Why Does Quantitative Easing Benefit the Rich?

63 pointsby robinohover 3 years ago

10 comments

cletusover 3 years ago

I didn't see this mentioned: when interest rates are at or near zero the tax burden on the rich almost entirely disappears. Why? Because you can borrow money for essentially nothing instead of realizing a gain or repatriating money from tax free havens.It has a name too: buy, borrow, die.Why die? Because beneficiaries inherit many things at a stepped up basis. Example: you buy a house in 1985 for $100,000. Now it's $3 million. If you sold it, you'd pay capital gains on $2.9 million. If your children inherit it, the cost basis gets reset to $3 million.Why we're giving such massive tax breaks to the wealthy is beyond me. Actually what's really beyond me is why so many poor and middle class people are willing to defend such a practice.As for QE, it's meant to benefit the government too. Why? Because inflation wipes out national debt. There'll be a point in the future where the $30T debt we have now (or whatever it is) just won't seem like that much money.Thing is, none of the predictions about QE and inflation have come true, at least not yet. This is interesting and possibly concerning.

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1cvmaskover 3 years ago

QE benefits those who already have assets. The rich generally have assets like real estate and stocks.QE leads to asset-price inflation making those with assets wealthier than those without assets.The rich get richer and the poor get relatively poorer. The poor get priced out of assets as their incomes do not keep pace with the rise in asset prices.It is big transfer of wealth from the poor to the rich.-On a side twist. In poor third world countries and banana republics the governments in inflationary countries will transfer wealth to the rich from the poor through means of financing "strategic" projects and loans that are below the real inflation rate.

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dnauticsover 3 years ago

inb4: "inflation helps people in debt and the poor are in debt"- the most poor in society don't have banking and can't be in debt. They're usually also VERY price sensitive.- typically the poor who have weak access to financial products are participating in e.g. payday lending, which has very high "APR"s and this debt is not intended to be amortized on "inflationary" timescales (you're supposed to pay back at the end of the month).Above them, much debt is revolving debt at high rates (double-digit APR) and those rates are still both intended for money to be kept at for short periods and not helped by inflation.Just about the only "class" of "poor" folks who are helped by inflation are those that own houses that were purchased by a mortgage, and we are clearly seeing that homeownership is being pushed further and further upmarket. I guess there are some "poor" people on some sort of banking small business loan, but my gut feeling is that is sort of "princess and the frog" thing is today a very quaint notion, and not actually that common anymore.The rich, also greatly benefit from easy money and lending with low interest rates. Not directly, but, because they are able to maximize their return on capital through financial instruments like shorts, Forex, etc, whose mechanisms require "lending" in some form or another. These instruments would be more expensive in a regime with less QE.

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wfnover 3 years ago

Here's a nice related FT opinion article, "The rich get richer and rates get lower": <a href="https://archive.is/rMTnV" rel="nofollow">https://archive.is/rMTnV</a>It explains a sort of feedback loop taking place here (with regards to excess of money looking where to invest => "This pushes rates down directly, when those savings are invested, driving asset prices up and yields down; and indirectly, by sapping aggregate demand.")

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ladyattisover 3 years ago

I find it odd that the article makes no mention of Richard Cantillon or the Cantillon effect. To summarize the Cantillon effect, whenever the money supply is increased those who first receive the new supply of money can purchase goods at the pre-inflationary rate/price and therefore gain the benefit of extracting more value from the money before the rest of the economy begins to notice and thus inflate their prices to correspond to the new supply. The result of this early receivers get more wealth from later receivers of the money, it's basically economic rent.

nichohelover 3 years ago

QE may make "the rich" seem richer in nominal terms, but in reality they are generally poorer. Here is what I mean:If the house I paid $250,000 for ten years ago is now "worth" $1,000,000 due to asset inflation arising from quantitative easing, I still own the same house. I am not really richer in a real sense as long as I still hold the house. I have $750,000 more nominal dollars in assets, but the dollar is just a unit of accounting. The house has not changed!If I then try to actually realize some of that nominal dollar gain by selling the house, I will pay about $250,000 "capital gains" tax on $750,000 even though I have not really seen any real-world gain (the house did not change). The government primarily benefits from this tax paid. So maybe I actually get to see $500,000 in nominal gain, after I pay the tax.But then I can use the post-tax "gain" of $500,000 to buy fun things, like better food or a cool car or a better house? Not really, if the food or car or house has also doubled in price over that interval. In fact, by assumption houses have tripled in price over this interval, and with tax losses I am worse off if I put the money in a new house, because now my $500,000 in gain plus the $250,000 I started with won't even buy as good a house as my old $250,000 house was, which now costs $1,000,000. [Edited to include the $250,000 I started with. The concept is unchanged.]The same argument applies to increasing stock values. QE inflation makes people seem nominally richer, but in reality capital gains taxes actually make them poorer if they try to utilize these nominal gains.There are subtleties to this argument and the step-up basis issue is a real thing (which would only prevent the frictional loss of taxation!) but the main point above does not seem to be appreciated.

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elzbardicoover 3 years ago

Well, that's the stuff unicorns are made of, folks.

rsj_hnover 3 years ago

First, it's not at all clear that QE benefits the rich. The Fed insists that QE lowers interest rates, but the evidence of that is mixed. Here is a study: <a href="https://www.frbsf.org/economic-research/files/KrishnamurthyVissingJorgensen.pdf" rel="nofollow">https://www.frbsf.org/economic-research/files/KrishnamurthyV...</a>Basically they argue that in some fixed income markets, QE can lower rates because of "technical" reasons -- e.g. there is a captive market for the bonds. But not corporate bonds.Moreover, QE results in a beautiful policy schizophrenia, where the same person can simultaneously believe all of the following:* Raising interest rates benefits the rich who are coupon clippers and want hard money* Lowering rates is good as it euthanizes the rentier and reduces immoral interest* Lowering rates is bad as it hurts the poor with high house prices and helps the rich get richer from asset bubbles.* Lowering rates is good because it causes inflation that helps debtors rather than creditors* raising interest rates is good for the banks because they earn more interest on deposits* lowering interest rates is bad for the banks because they are not able to earn much on the assets they purchaseBeyond the effect of interest rates, does QE do anything? I don't think so.QE does not increase money in circulation. Money in circulation goes up when the policy rate is zero because there is little incentive to keep your money in a savings account when those pay basically nothing. This indifference on the part of households is not economic stimulus. People don't run out and start spending money as a result of QE.But there may be another channel -- perhaps it freaks people out enough that they change their spending behavior as a result of being bothered by QE.Thus being aware that almost no one understands what QE does may be the key to knowing how it works. It's dadaist monetary policy, where the public is thrown into fear and confusion.The key, then, is to control the confusion.* If you want people to spend a lot of money on consumption, then play up how QE is "money printing" that will cause massive inflation.* If you want people to spend money on investment, then promise asset bubbles and capital gains.* If you want QE to discourage investment, then play up how the long durations make investments highly sensitive to very distant returns and so probably everything is mispriced and too volatile. Stay away from the asset markets!Whatever you need, QE is the answer.

boyadjianover 3 years ago

If quantitative easing did not benefit the rich, it would not be adopted so long, it is as simple as that

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SpicyLemonZestover 3 years ago

This article strikes a very particular faux-neutral tone that should raise warning flags even if you tend to agree with where they're coming from. When you see lines like:> ultimately, their main goal: higher inflation.> It hopes that enough money would trickle down so the economy improves and inflation increases (so that basic stuff get more expensive for ordinary Joe).> While the central banks increase the overall money supply and utilize low interest rates (or even negative rates), this process is creating ‘bubbles’ into the economy.That's not an attempt to provide honest information or generate productive discussions, but an attempt to get everyone pointlessly riled up so they'll share the article. Don't fall for it!

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