Friday, September 17, 2021

Engine of Generational Inequality

The Mises Institute has a great post on how QE has driven up wealth inequality in America.  Read the whole thing! And buy Katherine Petrou's book (you don't need to get it from Amazon either--you don't need to deal with oligopolists). 

While the QE discussion is framed as one that benefits the wealthy at the expense of everyone else there is another dimension which I have been blogging about.  Ultralow interest rates benefit asset owners most of whom are baby boomers and older.  On the other hand, low rates hurt asset purchasers who have to buy into overvalued markets or save at rates that are below inflation--negative interest rates.  Asset purchasers and savers are mainly young people who0 are looking to accumulate some wealth in the economy.  By pulling assets returns forward QE reduces the returns earned by asset purchasers and increases their exposure to downside risk.

The most recent chatter from the Federal Reserve is that they could maybe, possibly start reducing QE by the end of the year.  This is way too late.  By historical measures assets prices are way overinflated. The Fed's own financial stability report warns of heightened risks from declines in asset prices.  

I would rate the possibility that the Fed reduces QE in the next two years as slim to none.  Biden's deficits means that Treasury needs to find a lot of places to stuff Uncle Sam's paper.  Most of that for the past two years has been put on the Fed's balance sheet.  Look for that to continue as spending and deficits continue to swell.       

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