There is a strong argument to be made that central banks underestimated the efficiency of the transmission channel between accommodative policies and financial markets while simultaneously overestimating the efficiency of the transmission channel between those same financial markets and the real economy.
That’s from a piece we did for DealBreaker a couple of months back and the point there is that the policy response to the crisis has effectively served to exacerbate the wealth divide in America.
Although this isn’t a perfect way to visualize the excerpted passage above, it does a decent job of getting the point across:
Obviously, central banks were acutely aware that flooding the market with $15 trillion in liquidity would inflate the value of financial assets. The assumption – or so it seems – was that the fabled “wealth effect” would reflate the real economy in relatively short order, and thus the benefits of ultra-accommodative policies would quickly “trickle down”.
Of course that’s not what happened.
Instead, corporations took advantage of the hunt for yield fostered by ZIRP, NIRP, and QE by implementing debt-funded buybacks, the effect of which was to turbocharge the equity market rally.
Well, guess what? This:
And also this:
Because financial assets including and especially equities are overwhelmingly concentrated in the hands of the rich, the longer policies that inflate those assets take to trickle down, the wider the wealth divide gets.
Relatedly – and this is important – the longer the trickle-down lag, the longer the policies stay in place because after all, those policies were ostensibly designed to reflate the real economy and once you’re pot-committed (which central banks were a long time ago), you can’t very well throw in the towel and say the effort has been a failure. Rather, you’ve got to keep accommodative policies in place until growth and inflation finally tick up. Again, the longer those policies are in place, the wider becomes the divide between those who are disproportionately benefiting from financial asset price inflation and those who aren’t.
Note what’s implicit in the above. Namely: this is not a linear dynamic. And that nonlinearity runs all the way up the proverbial totem pole. Here’s how Salient’s Ben Hunt recently explained this:
The goodies of a trebled stock market aren’t evenly distributed. Who owns stocks? If we’re talking about households, leaving aside pension funds and endowments and other institutional investors, it’s the rich, mostly. And that household share of the Central Bankers’ Bubble doesn’t increase linearly with wealth, but exponentially, meaning that the really rich own a lot more stocks than the merely rich, so the really rich have gotten a lot richer than the merely rich.
It should go without saying that the GOP tax plan is going to make this worse. For one thing, corporations are going to use repatriated cash to buy back more shares and otherwise reward capital.
But the more overt “fuck you” to the middle class and to low income Americans comes courtesy of simple math, which shows that by 2027, households bringing in more than $1 million (the top 0.6% of filers) will be getting 81.8% of the benefits from Trump’s tax plan.
Now with all of the above in mind, consider the following chart from Pavlina Tcherneva:
As far as how this ends, allow William Spriggs, chief economist at the AFL-CIO, to explain it to you in no uncertain terms:
This is the last time they can get away with it, because the backlash is going to be huge. In the end, the trend toward inequality amounts to capitalist suicide. Businesses can’t create themselves, they respond to general growth in income. Inequality chokes off business development.
Grab the torches and the pitchforks.Subscribe to NFTRH Premium for an in-depth weekly market report, interim updates and NFTRH+ chart and trade ideas; or the free eLetter for an introduction to our work. You can also keep up to date with plenty of actionable public content at NFTRH.com. Or follow via Twitter @BiiwiiNFTRH, StockTwits or RSS. Also check out the quality market writers at Biiwii.com.