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“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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