“A bit of inequality is good as it creates incentives for hard work and rewards entrepreneurship,” explained Mohamed El-Erian, Chief Economic Advisor of Allianz and former CEO of PIMCO. “Lots of inequality is bad, disenfranchises segments of society, and erodes the social fabric,” he said, joining the chorus of voices that have been lamenting income and wealth inequality as an economic problem.
But none of these voices dare to mention the cause – though they all know it. And we just got numerical confirmation.
Hundreds of millions of people have been lifted out of abject poverty over the last two decades, mostly in Asia. In that respect, inequality has been reduced. But on a national level, “you get a different picture,” El-Erian said in the interview published on Monday:
Whether in the US, Brazil or China: there has been a significant increase in both income and wealth inequality, and so much so that it is now affecting access to equal opportunities. The minute you start talking about opportunities, you start making it a much deeper problem and harder to solve.
“Social cohesion is at risk,” said Allianz Chief Economist Michael Heise in the same interview. “That is a danger for industrialized and developing countries alike. In recent times we have seen social upheavals and conflicts where poverty played a major role.”
As if they’d coordinated this, Oxfam, a non-profit that works in over 90 countries, published a research report on Monday that found that the richest 1% have been on a global wealth-grab. In 2008, the 99% still owned 56% of global wealth, based on data from Credit Suisse, whereas the 1% owned 44%. Then the Financial Crisis happened. It impacted both groups in similar proportions, and there was no change in 2009. But 2010 was the “inflection point,” when the 1% started grabbing an ever larger share of global wealth, while the 99% began to lose their grip. By 2014, the 99% was down to 52% of global wealth, the bottom 80% owned a measly 5.5%, but the top 1% had squirreled away 48%.
The report projected that if this trend continues, the 1% will own more of the global wealth by 2016 than everyone else put together.
In 2009, the richest 80 people, based on the Forbes list of billionaires, sat on just under $1 trillion in net wealth, the report found. By 2014, their pile had doubled to $1.9 trillion. At the same time, the pile that the bottom 50% carves up amongst each other actually declined a smidgen, leaving them with less than half of the global wealth. So the 80 richest folks own more than he poorest 3.5 billion folks combined.
Something else happened in 2009: Central banks around the globe were furiously creating money out of nothing and buying financial assets to inflate asset prices. They imposed zero-interest-rate policies that offered banks and other financial institutions a near-zero cost of capital while sacrificing savers by depriving them of interest income. Go buy risky assets, savers were told. And everything began to soar: oil, stocks, bonds, junk bonds, leveraged loans, housing, paintings, farmland….
Since 2008, central banks have printed $10.7 trillion, BofA Merrill Lynch pointed out. Some central banks have imposed negative-interest-rate policies. ZIRP is now so wide-spread that it covers 83% of the global free-float stock market capitalization. These days, 52% of all government bonds yield less than 1%. In the Eurozone, Switzerland, and Japan there are $7.3 trillion in government bonds with a “negative” yield.
But who the heck benefited from these monetary policies?
Correlation is not causation. Just because two events occur in sync doesn’t mean one causes the other. I get that. But in this case, the Fed signaled its intentions back in 2008 and 2009: it wanted to inflate asset prices and create the “wealth effect” that Greenspan had already been talking about.
In case people still didn’t believe it, Fed Chairman Ben Bernanke himself explained the “wealth effect” in an editorial in 2010. The Fed’s “strong and creative measures” – that’s what he called QE and ZIRP – would lead to higher stock prices. “And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”
So now it’s official: He was right.
The “wealth effect” exists. The top 1% benefited from it. Their assets were bailed out by central banks. Their confidence grew, and they increased their leverage by borrowing at near-zero cost to buy even more assets that they were sure would continue to increase in price because central banks were continuing to print money and serve up ZIRP that would encourage more leverage and more buying. And they bought more assets and drove up prices further, which made them feel even better and more confident. They increased spending, and it started that “virtuous circle” where the 1% got richer and richer and the top 80 folks in the world made out like bandits.
Alas, there aren’t enough of them to have any real impact on the economy in the US and globally. Hence the overall doldrums for the bottom 99%.
The Oxfam report offers a “seven-point plan to tackle inequality,” from cracking down on “tax dodging by corporations and rich individuals” to, well, agreeing on “a global goal to tackle inequality.” However effective these strategies may be, nowhere does this report – or the interview of the Allianz heroes and QE beneficiaries El-Erian and Heise – mention what had caused the inequalities to widen in the first place: QE and ZIRP.
So the totally obvious solution to this ballooning inequality is for all central banks to immediately end these central-bank machinations – à la SNB – and start unwinding them next month.
While it’s politically correct and very convenient these days to finger inequality as a problem, it would be way too politicly incorrect for a non-profit that depends on corporate largesse to speak the unspeakable. It might be a career-ending move for top executives of one of the largest financial institutions in the world to pooh-pooh the dogma that QE, ZIRP, and the resulting “wealth effect” are somehow for the common good. And neither the White House, which is big into inequality these days, nor Republicans in Congress have the guts to point their fingers in the right direction – not at each other, but at the Fed and other central banks.
Big financial players are clamoring for the ECB to start a big bout of QE, now that the Fed has stepped back. And the ECB, as a French Megabank points out, is “a prisoner of financial markets’ expectations.” Read… Without QE, “Eurozone Financial Markets Would Collapse”
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