Opinion | Only the Rich Could Love This Economic Recovery

Opinion | Only the Rich Could Love This Economic Recovery

Conventional wisdom has it that the lower a central bank sets interest rates, the faster the economy grows. But the longer rates stay ultra-low, it’s not the economy that grows — it’s inequality.

There are signs of worsening inequality across the U.S. economy. But recent surges trace back to a major change after 2008, which transformed how America fights economic recessions.

By the start of 2021, the richest 1% of Americans held 32% of the nation’s wealth, its highest level since these records began in 1989. The bottom 50%, meanwhile, held just 2% of the nation’s wealth. This new record comes on the heels of a year’s worth of huge economic stimulus and more than a decade of rock-bottom interest rates. Who was helped by this policy? Since the start of 2020, the bottom 50% gained $700 billion in wealth. But this is a pittance compared with the mammoth gains for the ever fewer who are ever richer: In the same period, the richest 1% gained $10 trillion. Source: Board of Governors of the Federal Reserve System

The Fed, which controls America’s monetary policy, is mired in conventional thinking, even though its policy since 2008 has been unconventional in scale, scope and omnipotence. Adhering to its “lower rates are better” axiom, the Fed has kept “real” U.S. short-term interest rates at — or even below — zero, after taking inflation into account. The Fed now plans to keep rates ultra, ultra low until about 2023, even if inflation ticks up.

This results in even wider wealth inequalities as the gap between the rich and everyone else grows.

Is the stunning growth in U.S. inequality all the Fed’s fault? Of course not. Tax policy has favored the wealthy and corporations for decades, to name one other cause. But income and wealth inequality result from who gets the money. And the Fed has unrivaled power over who gets the money across markets, communities and even families.

The Fed controls the flow of money, and it flows to the wealthy

The Fed’s main tools for fighting recessions are twofold: those ultra-low interest rates and a policy known as quantitative easing, or Q.E. Q.E is what happens when the Fed buys up assets, like bonds, which keeps money flowing and gives banks lots of liquidity that is supposed to make lending easier.

To get an idea of the magnitude of the Fed’s role, take a look at its portfolio. Assets the Fed has taken out of the economy as part of Q.E. now stand at $8.1 trillion, or about one-third of gross domestic product.

A growing portfolio To stimulate the economy after 2008, the Federal Reserve increased its balance sheet and slashed interest rates. The current coronavirus pandemic sent that strategy into overdrive, creating the largest balance sheet on record and the lowest interest rates in modern U.S. history. Periods of quantitatve easing Federal Reserve balance sheet as a share of GDP 30% 20 10 Start of post-2008 monetary policy 0 2004 2008 2012 2016 2020 Interest rate Effective federal funds rate 6% 4 2 0 2004 2008 2012 2016 2020 Periods of quantitatve easing Federal Reserve balance sheet as a share of GDP Interest rate Effective federal funds rate 6% 30% 4 20 2 10 Start of post-2008 monetary policy 0 0 2004 2008 2012 2016 2020 2004 2008 2012 2016 2020 Periods of quantitatve easing Federal Reserve balance sheet as a share of GDP Interest rate Effective federal funds rate 30% 6% 20 4 10 2 Start of post-2008 monetary policy 0 0 2004 2008 2012 2016 2020 2004 2008 2012 2016 2020 Source: FRED

No one else could own that much, meaning no one but the Fed has so much power over the economy’s winners and losers.

The Fed’s approach is premised on trickle-down expectations, adopted in the early 2000s. U.S. central bankers believe the higher that markets fly and the more that the wealthy spend, the better that everyone else will be.

In truth, this policy works only for the wealthy.

Although the Fed’s huge Q.E.-based portfolio initially prevented still worse economic mayhem when the 2008 and 2020 financial crises struck, its benefits over time were 10 times greater for stock-market prices than for overall economic prosperity.

Who’s helped by stimulus? Using a model, researchers estimated the impact of an increase in quantitative easing on the economy. They found stocks saw 10 times the growth of G.D.P. Size of impact Stock prices 1.5% 1.0 0.5 GDP 0 0 5 10 15 20 25 30 35 Months since increase in quantitative easing Size of impact Stock prices 1.5% 1.0 0.5 GDP 0 0 5 10 15 20 25 30 35 Months since increase in quantitative easing Source: Bank for International Settlements

Ultra-low interest rates are meant to spur growth. But they stop having a beneficial effect when they dip so low that they distort savings incentives and instead drive speculative investing, like in Bitcoin or GameStop, to cite two current examples.

Savings, home values and stocks are up — but these also favor the rich

Many Americans own stock, but most stocks – 54 percent – are owned by the 1 percent and much of the rest by the next 9 percent.

The same can be said of real estate. Low interest rates set by the Fed spur lending, creating more demand to purchase homes and forcing prices higher. Rising equity is great for existing homeowners, but richer Americans who own property are the ones who benefit most.

Periods of quantitatve easing Stocks have soared … S&P 500 (log scale) 10k 1k Start of post-2008 monetary policy 100 1990 1995 2000 2005 2010 2015 2020 … benefiting the rich. Change in corporate equities and mutual fund assets +2000% Top 1% 1500 1000 500 Bottom 50% 0 1990 1995 2000 2005 2010 2015 2020 Stocks have soared … … benefiting the rich. Periods of quantitatve easing S&P 500 (log scale) Change in corporate equities and mutual fund assets 10k +2000% Top 1% 1500 1k 1000 Start of post-2008 monetary policy 500 Bottom 50% 0 100 1990 1995 2000 2005 2010 2015 2020 1990 1995 2000 2005 2010 2015 2020 Stocks have soared to staggering heights … … benefiting the rich more than others. Periods of quantitatve easing S&P 500 (log scale) Change in corporate equities and mutual fund assets 10k +2000% Top 1% 1500 1k 1000 Start of post-2008 monetary policy 500 Bottom 50% 0 100 1990 1995 2000 2005 2010 2015 2020 1990 1995 2000 2005 2010 2015 2020

Home prices are up … Change in U.S. median home prices 150 100 50 0 1998 2002 2006 2010 2014 2018 … benefiting the rich more than others. Change in dollar value of real estate Top 1% +400% 300 200 100 Bottom 50% 0 1998 2002 2006 2010 2014 2018 Home prices are up … … benefiting the rich more than others. Change in U.S. median home prices Change in dollar value of real estate Top 1% 150 +400% 300 100 200 50 100 Bottom 50% 0 0 1998 2002 2006 2010 2014 2018 1998 2002 2006 2010 2014 2018 Home prices are up … … benefiting the rich more than others. Change in U.S. median home prices Change in dollar value of real estate by wealth group Top 1% 150 +400% 300 100 200 50 100 Bottom 50% 0 0 1998 2002 2006 2010 2014 2018 1998 2002 2006 2010 2014 2018 Source: Board of Governors of the Federal Reserve System (wealth and equities); Zillow (home value index); Capital I.Q. (stock price).

What about Americans who are trying to get ahead not through assets, but through saving? Even low-income households are doing their best to save a surprising amount of money. But the Fed’s interest-rate policy robs savers of any interest they might see.

The inequality impact of the invest-you-gain, save-you-lose conundrum is clear. To understand why, imagine two people trying to grow $10,000 through investing or saving.

Low rates hurt savers The Fed’s low interest rate environment causes stocks to surge, but everyday savers struggle to keep up with inflation. $10,000 invested in 2007 +201% Appreciates by … $30,100 By June 2021, is worth … $23,250 After inflation, is worth … $10,000 put in a savings account in 2007 +0.5% Appreciates by … $12,336 By June 2021, is worth … $9,529 After inflation, is worth … In the stock market $10,000 +201% $30,100 $23,250 value in 2007 stock appreciation value by June 2021 value after inflation In a savings account $10,000 +0.5% $12,336 $9,529 value in 2007 compound interest rate value by June 2021 value after inflation $10k invested in 2007 +201% Appreciates by … $30,100 By June 2021, is worth … $23,250 After inflation, is worth … $10k in savings account in 2007 +0.5% Appreciates by … $12,336 By June 2021, is worth … $9,529 After inflation, is worth …

The calculations above show that even if average Americans could save $10,000, they would be falling far behind investors. After inflation, their thrift would net only $9,529 – a flat-out loss.

What is the Fed for?

The Fed’s role is spelled out under its statutory charter, which establishes the road map for unraveling the inequality it helped create.

The charter’s first goal is “full employment,” meaning pretty much everyone who wants a job has one. This would get a meaningful, immediate boost if the Fed reversed its cheap-debt policies that lead companies to take out debt to fund investor profits, instead of funding new plants or products.

Another goal is “price stability,” best measured by what it costs for a middle-class household to make ends meet. The measure the Fed uses misses the cost increases obscuring a household-to-debt build-up for all but the wealthiest. The Fed thus misses the long-term risks this debt poses to financial security, home ownership, and a secure retirement.

The law has a third Fed goal: “moderate” interest rates. Rates below zero after taking inflation into account are anything but moderate, so they must be gradually raised, starting now.

The current recovery is being driven not by the Fed but by the stimulus bills passed by Congress. After that spending fades, we will be a nation in which at least a quarter of middle-class households still can’t even afford the medical treatment they require, lower-income millennials have student debt equal to at least 372 percent of income, and still more won’t be able to handle even a $400 unexpected expense.

This is wealth without prosperity, a violation of every tenet in the Fed’s statutory mandate. Instead of regretting inequality even as it makes inequality worse, the Fed can and must quickly rewrite policy with a new goal in mind: shared prosperity, measured by how most of us do, not by how high the market flies.

Global tax deal a top priority to work on with U.S. -EU’s Gentiloni

BRUSSELS, July 12 (Reuters) - Securing an international agreement on corporate tax is a top priority and the European Commission will work with the U.S. administration to achieve this, EU economics commissioner Paolo Gentiloni said on Monday.

“What is clear is that, for us, it’s a top priority and this is also the reason why we decided to put on hold the (EU) proposal on the digital levy,” Gentiloni told a news conference after a meeting of euro zone finance ministers attended by U.S. Treasury Secretary Janet Yellen.

“We agreed with Secretary Yellen to work together, the U.S. and the Commission, to make this agreement possible because it is very important after such a crisis to have an important agreement on this issue,” he said. (Reporting by Philip Blenkinsop Editing by Chris Reese)

Except super rich, conditions continue to be harsh for all, with starvation, death and debt staring at them

In the deep shadows of the pandemic, society faces a divide, etched in blood. The vast sections of the masses, fighting the acute scarcity and steep rise in prices of essentials, also realise that the challenges are inherent in the system itself. To surmount them needs a struggle at the basics.

The French revolution in 1789 had started with a hike in taxes on loaves. The epoch-making change came only after miseries and the exploitation of the masses reached a quantitative saturation that was imperative for the qualitative change. People were burdened with unprecedented tax hike, rise in prices, and other interruptions in agrarian production. Starving and dying, they could not face another blow, and stood up to fight for justice.

Today, as people keep struggling to make two ends meet even as the pandemic looms around, they realise that unless all the suffering masses join together, the challenges cannot be met. The brutal deprivation, taking the toll from all sections of the society except the super rich, calls for unity of all the intermediary groups.

The middle class has almost joined those living in utter penury, making the ‘haves’ facing the milieu of ‘have nots’ directly. Society is entering a new stage, capitalism is leaving space for finance capital where investment and production is secondary and finance is primary. The conditions are harsh with starvation, death and finally debt.