Look Who’s Dragging Down the Global Economy Though No One Is Allowed to Say it

“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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  12 comments for “Look Who’s Dragging Down the Global Economy Though No One Is Allowed to Say it

  1. Paulo says:

    Too bad Oxfam isn’t a rising and up-coming political party for 2016. It’s only going to get worse, as far as I can see. Then it will get messy. A reset is needed, I just don’t see how it can be done any longer by the vote or slo-mo change in social consciousness? The lampreys have latched on and won’t let go until the ‘people host’ are near death. Then they will flee with the vitality and wealth of nations. I just don’t see how they will be able to hide and stay safe as this unfolds?

    Thank you for your many fine articles. They are a daily treat of information and thought.

  2. Petunia says:

    The GOP is running scared they know their policies have gone too far. When Romney starts talking about helping the people whose jobs he outsourced you know he sees the writing on the wall. They need to get back in power to try and keep a lid on what’s coming. The bottom half is no longer invested in the system and that is the biggest structural problem in America.

    • Mary says:

      I’ve heard it said that only when the middle (as opposed to working) class is getting screwed does progressive thought make much headway in the American political landscape . If that’s true, we are about due for a quiet revolution.

  3. Paulo says:

    Yeah Petunia,

    I always get a kick out of the pundits that tout Romney’s private sector job creation record, when in fact, he was a squid who bought companies with leveraged funds, loaded them with debt, paid out dividends to participating shareholders, paid out bonusses to management, and then declared in-debted companies needing a shut down.

    I am reminded of the Sopranos episode where Tony and ‘friends’ take over a sporting goods company owned by a family friend. When there was nothing left, they left. Usually, in these cases the lights get turned off with a well-timed fire. In Rommneys case it was done with asset sales and firings. Instead of an insurance fire they probably shorted the stock just before driving said company into bankruptcy.

  4. Mary says:

    New reader who continues to learn a lot. Even though, as someone not acquainted with the lingo, I have to keep looking up abbreviations. But that’s all good.

    What I’m really appreciating is economic theories being tested out by investigating historical evidence. What was the theory, how was it applied, what actually resulted? So often political/economic pundits only look forward in a sky-is-falling mode.

    My two favorite news essays this morning are yours and Paul Krugman’s in the NYT (New York Times). He’s examining how ideology trumps actual lived experience in the Amercian political consciousness. I know you may not appreciate the comparison, but hey, a compliment is a compliment.

    • Wolf Richter says:

      I take any compliment I can get. No questions asked. Thanks. :-)

      But now you need to tell Krugman the same thing, and he’ll claim that he has never heard of WOLF STREET or me.

  5. sangell51 says:

    Wealth effect? Well I’m retired and have some utility stock. The ‘value’ of that stock has gone up by 50% over the past few years but the dividend income I receive from it remains the same. Sell it I then pay a capital gains tax and lose the income. In a zirped world where am I going to find another investment that pays 3+% that is reasonably secure?

    • john tucker says:

      Sangell, it is precisely the effect of so many individuals putting their security ahead of production and growth (not to mention their freedom!) which has allowed the system to devolve the way it has.
      I am also “retired, on a fixed income” but I am keenly aware of the dangers of trying to bury my “one talent” under a rock. I continue actively researching and trading — it took hard work to amass what I have and there’s no problem with working hard to hold on to it.
      I’ve been mostly short since thanksgiving and I’m looking at a 15% gain since then. I’m extremely conservative and careful about what I do, but also alert and wise to what is going on.
      You do realize that utility stock prices tend to plummet in a rising interest rate environment, don’t you? I’d recommend you hit the books, and think about what adjustments might be in order ….

    • Petunia says:

      Sangell, from where am sitting I can’t see a reason not to lock in your gain. On a $100 investment you are up $50 and earning $4 at most. Paying capital gain at the top rate of about 25% leaves you with $37.50, more than nine years of yield in your pocket with no risk. Keeping the stock puts you at risk of losing both principal and yield. The only upside to keeping the stock is principal appreciation, if you stay lucky.

  6. John says:

    It’s really enough to induce apoplexy. Only half of Americans own stocks; you can guess who owns most of those from this article. Most working people haven’t seen a penny from QE; oil is not very timely at the moment but from’09-’14 they were putting that inflated commodity into their gas tanks, not their f***ing portfolios! QE is the greatest wealth transfer in history, and we have cartoon had bad guys at the Fed twisting moustaches and calling the deline in oil prices (market behavior, for once) the greatest wealth tranfer. This is wealth redistribution, plain and simple, to the rich! Don’t expect the media to notice though, they only want to write “Obama channels inner Robin Hood” while Marco Rubio pretends the rich earned it. Gotta stop there, burst a blood vessel in my eye.

  7. Robert says:

    “in 2009 central banks around the globe created money out of nothing and bought financial assets to inflate asset prices. They offered banks and other financial institutions a near-zero cost of capital while sacrificing savers by depriving them of interest income. ”
    If you read the recently released Senate report, it says that the Fed had made trillions available to the very banks that own it virtually interest-free with which they were squirreling away real assets, and not just financial assets, for their own accounts. This is exactly what Andrew Jackson warned of, and charged Nicholas Biddle of the Fed predecessor, the Bank of the united States of doing. It is not a matter of bad policy, it is criminal.

  8. Julian the Apostate says:

    It is not ideology so much as the people who adhere to it without critical thought. To be generous the government schools have done everything possible to dumb down the electorate, and critical thinking is no longer taught. Our baby birds are having their wings broken and the kicked out of the nest and told to fly. They can’t fly so they look around for answers and end up, as the Eagles song has it, following the wrong gods home.
    The media reinforces this with mindless twaddle that THEY learned in college (whom V.I. Lenin called useful idiots).
    Eventually the ideological pendulum will swing back the other way, but in the meantime things will be very ugly indeed. It is always easier to destroy than to build.

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