This blog post is the first in a series of posts that come from students of our 2nd year undergraduate “Capitalism and Democracy” course. As part of the module, students were asked to select and research a topic that is related to the global political economy of redistribution. The best blog posts have been selected to provide an opportunity to exceptional young scholars at UCD to contribute to the debate on the future of international politics, and to promote the insightful scholarship being undertaken at UCD to a wider public audience.
The hit 1985 song by British rock band, Dire Straits, ‘Money for Nothing’ could be used as a metaphor to describe the largest central bank financial experiment in history, quantitative easing (QE). An unprecedented strategy of creating vast sums of digital money to fire up ailing developed economies. We’ve been told it’s good for us and positive for the economy as a whole. A rising tide lifts all boats after all. But what if it’s not? What if trusting many of the banks and institutions, who had a direct role in the last crisis, to distribute these funds has resulted in a small cartel of extraordinarily wealthy capital owners pulling away from the rest of the wealth distribution? By digging a little deeper into the data it becomes clear that whilst the gains and benefits of QE have felt like an illusion for the vast majority of us, a small group has seen their wealth soar to levels never before seen.
The premise of QE is relatively straightforward (Khan, 2015). Central banks create vast amounts of money electronically and then distribute these funds to financial institutions, who are subsequently urged to invest in government and corporate bonds in different sectors. This pushes the price of these assets up and the rate of return from them down, forcing overly cautious investors to put their money into more risky assets such as stocks and other equities, to seek a better return on their investment. The policy was first pursued by the Federal Reserve and the Bank of England in the aftermath of the traumatic 2008 crash. Whilst the ECB was initially hesitant towards the idea, due to German fears of out of control inflation, the new ECB president Mario Draghi has, since 2012, gradually unleashed a torrent of easy credit into the system to help alleviate the Euro debt crisis and stimulate a sluggish overall economic environment.
In theory, it sounds positively blissful. Why the animosity? Well first of all, QE was devised as an emergency short term response to the liquidity crisis, yet here we are 7 years on from teetering on the brink, and the system is still addicted to cheap money at artificial, historically low interest rates (Evans-Pritchard, 2015). However of equal concern is that, considering the mammoth undertaking that QE represents, there has been a curious lack of public inquest and commentary regarding it. Just where has all that money gone and who are the winners and losers?
By literally ‘following the money’, it is easy to see that the wealthiest of society have benefitted enormously from this policy (Frank, 2012). In a way, this was inevitable. One of the central aims of QE was to push up stock prices and the vast majority of these assets are owned by the top percentile of the wealth distribution. An official Bank of England report on QE in 2012 gave some empirical insight into how exactly these gains are being distributed – “Asset purchases have boosted the value of households’ financial wealth, but holdings are heavily skewed with the top 5% of households holding 40% of these assets” (Bank of England, 2012). This trend is also illustrated by some further data from the US federal reserve which shows that the top richest 10% of Americans own a staggering 84% of all financial assets, whilst real estate value constitutes just 20% of their wealth on average. (Federal Reserve, 2014). The trend is also broadly similar in individually held stocks.
But if you’re not fortunate enough to be in that lofty peak of the wealth distribution, you should have no reason to worry, because commercial banks are loaning out all that cheap extra money on their books to SMEs and individuals, right? In a central bankers utopia that would be in the case but in reality, bank lending has remained relatively stagnant in the US and EU and low interest rates have penalized savers such as the elderly. A recent study regarding lending in the Eurozone throughout 2015 stated that, despite a QE injection of €60 billion, new lending increased by just 0.6% relative to a year prior. (Karunakar, 2015)
By helping to re-inflate the stock market after the crash, central banks have actually created a two-speed recovery. The wealthy quickly recovered and then subsequently increased their wealth as many stocks doubled in value. But people beyond the top of the distribution, who depend on real estate value and jobs for their wealth, have remained relatively stagnant. This is why the the vast majority of the population have not felt many tangible benefits of the so called “recovery” since 2013. Robert Reich, a former labor secretary under President Clinton and a notable wealth inequality commentator summed up this development in pessimistic terms in a recent speech – “Most Americans haven’t felt they’ve been in a recovery, because they haven’t received any of the economic gains — all of which have gone to the top 1 percent. This is the first recovery since World War II in which the median household is worse off than it was at the start.” (Reich, 2015)
The gains of the recovery going to the very wealthy have also been harmful from an overall economic standpoint. As the richest of the rich see their fortunes soar, they re-invest and seek to grow their vast wealth through various financial instruments such as stock portfolios. This activity certainly benefits a very miniscule cohort of investment bankers but does very little for the wider economy. On the other hand, the ‘average Joe’ has seen his purchasing power continuously fall due to a combination of lower and middle range wages remaining stagnant and also higher levels of inflation induced by QE. These outcomes coupled with the highest private debt levels in history has discouraged buyer activity. Remember that it’s everyday consumer spending that ultimately drives the economy and the lifeblood of almost all SMEs. Put it like this, no matter how rich entrepreneurs likes of Mark Zuckerberg become, they still only need to buy one microwave or one fridge etc. There is no doubt that the persistently stalled economic growth rates since 2008 have been exacerbated by the struggle of the middle class.
Among economists QE has been, in general, positively received. There is no doubt that from a purely macro-economic point of view, it has been successful in helping to stave off a deep depression. It has directly impacted on a strong, prolonged period of gains on the majority of the main world stock markets. The NYSE is in the midst of a bull market that has lasted 79 months for example. Unfortunately, the distributional element of the argument is less rosy. The Nobel prize winning Joseph Stiglitz has been one of the few academics to draw attention to this, stating that contrary to the past “where lower interest rates favored debtors over creditors and thus increased equality, today lower interest rates, combined with central bank intervention have actually increased inequality.” (Stiglitz, 2015)
In conclusion, there is considerable evidence pointing to the correlation between QE and growing wealth inequality, particularly in terms of capital wealth. Central bank intervention has led to a record breaking increase in the stock market but this has generally benefitted a small group at the top. Left unchecked, is this gap destined to grow infinitely so long as the holdings of equities and other beneficiary assets is so concentrated among such a small percentage of society? The recent evidence would suggest so. Is QE an unsustainable growth policy built on foundations of debt or is it simply another tool for the rich to enhance their wealth? Either way, for average Joe, the outlook is grim.
Jack is a final year Bachelor of Commerce Student. He has taken ‘Capitalism and Democracy’ at UCD School of Politics as an elective module and hopes to continue his studies next year by completing a masters of Finance degree. His main areas of interest are wealth inequality and demographic development. He also writes his own current affairs blog which can be found at https://jackcoppinger.wordpress.com/.
Khan, M 2015, ‘Economics explainer : What is Quantitative Easing?’ The Telegraph, 22 January. Available at: http://www.telegraph.co.uk/finance/economics/11361414/Economics-explainer-what-is-QE.html. [22 January 2015]
Evans-Pritchard, A 2015, ‘Central bank prophet fears QE warfare pushing world financial system out of control’ The Telegraph, 20 January. Available at : http://www.telegraph.co.uk/finance/economics/11358316/Central-bank-prophet-fears-QE-warfare-pushing-world-financial-system-out-of-control.html [21 January 2015]
Frank, R. (2012) Does Quantitative Easing Mainly Help the Rich? Available at : http://www.cnbc.com/id/49031991 [accessed October 22 2015]
Bank of England (2012) ‘The Distributional Effects of Asset Purchases’ . London. Available at : http://www.bankofengland.co.uk/publications/Documents/news/2012/nr073.pdf [accessed 23 October 2015]
Federal Reserve (2014) ‘Changes in U.S. Family Finances from 2010 to 2013: Evidence from the Survey of Consumer Finances’. Washington DC (Federal Reserve Bulletin Volume 100, no. 4). Available at : http://www.federalreserve.gov/pubs/bulletin/2014/pdf/scf14.pdf [accessed 25 October 2015]
Reich, R (2015) Boston, Robert Reich. 23 October. Available at : https://www.facebook.com/RBReich/?fref=ts [Accessed 25 October 2015]
Stiglitz, J (2015), ‘New Theoretical Perspectives on the Distribution of Income and Wealth among Individuals: Part IV: Land and Credit’. Washington DC (National Bureau of Economic Research, working paper 21192). Available at : http://www.nber.org/papers/w21192 [accessed 24 October 2015]
Karunakar, R (2015), ‘Euro zone bank lending sluggish despite tsunami of QE and cheap cash’. Reuters, 27 October. Available at http://blogs.reuters.com/macroscope/2015/10/27/euro-zone-bank-lending-sluggish-despite-tsunami-of-qe-and-cheap-cash [accessed 28 October 2015]