The Federal Reserve is gearing up to end “Quantitative Easing,” or its bond-buying program, this week (or likely in the near future). As a reminder, the Federal Reserve has been buying United States Treasury bonds to keep interest rates low and permit the federal government to spend money it does not have without paying high(er) interest rates. It does so by reducing the amount of Treasury bonds out there through purchasing them. Reducing the supply of bonds increased the demand for them. As the demand for bonds increased, the yields (interest to be paid on them) dropped. Quantitative Easing has been going on since the days of the financial crisis. The most recent round of “QE” began about two years ago, in September 2012.
There has been a lot of criticism of QE. People on the right tend to be concerned that QE has caused or will cause hyperinflation. Inflation is certainly happening in some areas of the economy (food, health care, education) and has cooled off a bit with the recent decline in oil prices, but Peter Thiel has acknowledged that the hyperinflationary event which was predicted as a result of QE has not happened (yet).
Some people on the left think that QE was a gift to the wealthy and opposed it for those reasons.
They’re right–QE was a gift to the wealthy. Quantitative easing helped people who owned certain types of assets.
Donald Trump – not usually one for distributional analyses of monetary policy – said on CNBC yesterday that “People like me will benefit from this.”
The reason is simple. QE drives up the prices of assets, especially financial assets. And most of the financial assets in America are owed by the wealthiest 5 percent of Americans.
According to Fed data, the top 5 percent own 60 percent of the nation’s individually held financial assets. They own 82 percent of the individually held stocks and more than 90 percent of the individually held bonds.
By helping to reinflate the stock market in 2009 and 2010, the Fed created a two-speed recovery. The wealthy quickly recovered much of their wealth as stocks doubled in value. But the rest of the country, which depends on houses and jobs for their wealth, remained stuck in recession.
Why all the hate for the rich? It’s because they own assets.
The S&P rose from a low of below 700 to nearly 2000 today, for example. Why did “the rich” benefit from this? Because “the rich” own things like stocks and bonds. They also own them, typically, for the long term. They don’t sell when the market turns south (briefly or for a long period) if their investment horizon is decades.
I’ve opined that even a person making a modest salary can save enough to become a millionaire upon retirement, assuming historical rates of return. Someone who is saving even modest amounts might “benefit” from QE as well. The short-term ups and downs of the stock market likely should not bother such an investor, if he or she is saving for forty years down the road. The point is, though, that rather than envying those who own assets, our hypothetical investor is an asset owner him or herself. He or she benefits from the policies who benefit other asset owners–maybe not to the extent that Warren Buffett has benefited. But everyone needs to start somewhere.
I’m no financial adviser and I’m certainly not “rich,” but the point here is that rather than demonizing “the rich,” America should focus on making more people investors in things such as stocks, bonds, and their own businesses. Rather than settling for a wage (and be “owned” by their bosses), more Americans should be come owners.
If you’re interested more in this topic, I recommend reading Richard Russell and Benjamin Graham, particularly his chapter on “Mr. Market.”
The rich own things that appreciate in value. If you can’t beat ‘em, join ‘em.
As always, free markets are better markets.