

 

[Wiseacre]

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.

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.

 

[pinkwaxfish]

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.

 

[akelch]

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.

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.

 

[Wiseacre]

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.

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.

 

[pinkwaxfish]

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.

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.

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.

 

[Wiseacre]

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.

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.

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.

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.

 

[akelch]

Enjoying the civil debate......a welcome relief from other discussions.

 

[akelch]

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?

 

[pinkwaxfish]

"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.

 

[pinkwaxfish]

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?

Yes, so long as their investments do alright. To the point I'm arguing about monetary policy, I'd note that most every country in the world is doing what the US is doing (lots of money printing from the central bank).

 

[EdwardBaiamonte]

What I've noticed is that the big spike in income inequality matches this easy money policy quite closely.

Easy money has always been a liberal policy. Remember the Gross of Gold Speech or how Bernie Sanders always wants easy money to decrease unemployment.

Easy money means inflation, inflation favors those in debt which means mostly poor folks. Sorry

Real Sources of inequality:

1) with no fault divorce, feminism, abortion, and welfare liberals have destroyed the American family and created millions of single mothers living on the liberal dole and also millions of young men with no need to work!! They are inequal


2) at the same time you have liberal unions shipping 30 million jobs off shore with their high prices. This creates inequality too!

3) and at the same time you have huge liberal debt so the Chinese and others can buy that debt with their dollars rather than buy our products.This creates inequality too!


4) oh and lets not forget that liberals let in 10 million illegals to take jobs that would have gone to Americans.This creates inequality too!


2) The average number of people with jobs in a top income quintile household is two, while a majority of bottom income quintile households have no one employed. family destruction create inequality

3) If there are two adult income earners in a household who are married, their incomes are combined on tax forms. This is very common among top quintile income households.

4) The lowest quintile households, however, include a lot more single-person households, or two unmarried working adults living together, and sharing expenses, but reporting their incomes to the IRS as if they were two separate households.


5) 75% to 80% of the actual income for bottom quintile households is transfer payments (aka “welfare&#8221 that are not included in IRS income data. This makes inequality look worse than it is


(6) The IRS warns against comparisons of pre-1987 and post-1987 income data due to significant changes in the definition of adjusted gross income (AGI) that made top quintile households appear to have large reported income gains, when in fact there was no change to their income at all.

7) In addition to the AGI changes, large marginal tax rate reductions during the Reagan Administration caused another large change in tax reporting. This reporting change appeared to boost top quintile income, when in fact their incomes had not changed.

8) Lastly, income for the bottom quintile does not include welfare entitlement tranfer payments making them seem far poorer than they actually are.

Finally, even improved income measures fail to capture important components of economic well-being such as consumed wealth, the ownership of durables such as houses or cars, or the insurance value of government programs. For example, consider the case of a retired couple who own their home outright and who live off of savings. Clearly, their income will not reflect their material well-being.

 

[akelch]

What I've noticed is that the big spike in income inequality matches this easy money policy quite closely.

Easy money has always been a liberal policy. Remember the Gross of Gold Speech or how Bernie Sanders always wants easy money to decrease unemployment.

Easy money means inflation, inflation favors those in debt which means mostly poor folks. Sorry

Sorry... But I would disagree. What I save in my loans (if I have any) I spend in a higher gas and grocery bill every week. And with the economy stagnant at best, I see no increase in my pay.

 

[akelch]

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?

Yes, so long as their investments do alright. To the point I'm arguing about monetary policy, I'd note that most every country in the world is doing what the US is doing (lots of money printing from the central bank).

Side question:
Have you watched any of Ben Still's videos....Money Masters or Secrets of Oz? I would be curious to hear your take on his solution to our Monetary system and National Debt. I personally think it sounds reasonable but I am not a professional economist.

 

[EdwardBaiamonte]

Sorry... But I would disagree.

you cant actually disagree with the traditional liberal support for easy money. William Jennings Bryant was real as was his famous speech, as is Bernie Sanders. In fact the mandate of the Fed is to use easy money to reduce unemployment and so inequality.

What I save in my loans (if I have any) I spend in a higher gas and grocery bill every week. And with the economy stagnant at best, I see no increase in my pay.

Regardless of your situation which is not at issue here anyway, easy money means inflation, inflation favors those in debt which means mostly poor folks. Now you know why liberals have always supported easy money through monetary and fiscal policy, and any other way they can think of.

 

[akelch]

Sorry... But I would disagree.

you cant actually disagree with the traditional liberal support for easy money. William Jennings Bryant was real as was his famous speech, as is Bernie Sanders. In fact the mandate of the Fed is to use easy money to reduce unemployment and so inequality.

Your right. I do not disagree with that.

What I save in my loans (if I have any) I spend in a higher gas and grocery bill every week. And with the economy stagnant at best, I see no increase in my pay.

Regardless of your situation which is not at issue here anyway, easy money means inflation, inflation favors those in debt which means mostly poor folks. Now you know why liberals have always supported easy money through monetary and fiscal policy, and any other way they can think of. [/quote]

I understand what you mean...I was thinking about the responsible poor that live on tight budgets and don't use credit cards for everything.

 

[EdwardBaiamonte]

Sorry... But I would disagree.

you cant actually disagree with the traditional liberal support for easy money. William Jennings Bryant was real as was his famous speech, as is Bernie Sanders. In fact the mandate of the Fed is to use easy money to reduce unemployment and so inequality.

Your right. I do not disagree with that.

What I save in my loans (if I have any) I spend in a higher gas and grocery bill every week. And with the economy stagnant at best, I see no increase in my pay.

Regardless of your situation which is not at issue here anyway, easy money means inflation, inflation favors those in debt which means mostly poor folks. Now you know why liberals have always supported easy money through monetary and fiscal policy, and any other way they can think of.

I understand what you mean...I was thinking about the responsible poor that live on tight budgets and don't use credit cards for everything.[/QUOTE]

well its not clear how they would be affected by inflation. Those in debt are helped most. If not in debt than inflation will be a slight negative I suppose since it distorts price signals from the market place and then causes many problems.

I suggest you read and study "Free to Choose" to get some basics down. Economics is too complicated to start speculating on your own

 

[pinkwaxfish]

Yes inflation can reduce the real amount of debt someone owes, but it's wrong to say inflation is helpful to poor people. Poor people spend most of their income. If everything they're buying is going up in price, they're getting hurt.

In contrast, rich people own the assets that are appreciating in value.

And I don't care what Bernie Sanders is setting out to achieve--in my experience, if someone in government is trying to help someone, they usually do just the opposite.

 

[Toro]

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.

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.

I think what you think is mistaken.

If excess money flows into asset markets instead of consumer markets, asset prices rise above what would otherwise be expected. That would benefit the wealthiest the most.

Rising asset prices is expressed policy of the Fed.

 

[akelch]

well its not clear how they would be affected by inflation. Those in debt are helped most. If not in debt than inflation will be a slight negative I suppose since it distorts price signals from the market place and then causes many problems.

I suggest you read and study "Free to Choose" to get some basics down. Economics is too complicated to start speculating on your own

What do you mean "inflation distorts price signals"? I always thought it was the artificial manipulation of the interest rates of the FED.