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Thread: Rising income inequality

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    Rising income inequality

    There's a website I visit rarely, but it has some really good information on it. It's called Mises Institute. It's an economic website. Anyway, they recently wrote a fabulous article.

    https://mises.org/wire/fed-has-given-get-ready-more-qe

    Here's a key portion about wealth inequality and how it is not a natural occurance of a market but rather, being caused by really low interest rates in the name of preserving assets. IOW, the FED is taking care of rich folks that own lots of stocks, etc.

    Rising Inequality

    Earlier this week, finance researcher Karen Petrou explained the problem that comes from ultra-low rates which lead to yield-chasing for the wealthy:

    When interest rates are ultra-low, wealthy households with asset managers acting on their behalf can play the stock market to beat zero or even negative returns. We’ve shown in several recent blog posts how wide the wealth inequality gap is and how disparate wealth sources help to make it so. However, even where low-and-moderate income households can get into the market, their investment advisers should not and often cannot chase yields. As a result, ultra-low rates mean negligible or even negative return.

    Thus, ordinary people are faced with rising asset prices — driven in part by the Fed's balance sheet purchases — while also finding themselves unable to save in way that keeps up with inflation.

    Meanwhile, the wealthy reap the most benefits from Fed policy as they're able to more effectively engage in yield-chasing.

    Ordinary people get the short end of the stick from Fed policy in other ways. Petrou continues:

    Historically, pension funds and insurance companies have invested only in the safest assets. These are now in scarce supply due in large part to QE andcomparable programs by central banks around the world . Pension plans and life-insurance companies increasingly have two terrible choices: to play it safe and become increasingly unable to honor benefit obligations or to make big bets and hope for the best. Under-funded pension plans are so great a concern in the U.S. that the agency established to protect pensioners from this risk, the Pension Benefit Guaranty Corporation, faces its own financial challenges . Yield-chasing life insurers are also a prime source of potential systemic risk.

    Middle class people who have been told for decades to rely on pensions are now imperiled by Fed policy as well.

    Not surprisingly, this has led to rising income inequality. While some free-market advocates tend to dismiss inequality as an unimportant metric, this is not a good approach when we're talking about public policy. Fed policy — and resulting inequality — does not reflect natural trends arising from market transactions. Monetary policy is something imposed on markets by policymakers. And that's what's going on when we witness rising inequality due to the Fed's monetary policy.

    This has been going on since the late 1980s when Alan Greenspan relentlessly opened the easy-money spigot to spur economic growth throughout the 1990s. But, there were problems that resulted, as noted by Daniell DiMartino-Booth:

    [A]t the National Association for Business Economics recent annual conference, University of California-Berkeley economics professor Gabriel Zucman presented his findings on the widening divide between the “haves” and “have nots” in the U.S. His conclusion: “Both surveys and tax data show that wealth inequality has increased dramatically since the 1980s, with a top 1 percent wealth share around 40 percent in 2016 vs. 25 – 30 percent in the 1980s.” Zucman also noted that increased wealth concentration has become a global phenomenon, albeit one that is trickier to monitor given the globalization and increased opacity of the financial system.

    Defenders of ultra-low policy tend to claim low rates aren't the real culprit here because even middle-class buyers can take advantage of easy money.
    But experience suggests this hasn't been the case. Part of the problem is that banking regulations handed down by the Fed and other federal regulators make loaning to smaller enterprises and lower-income households less attractive. Writes Petrou:

    But, wasn’t there a burst of lower-rate mortgage refinancings that allowed households to reduce their debt burden and thus accumulate wealth? Did low rates allow higher-risk households at least to reduce their mortgage debt through refinancings? Again, low-and-moderate income households were left behind. They continued to seek refis after the financial crisis ebbed, but subprime borrowers current on their loans regardless of loan-to-value (LTV) ratios were less likely than prime or super-prime borrowers to receive refi loans even though higher-scored borrowers may or may not have been current and lower rates enhance repayment potential.

    The overall effect suggests the accelerating reliance on quantitative easing and near-zero interest rates has been great for some Wall Street hedge fund managers — but for those at the low end of the lending and saving apparatus, things are even more constraining than ever. It's hard to get a loan, and it's also hard to save.

    But at least the aggregate numbers are great, right?

    Well, the Fed can't brag about even that. A policy that favors billionaires might work on paper, of course, so long as the aggregate numbers point toward sizable growth. But even those numbers are so iffy as to prompt growth fears at the FOMC, and to ensure that the Fed puts an end to its promises to return policy to something that might be called normal.

    As it is, it looks like we should expect a continuation of the policies which have coincided with both an unimpressive economy and rising inequality.

    If that's not evidence of the Fed's failure, it's hard to imagine what is.


    I put in bold the paragraph above. The original article does not have that paragraph in bold font.

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    Re: Rising income inequality

    Ron Paul wrote a book "End The Fed " and I agree . Top 10 reasons to end the Fed ! http://www.freedomworks.org/content/...ederal-reserve

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