All the same, if they take the time to read through the posts, they would probably be somewhat shocked at the level of cynicism that the rich have been the biggest beneficiaries of the monetary stimulus policies major central banks have adopted to insulate their economies from the devastation of the coronavirus pandemic. These policies include slashing interest rates to zero or even into negative territory, and buying trillions of dollars of bonds.
And, if they’re wise, they’ll spend more time emphasising that ultra-low rates help boost economic activity and put people into jobs, rather than just helping the rich to become even richer.
It’s now universally accepted that ultra-low rates push up the price of all assets – from property, to shares and bonds and even cryptocurrencies, such as bitcoin.
And because the rich own a lot more assets than everyone else – the top 1 per cent of American households own just over half of the entire US share market – there’s a widespread perception that the central banks are simply helping the rich to become even richer.
Indeed, the expectation that the Fed’s ultra-easy monetary policies would boost the sharemarket explains why the US stockmarket was able to rebound from the coronavirus pandemic in record time last year.
The US equity market plunged about 35 per cent, as the fast-spreading virus shut down the economy, putting millions of people out of work.
But in March, to prevent the panic from freezing the financial system, the Fed slashed interest rates nearly to zero, and said it stood prepared to buy unlimited quantities of US bonds.
Like Pavlov’s dogs, investors knew what would come next. Even though the US economy remained mired in recession, they stampeded into the US stock market, catapulting it to a record.
Of course, the US market isn’t the only one surging. Japan’s main stock index, the Nikkei 225, has soared to its highest level in more than three decades, while the Australian share market has climbed to an 11-month high.
This time around, Fed boss Powell didn’t have to write a newspaper column explaining to people how the Fed’s massive bond purchases would boost share markets and push long-term interest rates lower. They already knew.
This contrasts with the situation in 2010, when the then Fed boss Ben Bernanke penned an op-ed for the Washington Post in which he spelt out that the Fed’s decision to embark on a second round of bond-buying would cut borrowing costs and boost economic growth.
“For example”, Bernanke explained, “lower mortgage rates will make housing more affordable and allow more homeowners to refinance.
“Lower corporate bond rates will encourage investment. 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.”
Unfortunately, this “virtuous circle” failed to eventuate in quite the fashion that Bernanke expected.
Instead, many people looked on dismayed as corporate bosses – whose pay is linked to share price performance – pocketed an undeserved windfall as the Fed’s ultra-low rates buoyed the US equity market.
And there was a good deal of head shaking as companies used cheap debt to repurchase shares – thereby boosting equity prices even further – rather than investing in new plant and equipment.
Easy money also turbocharged the profits of the big Wall Street investment banks, who charge fat fees for helping corporates to raise debt and equity.
And, of course, ultra-low rates were a godsend to the private equity world, whose modus operandi is based on taking over companies and loading them up with lots of debt.
So vocal had this criticism become that in 2015 – about 18 months after he departed the Fed – Bernanke felt compelled to reply to criticism that ultra-low rates had exacerbated wealth inequality.
He countered that widening wealth inequality is a long-term trend, driven by structural changes in the economy, including globalisation, technological progress, demographic trends, and institutional change in the labour market and elsewhere. In contrast, he wrote, “the effects of monetary policy on inequality are almost certainly modest and transitory”.
What’s more, he contended, even if benefits from easy monetary policy are unequally distributed, this can best be addressed by using fiscal policy (such as taxes and government spending programs).
And although he conceded that easy monetary policy raises stock prices and that stocks are disproportionately held by the wealthy, “it does not follow that, overall, the Fed’s recent monetary policies have disadvantaged the poor and middle class relative to the rich”.
That’s because ultra-low interest rates boost job creation as well as supporting higher asset prices. “A stronger labour market – more jobs at better wages – obviously benefits the middle class, and it is the best weapon we have against poverty.”
In addition, he pointed out that although the rich have more assets than the middle class – the poor have almost no assets – the middle class “is not without assets whose values rise during a period of easy money”.
“Most obviously, more than 60 per cent of families own their home”, he noted.
This argument, of course, is even stronger in Australia, where around two-thirds of households own their own home.
And, of course, record low interest rates are fuelling a brisk surge in property prices, with the Commonwealth Bank economists predicting national house prices to rise by about 16 per cent over the next two years.
And, as the minutes of its February board meeting demonstrate, the Reserve Bank of Australia is keeping a close watch on the situation.
At that meeting, RBA board members “acknowledged the risks inherent in investors searching for yield in a low interest rate environment, including risks linked to higher leverage and asset prices, particularly in the housing market”.
Still, they decided that these risks were outweighed by the boost that ultra-low rates are providing to economic activity and the jobs market.
“The board concluded that there were greater benefits for financial stability from a stronger economy.”