Investment Bank Discovers the “Redistributive Effects” of QE

A new study found that the inflation-adjusted wealth of America’s median household – half of households are above and half are below – plunged 36% from 2003 to 2013. These years include the phenomenal stock and bond market rallies and price surges in other asset classes, propelled by the greatest credit bubble in history, ingeniously engineered by the Fed via QE and ZIRP.

But the median household wasn’t the only one to get shafted. The wealth of the lower 25th percentile, those folks who don’t have much to begin with, plunged 68%. And the bottom 5th percentile? Well, these hapless souls fell even deeper into the bottomless pit of owing more than they have in assets. Three times deeper. Even at the upper end, it was tough. The 75th percentile couldn’t beat inflation and lost on wealth, according to research by the Russell Sage Foundation. Only the top 95th percentile came out ahead and saw their wealth rise 14%. Which still isn’t much, over ten years.

What the report wisely left untouched is how the real winners of the Fed’s policies, the 99.9th percentile, made out.

Other studies have consistently pointed out similar shifts in wealth, though methods and numbers might have been different. By now, the results surprise no one. They have become a fact of life. But every one of these studies, whether it’s their intent or not, is an indictment of a magnificent wealth transfer scheme that isn’t an accident of history but the result of policies, pursued by nearly all major central banks, with the Fed at the forefront.

Bloggers have hammered on this for years, only to be shoved aside as conspiracy theorists. But now, Natixis, the asset management and investment banking division of Groupe BPCE, the second largest bank in France, and one of the largest banks in the world, came to the same conclusion in its economic research report on the “redistributive effects” of QE.

The report laments that most of the attention has focused on the macro-economic impact of QE – that it largely failed to boost credit though it succeeded in crushing the currency and stirring up inflation, particularly in Japan, while inflating asset prices around the world – but that “not enough attention” has been paid to the “redistributive effects” of QE “in terms of income or wealth.”

Conventional monetary policies, such as the imposition of ZIRP, also have a bevy of redistributive effects – they’re efforts by central banks to shift wealth and income around – but these effects are very different from those of QE. ZIRP, the report explains, is a negative for lenders, such as older wealthy households and savers. But it benefits those borrowers who borrow the most: young and middle-aged households, and of course companies – including all manner of large corporations, Wall Street speculators, hedge funds, banks, and the like.

QE is a different animal. It is supposed to boost economic growth by pushing up demand through the infamous “wealth effect” that Greenspan had conjured up. The report explains that inflating asset prices with printed money is “clearly good news for holders of financial and property wealth – among them “old and wealthy households.” Not further mentioned in the report, given that it comes from an investment bank, are the other major “holders of financial and property wealth,” namely investment banks, hedge funds, private equity firms (which are now the largest landlords in the US), banks, corporations of all kinds, other players in the financial and real-estate markets, and the people affiliated with them.

But QE has some drawbacks. Among the “well-known” ones, according to the report, are the sea of excess liquidity and the “abnormal tightening of risk premia,” say between junk bonds and US Treasuries. And then there are the drawbacks that, as the report pointed out in the beginning, “not enough attention” has been paid to: the redistributive effects of QE “in terms of income or wealth.”

QE comes “at the expense of the young.” As “buyers of real estate” they have to spend an extraordinary amount of money to buy their starter home at an inflated price. Which explains the collapse of the first-time buyer as a force in the US housing market.

And QE is “clearly negative for wage earners” if it leads to inflation, which is one of the other stated purposes of money printing. If it crushes the currency, another policy goal of QE, it makes imports more expensive, squeezing wage earners even more. Both factors are now playing out beautifully in Japan, compounded by the consumption tax hike, “which has obviously led to a steep decline in real wages.”

So now there is an investment bank – a division of a megabank, and one of the primary beneficiaries of central bank policies (and not just a blogger like yours truly) – whose research discovered the reeking breath of QE: Through its “redistributive effects,” central banks channel wealth and income from the young and from wage earners and redistribute them to those who already have the most, namely “wealthy households” and companies that hold financial and real estate assets.

The Fed and the Bank of Japan, among others – with all their resources at their fingertips – have known all along about these “redistributive effects” of QE. Their notion of the “wealth effect” proves that these “redistributive effects” have been among the objectives of QE, and not an unintended consequence. Yet these redistributive effects, by lowering the income and wealth of most consumers to enrich a few, are clearly responsible at least in part for the very lousy economic growth in the US and Japan.

There are other consequences of QE. Money-losing Amazon is Exhibit A of how the Fed’s free money for Wall Street and corporate mastodons is destructive to the rest of the economy. Read….. But Wait, There Are A Few Differences between Amazon and the US Postal Service

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  2 comments for “Investment Bank Discovers the “Redistributive Effects” of QE

  1. Simon says:

    I think if you steer clear of the MSM this has been pretty clear for several years now. I have come to the conclusion that we need to take the terms ‘wealth effect’ and ‘wealth redistribution’ in their Orwellian sense. The former being the the effect of policy on the .1%, and the latter redistribution from the 99% to the few.

    • Wolf Richter says:

      True, Simon. I was one of those bloggers who “have hammered on this for years,” as I wrote in the article. But we’re just bloggers. Natixis is a powerful part of the inside game. When they proclaim something like that in public, it carries a different weight. I feel a personal sense of satisfaction that they’re finally admitting it, after years of denying it.

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