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Can you elaborate on how QE and inflation is a direct wealth transfer from poor to rich? Do you mean that QE funds upper class purchase of assets with cheap deb

by ytim 10y ago

Can you elaborate on how QE and inflation is a direct wealth transfer from poor to rich? Do you mean that QE funds upper class purchase of assets with cheap debt versus inflation's havoc on lower income savings/purchasing power? And isn't QE ultimately beneficial to the poor, in that it's funding labor that would otherwise go unused during a recession (for example)?

skissane 10y ago
The phrase "direct wealth transfer" might be too strong, but it's clear that in many cases inflation has a disproproportionate impact on low income people than on high income people. Higher income earners are more likely to obtain regular pay-rises than lower income earners, so inflation has less of a negative impact on their pay. Lower income people tend to spend the vast majority of their income on meeting their basic needs, so any decline in real income has an immediate negative impact on their standard of living. Higher income people tend to allocate much more of their income to saving or investment, so a reduction in their real income has a much smaller impact on their standard of living. If an economic change makes the poor poorer, while the rich stay where they are (or even get richer), is it wrong to call that a "wealth transfer"?
kaonashi 10y ago
QE removes government bonds from circulation, replacing them with reserves which pay less interest. This forces those seeking a return on idle cash to seek alternate mattresses, of which real estate is a handy one. This leads to more real estate transactions, and thus higher prices.
cderwin 10y ago
I'm no economist, but my understanding is that QE subsidizes capital for banks (by lowering interest rates) with the intent to lower interest rates set by those banks and encourage investment. This first most benefits banks, which are obviously not staffed by the poorest Americans, and secondarily benefits those who will take out loans against those (mostly commercial) banks, namely large businesses (the "corporations" in common discourse, though I hate misusing that term). Eventually I suppose these lower interest rates will trickle down to other banks, allowing middle and upper class Americans to take advantage of loans poor Americans usually can't -- refinancing mortgages and home equity loans, for example. The argument that this helps the poor seems to rest in the conclusion that eventually QE will speed up recovery for everyone, but even if they do "benefit" from QE down the line, they will now be paying for QE the same way the rest of Americans do -- through their taxes (at some point down the line anyway). Also, > And isn't QE ultimately beneficial to the poor, in that it's funding labor that would otherwise go unused during a recession (for example)? In the case of commercial loans I guess this is possible, but that's certainly not the point of QE, which is to stop businesses and people from pulling out or the markets at a time when that would have catastrophic events for the economy at large. I would assume that whatever portion of QE eventually trickles down to the lowest income brackets is largely offset by the corresponding inflation QE has caused, which is another way of saying that in real terms QE really helps the rich get richer, while the poor do not all that much better. I suppose plans like the various stimulus packages that were proposed over the years would have had the opposite effect though (if they were effective).
chrishynes 10y ago
Inflation and zero interest rates kills on two levels -- prices go up and saving is useless at a (near) zero percent return. To make a return in this market, you either need to be rich and have access to investments funded by cheap debt or you're forced into increasingly risky investments i.e. the stock market. Very different from the previous environment where you could save for decades at 5% and rely on compound interest.

by ytim 10y ago

skissane 10y ago

The phrase "direct wealth transfer" might be too strong, but it's clear that in many cases inflation has a disproproportionate impact on low income people than on high income people. Higher income earners are more likely to obtain regular pay-rises than lower income earners, so inflation has less of a negative impact on their pay. Lower income people tend to spend the vast majority of their income on meeting their basic needs, so any decline in real income has an immediate negative impact on their standard of living. Higher income people tend to allocate much more of their income to saving or investment, so a reduction in their real income has a much smaller impact on their standard of living. If an economic change makes the poor poorer, while the rich stay where they are (or even get richer), is it wrong to call that a "wealth transfer"?

kaonashi 10y ago

QE removes government bonds from circulation, replacing them with reserves which pay less interest. This forces those seeking a return on idle cash to seek alternate mattresses, of which real estate is a handy one. This leads to more real estate transactions, and thus higher prices.

cderwin 10y ago

I'm no economist, but my understanding is that QE subsidizes capital for banks (by lowering interest rates) with the intent to lower interest rates set by those banks and encourage investment. This first most benefits banks, which are obviously not staffed by the poorest Americans, and secondarily benefits those who will take out loans against those (mostly commercial) banks, namely large businesses (the "corporations" in common discourse, though I hate misusing that term). Eventually I suppose these lower interest rates will trickle down to other banks, allowing middle and upper class Americans to take advantage of loans poor Americans usually can't -- refinancing mortgages and home equity loans, for example. The argument that this helps the poor seems to rest in the conclusion that eventually QE will speed up recovery for everyone, but even if they do "benefit" from QE down the line, they will now be paying for QE the same way the rest of Americans do -- through their taxes (at some point down the line anyway). Also, > And isn't QE ultimately beneficial to the poor, in that it's funding labor that would otherwise go unused during a recession (for example)? In the case of commercial loans I guess this is possible, but that's certainly not the point of QE, which is to stop businesses and people from pulling out or the markets at a time when that would have catastrophic events for the economy at large. I would assume that whatever portion of QE eventually trickles down to the lowest income brackets is largely offset by the corresponding inflation QE has caused, which is another way of saying that in real terms QE really helps the rich get richer, while the poor do not all that much better. I suppose plans like the various stimulus packages that were proposed over the years would have had the opposite effect though (if they were effective).

chrishynes 10y ago

Inflation and zero interest rates kills on two levels -- prices go up and saving is useless at a (near) zero percent return. To make a return in this market, you either need to be rich and have access to investments funded by cheap debt or you're forced into increasingly risky investments i.e. the stock market. Very different from the previous environment where you could save for decades at 5% and rely on compound interest.