“Wealth Effect” = Widening Wealth Inequality

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. 

I’m offering my new book Money and Work Unchained at a 10% discount ($8.95 for the Kindle ebook and $18 for the print edition) through December, after which the price goes up to retail ($9.95 and $20).

Read the first section for free in PDF format. 

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  • WillDippel

    Here is an article that looks at the wealth of America’s richest individuals and compares it to the wealth of Main Street America:

    https://viableopposition.blogspot.lt/2017/11/the-growth-of-income-inequality-in.html

    As the wealthy have discovered, money tends to reproduce itself.

  • Sparticus

    You do not need charts or analysis, in reality, just look on the back of the US dollar: You will find the proportions (pyramid) are exact. Raising the Cost of Housing and Necessities makes it so the slaves need more credit to live and will work for less. America is the Greatest Lie Ever Told.

  • diogenes

    Note that the first graph begins its steep climb at the beginning of the Clinton presidency, begins a second steep ascent at the start of the Bush regime and a third one commencing with Obama’s. This shows that we are confronting the same system run by the same methods to serve the same people, whether they wear the Donkey mask or the Elephant mask.

    Now back to your regularly scheduled programming.

  • diogenes

    When Picketty and Saez (and Smith) tout statistics giving “average family income excluding capital gains” its a dead give away that all three are hired liars bent on covering for the plutocrats they pretend to “expose” — they are self-exposed as nake cynical hypocrites of the lowest order, to anyone who understands what they are saying — and they are in the business of preventing that, while pretending otherwise. It’s called “journalism in the public interest” and “education.” Although, I can think of other words, also, not so nice ones.

    • XXX

      Yes, Agree. I do not understand how they get away with it.

  • Re: the stagnant spending of the 95%:
    In the old days, what the so-called masses spent was based on what they earned. That’s shifted in the last couple of decades. Now income doesn’t consist exclusively of earnings but earnings supplemented by credit and/or public assistance. So my questions are: When did that failure, so to speak, of fair compensation end and credit and public assistance becoming important, necessary supplements?

  • Black Swan

    STATISTICAL MUMBO JUMBO,103 YEARS OF PRIVATE USURY MONEY AND CREDIT CREATION BY THE PSYCHOPATHS WHO CONTROL THE FEDERAL RESERVE, WORLD BANK AND THE INTERNATIONAL MONETARY FUND IS THE PROBLEM. YOU OFFER NO SOLUTIONS, WHY IS ARTICLE I SECTION 8 OF OUR CONSTITUTION IGNORED, CONGRESS IS SOLELY GIVEN THE AUTHORITY TO COIN MONEY, REGULATE THE VALUE THERE OF, AND OF FOREIGN COIN, AND FIX THE STANDARD OF WEIGHTS AND MEASURES.
    ” Money is a new form of slavery, and distinguishable from the old simply by the fact that it is impersonal, there is no Human Relation between Master and Slave.” Leo Tolstoy