How Central Banks Widen Wealth And Income Gaps

Authored by Hal Snarr via The Mises Institute,

The Federal Reserve’s latest Survey of Consumer Finances, according to Federal Reserve Governor Brainard, shows that the share of income held by the top 1 percent of households has risen from 17 percent in 1988 to 24 percent in 2015, and that the wealth held by that same group rose from 30 percent in 1989 to 39 percent in 2016.

There are many explanations of why the gap between the rich and the poor widens. Governor Brainard attributes some of it to labor market disparities relating to geography and to race and ethnicity. She and Robert Frank say it results from the wealthiest households being much more likely to invest additional money received than those in other income groups. Vincent Del Giudice and Wei Lu blame automation and robotics. John Tamny says it is a consequence of the explosion in entrepreneurship that has benefited us all. A Tax Policy Center report concludes that it will widen even more if the president’s income tax overhaul is enacted.

The Brookings Institute held a conference to explore whether monetary policy widens the wealth gap.

Mainstream economists support expansionary monetary policy because the income gap closes after mortgage payments are lowered when homes are refinanced at lower interest rates.

However, a conference panelist and former Federal Reserve (Fed) board member Kevin Warsh referred to the Fed’s monetary policy during the financial crisis as being “reverse Robin Hood.”

This view has merit because the Fed’s purchases of securities push interest rates down and expand the money supply. The expansion of money then inflates the prices of financial assets, which are disproportionately owned by the rich.

In a previous article for Mises Wire, I discussed data that seems to support both sides of the Brookings debate. In it, I conducted a thought experiment using aggregated data from Edward Wolff’s recent NBER paper and total household debt from the Federal Reserve Bank of New York. The experiment uses these data to calculate windfalls (or reductions in interest payments) that accrue to households when central banks lower interest rates. It assumes the interest rate that would have prevailed in the absence of central banking starts at 5 percent. To meet its annual inflation target of 2 percent, the Fed expands the money supply through time. This has lowered the interest rate on reserves to around 1 percent. The experiment assumes this is the interest that prevails in the presence of the Fed.

In aggregate, the experiment suggests that a reduction in interest rates from 5 percent to 1 percent benefited the bottom 90 percent. That group received the larger aggregated windfall from the Fed’s too-low interest rates. The total interest that this group paid declined by $332 billion. For the richest 1 percent, the total interest they paid declined by only $24 billion.

The above result supports the mainstream view that expansionary monetary policy disproportionally benefits the Americans populating the bottom 90 percent. Aggregation, however, is the fatal conceit of this view.

As I pointed out, 98.9 percent more people are in the bottom 90 percent than in the top 1 percent. When the aggregate windfalls are disaggregated to the household level, the annual windfall for the richest 1 percent was $20,852, but only $3,154 for the bottom 90 percent.

So, in any given year, setting too-low interest rates widens the income gap between rich and poor.

Over a long period of time, investment compounding of these windfalls widens the wealth gap. This results from the richest households being much more likely to invest windfalls than people in the lower income group, who mostly live paycheck to paycheck. Investing annual windfalls of $20,852 at 5.91 percent increases the wealth of those in the top 1 percent by $273,687 in 10 years or $1,622,639 in 30 years. This is not the case for those in the bottom 90 percent. If they spend most of their annual windfalls on consumer goods and invest the rest, say $1000, at 3.27 percent, their wealth increases by $11,607.45 in 10 years or $49,711.94 in 30 years.

Although the Federal Reserve was created to provide the US with a flexible and stable monetary and financial system, it has not.

Its policies have caused economic booms and busts, reduced the value of the dollar to about a penny in just over 100 years, and may be causing substantial income and wealth inequality.

Comments

J S Bach zzzz88 Thu, 11/09/2017 - 21:50 Permalink

"Although the Federal Reserve was created to provide the US with a flexible and stable monetary and financial system, it has not."This oft quoted pap is such a joke.  In truth, the Federal Reserve System was set up by jews to funnel - ever so slowly and insidiously - the wealth of the genitles into their coffers... period.  With this ill-gotten purchasing power, they were able to buy and therefore corrupt politicians to do their nefarious bidding.  This is why they favor "democrazies" the world over.  The results are there to behold.  Until we reclaim our money and remove the usurious birth of it, we will continue to slide into the ooze of debt slavery.

In reply to by zzzz88

Scornd zzzz88 Thu, 11/09/2017 - 23:51 Permalink

we do know what will happen. Banks call
in all debts and when said corporation/country/person cant pay they make them do things for them. just like any organised racket: many of these entities wont/cant repay an so they will get hit with economic warfare like we see right now. basicly they want blood. doom sayer? huh? im in a position of great authority in this subject and yall need
to get on board.

learn what this is: Normalcy Bias
and get over it.

or you can read
the bible and its prophecies to see what happens.

In reply to by zzzz88

EddieLomax Scornd Fri, 11/10/2017 - 04:56 Permalink

We do know what will happen, an expanding money supply compared to goods and assets means that goods and assets go up in dollar terms.Therefore the more assets you have the faster your wealth increasesIf you have more assets or earn more you can borrow more, more debt you have earns you more profit.So if we had Ron Paul's sound money, or anything like it we'd see a crash, the housing market and all the bubbles would pop simultaneously.  And then slowly we'd see real prosperity return bit by bit to those that earn it, and those that do not earn it will learn how to by watching those that do, rather than watching bozo's running around with an inflatible ball.

In reply to by Scornd

MozartIII earleflorida Thu, 11/09/2017 - 22:19 Permalink

No. They're steeling through interest rates, money manipulation rates, depreciation in different regions, ect. That is why they are all linked! Trillions of dollars a year in proffits. You will never read a news or financial article on these topics. They control all of these and give the rates to the financial institutions/desks. Best racket ever!

In reply to by earleflorida

Mr. Universe Obsidian Samctum Thu, 11/09/2017 - 21:53 Permalink

Fuck off asshole. There were no baby boomers alive when the Federal Reserve Act was passed in 1913. There were also zero baby boomers responsible for WW2 and the clusterfuck that followed. In Fact there would be no boomers at all with out the Central Banksters manipulation of the world into war. Sure blame the boomers, but look into the eyes of those who are telling you it's all their fault. Then tell me how it wasn't all pre planned by the whores of Babylon.

In reply to by Obsidian Samctum

Obsidian Samctum MozartIII Thu, 11/09/2017 - 22:40 Permalink

Cause we boomers had everything handed to us from the government. We let them have their way so long as they gave us everything the easy way. They made us CEO straight out of a two year college. We were spoiled. We were like snobs who worked for one day and thought we were tough. We had it so good we sidnt think about the future of our children, we sold them to the oligarchs.

Even today, we feel entitled because everything was handed to us. We even call ourselves the greatest generation because we are snobs. We still think the government should hand us everything through pensions and social security. No generation have ever had it easier.

In reply to by MozartIII

Mr. Universe Obsidian Samctum Thu, 11/09/2017 - 23:36 Permalink

You must be talking about some other boomers. First job was delivering newspapers at 10 then scrubbing toilets at 16, working at the mall and various nightclubs until I joined the USAF at 18. There the Air Farce spoiled me for two years until I couldn't take the privilege of it all and I expelled myself in shameful guilt taking the VA bill even though I wasn't truly entitlted. Now after my wife has worked for the county government at below market wages for almost 30 years how dare she expect the pension promised her. Yes indeed, none easier BULLSHIT take a look around. Half don't work because they don't need to. Poor people all have big screen TV's , cable, Internet, smart phones, EBT cards and AC. When I was a kid we drank powdered Milk to save money. Today's generation is the laziest fucking worthless group of fucktards I have ever seen. On top of that when things don't go exactly their way...WAHHHH rassscist, privvvvledge, booomers....always someone else to blame.

In reply to by Obsidian Samctum

Obsidian Samctum Mr. Universe Fri, 11/10/2017 - 00:26 Permalink

See what I mean? We had it so fucking easy. Jobs were handed to us at an early age. Today? Good luck finding a mews paper delivery job. You spoiled little prick.

You said your wife worked for below market wages? Awwee that was so tough wasnt it? Poor you. Bitch, people work for the same wage your wife worked for today! You stupid worthless fucking entitled prick.

In reply to by Mr. Universe

ZeroLounger Thu, 11/09/2017 - 21:48 Permalink

Ever notice that those $100 bills used to light cigars are always freshly lit?  Soon as the cigar's lit, they snuff out the flame.  The bank still takes 'em back as long as 50 % of the bill is intact.A real Big Spender would let the bill burn down past half, THEN light his White Owl! Poseurs!

nsurf9 Thu, 11/09/2017 - 22:36 Permalink

Let me know when you can tell me who owns "our" present day U.S (big lie) Federal Reserve (Rothschild) Bank that counterfeits our money.  You know, the one with the unconstitutinal perpetual charter created by the Swiss, Italian, and other Rothschild banks to steal us blind of the value of our real, hard-earned labor and savings.I have a perforated Venezuelan Bolivar, right here, for everyone that has the answer.Just let know.  Anytime - I'll be waiting right here. Not going anywhere.NO ONE, but US citizens and our Government has any business in the creation and maintenance of our money. Anything else is a counterfeit!(I know, that scares me too - but, at least we can fire  (or hang) them)

overmedicatedu… Thu, 11/09/2017 - 21:56 Permalink

your money returns .02% in a savings account..even a .gov bond gives what 2.5% for 10 yrs?  yet the big credit card banks get double digit interest..from ave joe'son fed money at 0% push out to them by our money lords..see how to get rich here with little risk..not for the ave man no no that can't happen..banking system is rigged to enrich the banks and rob the people..yet many will not understand what i posted above.

khakuda Thu, 11/09/2017 - 22:16 Permalink

It is worse than this.  Artificially low interest rates and subsidies are what have allowed prices to rise for things like houses and college tuitions WAY beyond the rate of income growth.  Yes, you saved interest on your monthly payment, BUT the price you paid went up a lot more than it would have if rates were higher and you now are in more debt than you would have been if rates had remained higher.Would you rather buy a house when rates are high and, consequently, prices are low OR would you want to buy when rates are low, but prices are high?When you buy when rates are insanely low, you have to take on more debt because home values are inflated AND you can't refinance it since rates are unlikely to fall further (like now).  As rates normalize, your equity gets wiped out as asset prices fall and you are still stuck with debt.  On the other hand, if you bought at high rates and low prices, you have less debt AND can refinance if rates fall AND can see appreciation as rates fall.Warsh is right.  The Fed has screwed those with lower wealth and incomes in a major way.We are in a major bubble and the only thing preventing it from popping is that rates are not being allowed to normalize, maybe ever.  As such, the bubble keeps building.

Radical Marijuana Mon, 11/13/2017 - 21:30 Permalink

Another gross understatement of the situation from an author associated with the Mises Institute, which is another controlled "opposition" outfit. Hence, the series of articles providing superficially correct analyses, that must be deliberately avoiding calling a spade a spade with respect to the Federal Reserve Board, as the American King of Fraud, integrated into the global systems of national central banks, as national Kings of Fraud, which are supervised by the King of Kings of Fraud, the Bank of International Settlements. Three Americans Now Own More Wealth Than Bottom Half of US Combined Private property does not exist outside of some system of public violence. The biggest and best organized gangsters are governments dominated by the international bankers, the banksters, who were able to capture the powers of governments through persistent and prolonged applications of the methods of organized crime, through the political processes, via the vicious spirals of the funding of all aspects of those political processes, including bribery, intimidation, and assassination of those who could not be otherwise bribed or intimidated.The dominate languages are those which express the biggest bullies' bullshit world views, which became the banksters' bullshit regarding political economy. At the present time, it seems politically impossible for enough people to stop believing in that bullshit, especially because they continue to mostly take it for granted. The foundation of the existing political economy CONTINUES to be that the public powers of governments are used to enforce frauds by private banks, and the big corporations that grew up around those big banks being able to create the public "money" supplies out of nothing as debts. ENFORCED FRAUDS ARE SYMBOLIC ROBBERIES. The vast majority of people are being robbed blind by the established systems. (Some of the mechanisms are such as outlined by the article above.) Meanwhile, the dominate public debates regarding those developments are mostly parroted repetitions using terms such as "capitalism," or "socialism," etc., in ways which have pretty well nothing in common with either the dictionary definitions of those terms, nor the actual social facts. Mostly such debates are not even superficially correct, but rather gibberish and nonsense. The tragic trajectory "We the People" are on is for Their power to be primarily used to symbolically rob Them, since Their public powers are primarily operating through integrated systems of legalized lies, backed by legalized violence, the most important forms of which are the ways that the monetary systems were backed up by the taxation systems, such that "money" made out of nothing as debts, through legalized counterfeiting, amounted to enforcing frauds that relentlessly and ruthlessly enabled very tiny minorities to symbolically rob the vast majority. Indeed, at the present time, almost everything which is worth robbing has already been robbed, to the degree that Civilization probably has become too completely corrupt and crazy to be able to recover from the degree to which that has become so. Unless enough People better understood the principles and methods of organized crime, which are actually the ways that Civilization operates, then there are no good grounds to expect that enough People would become more competent citizens, rather than continue to act like political idiots. One of the main reasons for how and why symbolic robberies have become social polarization runaways are that there is almost nothing but the central core of triumphant organized crime, in the form of banker dominated governments, surrounded by layers of various controlled "opposition" groups, which stay within the same bullshit-based frame of reference that the banksters were able to make become the dominate world views, through which public debates of political issues are framed, such as, I REPEAT, the bizarre uses of terms like "capitalism," or "socialism," etc., that have almost nothing in common with either the dictionary definitions of those terms nor the factual situation. I WISH that I could come to some better conclusions than that Globalized Neolithic Civilization has become too terminally sick and insane to recover from the degree to which that is so! However, the entrenched systems based on enforcing frauds are being enabled by about exponentially advancing technologies to become about exponentially more fraudulent. EVERYTHING regarding "private property" is based on being able to back up claims with coercions. The most abstract form of those are the ways that MONEY IS MEASUREMENT BACKED BY MURDER. The public "money" systems have been almost totally privatized, while the public murder systems are following after by becoming increasingly privatized, in the sense of the public powers of the state being contracted out to private corporations. The increasingly "ironic" twists are the ways that the powers of "We the People" are used to symbolically rob, while the majority of "We the People" do not understand that because they have been conditioned to feel like they do not want to understand that. Meanwhile, the main reasons for why there are no reasonable hopes for the foreseeable finite future of that kind of Civilization is that there is no publicly significant genuine opposition, but rather, only various forms of controlled "opposition."  Therefore, "We the People" being robbed blind have practically nowhere to turn to for any genuine resistance to their plight. Furthermore, in the background are the related ways that the natural world is being destroyed by "money" made out of nothing being able to "pay" for strip-mining the natural resources of a fresh, but finite, planet. Those underlying issues of the GLOBAL limits of exponential growth, manifesting as diminishing returns, has not comparable precedent in human history. Those underlying issues of the strip-mining of the planet being "paid" for by fundamentally fraudulent financial accounting systems are the deeper reasons why the exponentially increasing fraudulence of central banks is IMPORTANT. https://www.youtube.com/watch?v=Iif0vb2SFHcNomi Prins - Central banks will Destroy the planet  of course, Prins was also understating the seriousness of the situation, and its sources in the triumphs of the maximization of maliciousness by the banksters, as the best organized gangsters. Since there are enough natural resources left to strip-mine, while the diminishing return issues are only beginning to become serious on the GLOBAL horizon of history, the underlying issues that Civilization operates through fundamentally fraudulent financial accounting systems are still heading towards causing overshoot in a nutshell:http://www.marijuanaparty.ca/IMG/png/limits-to-growth-forecast.png"We the People" have been too successfully brainwashed, for generation after generation, to take for granted thinking in terms of the DUALITIES of false fundamental dichotomies and the related impossible ideals, which always backfire badly and cause the opposite to actually happen. The only ways that the real problems could be more realistically resolved would be through starting to use more UNITARY MECHANISMS, such as understanding how and why governments are necessarily the biggest forms of organized crime, dominated by the best organized gangsters, who are now the big banksters, and the big corporations which have grown up around those big banksters.  THERE IS ONLY ONE POLITICAL SYSTEM: ORGANIZED CRIME. As long as public debates regarding political economy continue to use the bogus, bullshit-based, misuses and abuses of terms which take for granted the DUALITIES of false fundamental dichotomies and the related impossible ideals, then there can not be any progress through those public debates. Rather, those debates will continue be stuck in the vicious spirals of taking for granted the basic bullshit upon which everything was built. In particular, the various controlled "opposition" groups will continue to follow superficial correct analyses with bogus "solutions" proposing and promoting the same old-fashioned impossible ideals, which perceive the mechanisms of how things work in the most absurdly backward ways possible. The runaway fascist plutocracy juggernaut is actually due to that the main source of the "wealth" of those plutocrats was being able to make the government mandated legal tender out of nothing as debts. The assertions of "ownership" of the "wealthy" are paradoxically based on the ways that "We the People" continue to believe in bullshit, such that enough of those masses of muppets vote for the banksters' political puppets, as the excessively successful applications of the methods of organized crime to control Civilization thereby become more and more out of control manifestations of runaway criminal insanities.Central Banks NECESSARILY Widen Wealth And Income Gaps because those almost totally privatized banks are based on fundamentally fraudulent financial accounting systems, whose frauds are enforced by governments. OF COURSE, BY EVERY POSSIBLE MEANS, THOSE ENFORCED FRAUDS ACHIEVE SYMBOLIC ROBBERIES. As soon as human beings are perceived as relatively separated from their environment and each other, then civilizations are necessarily gangs of reproducing robbers. The existence of the central banks is due to the history of the biggest and best organized gangsters being able to legalize rackets, with the supreme achievement of organized crime becoming legalized counterfeiting of fiat money which must be used as legal tender for payment of taxes.The longer term consequences of fundamentally fraudulent financial accounting systems dominating the GLOBAL political economy are probably going to be many orders of magnitude WORSE than the authors associated with the Mises Institute tend to point out in their superficially correct analyses of central banks creating more and more "credit" out of nothing as debts in order to prop up the existing economic systems, which depend upon being able to continue to endlessly strip-mine the planet at about an exponentially increasing rate.

MrBoompi Thu, 11/09/2017 - 22:18 Permalink

If the US treasury was allowed to create money for government spending on infrastructure, like it was supposed to, we could create many good-paying jobs.  If there was a shortage of workers, wages would naturally rise in a supply demand fashion.  But we have to borrow all our money from the federal reserve.  This money is not spent on infrastructure in any significant amount.  It is spent on defense, interest on the debt, and everything under the sun.  Just nothing for the benefit of the losers in the bottom 90%.  

strickler Thu, 11/09/2017 - 22:19 Permalink

Low interest rates make automation cheaper for big corporations which displaces workers while making consumer credit go further.  This is allowed to continue as the Federal Government pumps deficit counterfiat spending into the economy in an effort to keep the whole system moving.The rich get richer, the poor get poorer, and the middle class get slowly eaten by the inflation.

Umh Xena fobe Thu, 11/09/2017 - 22:55 Permalink

You distracted me. All of my cards are for less that 10%. This does not really matter since I pay them off every month.

A somewhat subtle point is that those who have the most to gain or lose influence the outcome for the rest of us. That is why the PTB have so much influence even little things for us are dreadfully important to them if they live off the outcome.

In reply to by Xena fobe

Scornd Thu, 11/09/2017 - 23:54 Permalink

its simple, throw all the dupes
under you under the bus until a great calamity happens that you can take advantage
of and use all your new riot gear and tracking technology and ultra efficient human resources processing technology on the starving survivors.

after u get their gold and guns

ThinkAgain Fri, 11/10/2017 - 01:48 Permalink

It's simple: financial capitalism delivers wealth concentration by the market, productive capitalism delivers weallth distribution by the market. We went south since the 80ties when Chicago Economics kicked in: replacing wages by credit. What a joke: as if credit could grow endless. Credit can only grow to certain levels, than it can't grow anymore and that's the momentum fake growth is erased and an era of stagnation (or even negative growth) is entered. We're toasted by following the wrong model. We're toasted as we cultivated a society where dissent is not favored and media are brainless and so correction is not possible till we hit the wall. And that is what happened and we're still in denial.http://www.planck.org/publications/Global-West-Economic-Adulthoodhttp:/… need productive instead financial capitalism now.http://www.planck.org/publications/Productive-Capitalism-Perspectivesht… need to start making things, otherwise we're toasted: We are not more clever than the Global East. On the contrary. We only think we are, but that's our hubris fogging our perceptions.   

desertboy Fri, 11/10/2017 - 03:32 Permalink

Gee, where does the disparity come from? Maybe the intellectually dishonest dipshits at Brookings should travel to and live in an even more blatantly corrupt third-world country if they feel confused.  Or, just read Plato's writings on why it happens - cronyism and nepotism. 

overmedicatedu… Fri, 11/10/2017 - 06:21 Permalink

what does the FED want in the new tax laws the gop is hoping to write? they are the .gov's banker& debt holder, so I am sure they get the laws they want. yet not one congressman ever speaks to what the FED input into tax law is..strange?

Hugh Mann Fri, 11/10/2017 - 06:21 Permalink

"Give me control of the money and I care not who makes the laws." The Federal Reserve was created to centralize control and power. It was created to rob us blind. Wake up!