"Wealth Effect" = Widening Wealth Inequality

Authored by Charles Hugh Smith via OfTwoMinds blog,

Note that widening wealth and income inequality is a non-partisan trend.

One of the core goals of the Federal Reserve's monetary policies of the past 9 years is to generate the "wealth effect": by pushing the valuations of stocks and bonds higher, American households will feel wealthier, and hence be more willing to borrow and spend, even if they didn't actually reap any gains by selling stocks and bonds that gained value.

In other words, the mere perception of rising wealth is supposed to trigger a wave of renewed borrowing and spending.

This perception management only worked on the few households which owned enough of these assets to feel wealthier--the top 5%, the top 6 million out of 120 million households. This chart shows what happened as the Fed ceaselessly goosed financial assets higher over the past 9 years: the gains, real and perceived, only flowed to the top 5% of households earning in excess of $200,000 annually.

Spending by the bottom 95% has at best returned to the levels reached a decade ago in 2007.

By focusing on boosting financial assets to the moon as a means of goosing spending, the Federal Reserve has widened wealth and income inequality to the breaking point. Perception management doesn't actually boost the inflation-adjusted wages of the bottom 95%, which have stagnated for decades. Nor does boosting assets do much good for the vast majority of households which have modest holdings of stocks and bonds, usually in IRA or 401K retirement accounts they can't touch without paying steep penalties.

As the charts below illustrate, the Grand Canyon between the top 5% and everyone else is widening. Let's say a househould has $12,000 in retirement funds and $5,000 in a savings account. (Many households have less than $1,000 in savings, so this example-household is doing pretty well to have $17,000 in cash and financial assets.)

Thanks to the Federal Reserve's Zero Interest Rate Policy (ZIRP), savers have lost ground after adjustments for inflation. The stock market has more than doubled, and most bond funds have appreciated, but precious metals and other commodities have not performed as well. So let's say the household's retirement portfolio rose by a hefty 75%, or $9,000, to a total of $21,000.

Does this modest gain actually change the financial foundation of the household to the point that the household can now afford to buy a new vehicle, college tuition, etc.? The short answer is no; the gains are simply too modest as a percentage of income to make any difference.

Compare this to a top 5% household with hundreds of thousands of dollars of financial assets: gains registered in the hundreds of thousands do indeed move the needle on household wealth and perception management. The top 5% haven't just reaped outsized gains in Fed-goosed assets; they've also reaped the vast majority of any wage gains generated in the past 9 years of "recovery."

As this chart shows, the bottom 90% lost ground, and the really substantial gains have accrued only to the top 1%.

Note that widening wealth and income inequality is a non-partisan trend. The political and financial elites have feathered their own nests while the bottom 95% have lost ground.

The Federal Reserve's perverse policy of perception management has exacerbated wealth and income inequality: "wealth effect" = widening wealth inequality.

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IntercoursetheEU khnum Tue, 12/26/2017 - 21:50 Permalink

Intelligence doesn't 'trickle down' from network TV. Wealth is directly related to intelligence.Look to your left, look to your right, look in the mirror? Drug addled morons.Yeah, someone is moving your fucking cheese, and eating your lunch. Cut the cable, ...and stop takin' that shit.  

In reply to by khnum

GRDguy Tue, 12/26/2017 - 21:39 Permalink

The only reason those at the top have more money to spend than ever is that they learned to lie and steal more effectively without going to jail.Sorry, don't need a book to understand that.

Giant Meteor GRDguy Tue, 12/26/2017 - 21:56 Permalink

Yes, and of course their fiatskie money buys the law, but I merely reiterate what you have written ,,Non prosecution agreements, no admission of guilt ,, would be another major "tell.:"Let's say I am running a major grifting operation, have full access to the magic money machine, and write the laws of the land ..Game, set, and match ..

In reply to by GRDguy

raki_d Tue, 12/26/2017 - 21:56 Permalink

Purposefully no one talks about if fed had any other choice at all and what if they had NOT done anything and how much more worse it couldve been

Giant Meteor raki_d Tue, 12/26/2017 - 22:44 Permalink

Well worse, yes, it would have been worse .. for a time (I must add here, all things being relative, worse for whom, etc..)On the other hand, a wife takes her daily beatings, each successive beating intensifies. She suspects the next beating may just put her in a pine box, but she stays. Afraid of what she does not know, the unknown, fearful, "oh my, whatever shall become of me and the children!" To most any objective outsider, her decision may appear insane, illogical at the least. Yet, in her mind she sees no way out, Fear of the pine box is less intimidating then going into what she does not know. Some may believe, she is a hostage, and they'd be right ..Oversimplification? Of course! Aside from that little tale, there is this . What serious thought or discussion was ever given to any alternative. Were there any discussion with the American people at all, who by and large said NO, NO fucking bailouts to these criminal enterprises. And of course there was Johnny on the spot, Hank the Tank Paulson (the wife beater in my poor analogy, or at least one of them) , threatening suggesting tanks in the street by mornin. There IS no TIME for that (debate!)How utterly convenient!Whose way of life was being protected? Those government pensions, all tarted up on Wall Street no doubt, but the least of it. Sure, these actors can rain down hell on the lumpenproletariat, the great unwashed  and uninitiated ( the abused wife  in my example.) Blackmailed, held hostage to "our way of life. mom and apple pie! I suppose it never dawned on anyone the percentage of budget being spent on MIC, squandered year on year, a blank check! If one goes on the assumption that what is taking place , perhaps the greatest global, socio economic heist known to the history of mankind, quite naturally there will be pain in ANY attempts to reverse the trend. If however, it is NOT reversed, the stakes I'm afraid grow ever steeper, parabolic even, knowing full well, at some point, there WILL be an appointment with destiny, and a price to be paid for all  this lyin, cheating, stealin and all round chicanery ..Hell, it must be noted, many folks are already payin  .. and we've only just begun .. and then it may be said, one day, "it's a big club, and we're all in it. "

In reply to by raki_d

Non-Corporate Entity Tue, 12/26/2017 - 21:58 Permalink

Every pyramid needs a base and it always supports the top. The linemen in football are underpaid blue collar dudes who protect the guy that lives in a penthouse, to win a trophy for the other guy that lives in a mansion. We can't all live in penthouses and mansions...that's like a Dr. Seuss story. I'm happy with what I've got.

ps. Floyd Mayweather made over 100 million for working out, eating right, and dancing with an Irishman for a half hour.

HopefulCynical red1chief Tue, 12/26/2017 - 23:45 Permalink

The 0.01% causes all the problems.The 4.99% pays all the freight and gets all the blame.I'm glad to see so many others finally starting to make this distinction. I figured it out like 20 years ago. That's maybe not overly special, except that I knew jack shit about finance back then. We need lots of people to say this publicly, to point out the men behind the curtain, who've hidden from the masses for so long and blamed the world's problems on those who are successful by legitimate means, instead of all this globalist parasite bullshit. Sunlight, you fucking roaches...

In reply to by red1chief

Deep Snorkeler Tue, 12/26/2017 - 22:04 Permalink

America's Billionaire Leech ClassGod's select few enjoy immense tax privilegeswhile preying on the vast hordes of lesser beings.Corporations grow to titanic size and assume federal power.The working class sees wage shrinkageand retirement prospects dwindle.Wealth to the wealthiest!Power to the corporatists!Applause for the Pentagon!There's a robot with your name on its forehead. 

NeoClassicist Tue, 12/26/2017 - 22:25 Permalink

What do the Jews have to do with this? Look at the Weimar Republic and how they financed the shit out of Goy and then cried anytime they were asked to do anything for the comunity. Time to round those MOT up again and put them to honest work. 

francis scott … Tue, 12/26/2017 - 22:30 Permalink


JibjeResearch Tue, 12/26/2017 - 22:30 Permalink

It's not all the elites, Fed, and Gov fault.  The poor do not save and invest well.  They failed because they are not smart.  To be exact, the poor are dumb and stupid.The poor:1. Lack of character: most want free shits.  There's no free lunch.  Work hard for your money or have nothing.  Overtime this mentality builds character.2. Uneducated: A colledge degree is not education.  Understand socio-geo political economy is knowledge and education.The only fault I placed on the Elites is that their wealth is not capped at a certain level.  They are free to take and take ... and don't return it to the economy.  This can not and must not happen if we are to have a working society.

pigpen Tue, 12/26/2017 - 22:51 Permalink

CHS, please write about advertising fraud and why the best and brightest engineers are working on how to sell us a Nissan more effectively.Destroy the digital advertising attention bubble and we are better off as a society.Every citizen needs to download brave browser to block by default advertising, malware and tracking and even allows you to listen to YouTube with screen off.Render goobook monopolies useless and drive value of digital advertising to zero.Cheers,Pigpen

I Write Code Tue, 12/26/2017 - 22:55 Permalink

How about recognizing the effect at least a little.Everybody over age 18 gets to vote in all elections, once.  Illegals.  Tourists.  Bums.  Visitors.If you're a citizen you get a second vote, and access to more.Everyone can sell their vote for $1,000 on a Trumpocare website.  Sell it to someone you like. Sell it to someone you hate.  Doesn't matter.  Get $1,000.  Oh, tax free.If you paid even $1 in taxes to the authority, city, state, federal, you get a third vote.If you paid $10,000 to the authority you get a fourth vote.Then, I dunno, use a log system, you get more votes if you paid $100k, $1m, $10m, $100m, etc.

I Write Code D503 Wed, 12/27/2017 - 01:26 Permalink

That's lovely, only it's moving in another direction, obviously.I would add one more thing, besides the votes you qualify for and buy from other people, you could also simply buy votes outright for some larger amount, say $10,000 each.Should allow a billionaire to pretty much buy any city office in the country, most state offices, or a seat in the House, maybe even a senate seat from a small state like Rhode Island (or Alaska).

In reply to by D503

pascal bets Tue, 12/26/2017 - 23:52 Permalink

There are some really distorted views of reality in the comments here. Very entertaining.Shepwave traders are calling for a major market move next week.   So far they have been the only ones correctly calling anything in the markets.

truthalwayswinsout Wed, 12/27/2017 - 00:52 Permalink

It cannot be argued that someone, the same group of people at the "top," decided to create easy money and also decided to ship jobs overseas and also decided to allow 30 million illegals into the country.Sounds like someone does not like the Middle Class American and set out to purposefully screw them.And TV Trump is getting very little results and blowing smoke up our asses.It's a fact, immigration and trade can be fixed in less then five minutes. It is either real free trade or reciprocal trade. Let the countries we trade with decide. Give them 24 hours to notice what they want and 14 days to implement free trade or we implement reciprocal trade 24 hours after the deadline. Immigration is the easiest fix in the world. It takes 5 minutes to implement. Start raiding big employers who hire illegals. Arrest the employer. Leave the illegals alone. Make a plea bargain that no more illegals will be hired and put them on probation for 10 years. If they hire an illegal they must pay the full cost to deport the illegal and if they keep hiring they go to jail and suffer asset forfeiture. Once you very publicly raid and convict owners and key employees you then post all your agents at welfare offices or you have states post state police at welfare offices to check the identify of everyone applying for welfare. Arrest them and deport them. Guaranteed 30 million people will disappear from the country in 3-6 months because they can no longer find work.As for the Fed. that is the easiest problem of them all. Take NASA Public. Raise $800 billion plus over a decade. Use the money as venture capital and start 100's of new startups run by engineers and not silicon valley VC.  The profits from the commercialization of Space will pay off the national debt, create 15 million new jobs and save the environment. But most of all gold will once again be used as our currency. Of course, there will be so much of it that it will only be worth $10-$20 per ounce. But the Fed will be gone as money creation will come from the resources from space and not the banks. It will be a bitcoin or gold coin but based on real wealth. Paying off the National Debt will also destroy the federal reserve. Taking NASA Public will save the environment as well. 

Manipuflation truthalwayswinsout Wed, 12/27/2017 - 01:08 Permalink

It will be gold and silver only.  I am good at this game.  I did play bitcoin a bit.  I am a hard money guy.  I didn't buy in becasue it was not my style.  I have stacks of metal.  I am happy.  I have enough.  When you die then what was all about?  Were you so absorbed into making money that you forget about living your life?What else can a person say?      

In reply to by truthalwayswinsout

ds Wed, 12/27/2017 - 02:18 Permalink

The muppets (90%) have too many agendas. Focus on the wealth/income gap is dissipated and therefore the stablizer for the gap remains. Towards 2018 and beyond nothing will change. A global phenomenon, not just US. 

Sudden Debt Wed, 12/27/2017 - 05:05 Permalink

It's a choice.You can be a drug addict smoking his joint every hour or...you can build a carreer and then you don't have to deal with this mess. Lazy people most often don't get rich.People who make the bad decissions in life, have kids when they're just out of school, no carreer plans, no ambition, free shit lovers....always end up on the wrong side of the street. Like that guy recently here on zerohedge complaining that he had a poor childhood becaue his mother didn't work, no graduation, 2 kids out of wedlock... do some crime and some time... and opening a beerbottle with your teeth isn't a skill you can make money on.you can act surprissed why you're not rich but it's all pretty logical.Smart people rule over dumb lazy people. The dumb and lazy will never admit they're dumb and lazy but life is life.Just like in nature, it's survival of the fittest.People who're not rich always like to say that you need to be born rich. Not so! 70% of people born poor become middleclass.The other 30% can blame their genes on their parents.And dumb kids born rich don't stay rich long.

ludwigvmises Wed, 12/27/2017 - 05:23 Permalink

The higher you go on the income curve the higher IQ gets. We can't blame SMART people to make lots of money. We can't simply give the sub 80 IQ bums on the income scale handouts. We want capitalism to work and it is working. Those who are the most intelligent make the most money. Capitalism is working, that's exactly what we want.

J J Pettigrew Wed, 12/27/2017 - 05:44 Permalink

Do you think Goldman Sachs gives a shit?There are two classes in this country......that's right, CLASSES.There are those who got wealthy off the stock market the last 8 years....and those who didnt.Stocks used to be a place where you could gradually ride the long rising tide, with ups and downs.This has been an engineered MOON SHOT, off the cheap money and record low interest rates falselyallowed by the systemic emergency created by those who thus engineered this moon shot.

Snout the First Wed, 12/27/2017 - 07:44 Permalink

If a billionaire's wealth was distributed evenly across all Americans, everyone would get three bucks and change. Boy, that is sure going to change my life, isn't it?