Federal Reserve Accidentally Admits It Is Causing Inequality

Less than a decade ago, the mere hint that the Fed was either propping up markets or actively pushing them higher was enough to get one branded a conspiracy theorist loon and never again invited to polite conversation. Since then first Bernanke, and then virtually all central bankers both domestic and foreign have admitted that the "wealth effect", a polite way of saying pushing up asset prices, has been their primary goal and function.

And yet, despite this admission, the same central bankers would get strangely defensive any time it was suggested that it was they that also were the driving force for global inequality. That was understandable: if the broader public realized that the middle class was in jeopardy and living standards of the vast majority were collapsing as a result of a few career academics with their finger on the print button, those same academics would become an obvious - and very easy - target, when popular anger finally boiled over as it always has in history whenever the income inequality hit record levels.

Which is why we found it quite surprising to read a report by none other than the St. Louis Fed titled "Are Rising Stock Prices Related to Income Inequality?", which if answered in the affirmative would be an accidental admission that the Fed itself has been instrumental in creating the widest wealth and income gap ever seen in US history (now even greater than the Great Depression).

To our great surprise the answer was "yes."

The full note is below. To members of Congress questioning Janet Yellen the next time she is in the house - please ask her how she would rebut research from her own employees that confirms it is the result of the Fed's policies why America has never had a greater chasm between rich and poor.

Are Rising Stock Prices Related to Income Inequality

 

Income inequality in the U.S. started to increase in the 1970s, and stock market gains accompanied this increase, according to a recent Economic Synopses essay.

 

Assistant Vice President and Economist Michael Owyang and Senior Research Associate Hannah Shell noted that increases in stock prices and capital returns may benefit the wealthy more than others, as they have better access to markets. They wrote: “Thus, as stock prices and capital returns increase, the wealthy might benefit more than other individuals earning income from labor.”

 

The figure below shows stock prices (as measured by the S&P 500 Index) along with the Gini coefficient, which represents a measure of income inequality. (A Gini coefficient of 0 means incomes are perfectly equal, and a coefficient of 1 means incomes are perfectly unequal.)

 

 

The authors pointed out that inequality began to rise in the 1970s. The Congressional Budget Office estimated that between 1979 and 2011:

  • Market income grew an average of 16 percent in the bottom four quintiles.
  • It grew 56 percent for the 81st through 99th percentiles.
  • However, it grew 174 percent for the top 1 percent.1

Regarding stock returns, the S&P 500 Index grew from 92 in 1977 to over 1,476 in 2007. By comparison, it grew only 50 percent in the 30 years prior. The authors noted: “As stock prices rise, the gains are disproportionately distributed to the wealthy. Lower- and middle-income families who are also wealth-poor are less likely to expose their savings to the higher risks of equity markets.”

 

Owyang and Shell concluded: “The increase in income inequality in the 1970s was accompanied, in part, by gains in the stock market. Comovement between stock prices and income inequality results from the fact that gains in the stock market tend to benefit those in the wealthiest portion of the income distribution, who have better access to and higher participation in these asset markets.”

Thank you Fed for making yet another conspiracy theory into unconspiratorial fact.

As for what the direct effects of the Fed's disastrous policies are, the following article by the Guardian may provide some insight: "Inequality is destroying all the markers of adulthood, from home ownership to marriage." But at least it leads to all time highs in the "market."