Skip to main content

Robin Hood central banking

Robin Hood, N.C. Wyeth, 1917

There were plenty of reports in the press this year accusing central banks of behaving like King John, stealing from the poor to help the rich. Rich people's wealth tends to be geared towards holdings of stocks and bonds whereas the poor are more dependent on job income. By pushing up the prices of financial assets, central bank quantitative easing helped rich people while leaving the poor in the dust.

There are a lot of problems with the King John critique of quantitative easing.

First, a good argument can be made that QE had almost no effect on prices. Insofar as purchases were considered temporary by market participants, then the newly created money would not have been spent on stocks and whatnot, its recipients preferring to keep these balances on hand in order to repay the central bank come the moment of QE-reversal. If so, the large rise in equity prices since 2009 is due entirely to changes in the fundamentals and animal spirits, not QE.

But let's say that QE was not irrelevant and can be held responsible for a large chunk of the rise in equity prices over the last few years. Even then, the real economy, and therefore the poor, would have been equal beneficiaries of QE. As I pointed out in my previous post, financial markets are not black holes. Newly-created money, insofar as there is an excess supply of the stuff, cannot stay 'stuck' in financial markets forever. For every buyer of a financial asset there is a seller, and that seller (or the next seller after) will choose to do something 'real' with the proceeds, like buying a consumption good, investing in real capital, or hiring an employee—the sorts of purchases that benefit the poor. So if QE succeeded in pushing up financial markets (thus helping the rich), then the real economy (and the poor) must have benefited just as much. The King John argument doesn't hold much water.

But wait a minute. If both financial markets and the real economy were equally inflated by QE, then why have wage increases been so tepid relative to equity prices? One explanation is that wages are sticky whereas financial prices are quick to adjust. The relative wealth of the poor, comprised primarily of the discounted flows of wage income, stagnates, at least until wages start to catch up at which point it is the turn of the the relative wealth of the rich to decline.

Can we right this short-term wrong? Even if we try to convert central banks from being King John central banks into Robin Hood ones, things wouldn't change. Say we change where central banks inject new money. Instead of conducting QE with a select group of banks, central banks now purchase directly from the populace. And instead of buying financial assets, they bid for stuff that regular folks own, like cars, houses, and wedding rings. The moment Robin Hood QE is announced, the same effect occurs as when King John QE is announced: the prices of financial prices will be the first to jump. This 'injustice' occurs even though the counterparties to Robin Hood QE are all too poor to play the stock market and the items being purchased from them are not financial assets. Consider that an impoverished recipient of new funds may use them to purchase something at a grocery store, and the owner of that store may in turn use the proceeds to buy new inventory, and the farmer producing that inventory could use the funds to buy seed, etc etc. Someone along this line will eventually purchase shares. However, stock markets participants don't wait for this excess money to flow into stock markets before marking up prices; they adjust their offers ahead of time upon the expectation of excess money being used to purchase stocks. Robin Hood QE or not, the relative wealth of the rich is the first to rise thanks to flexible financial prices, at least until sticky wages start to catch up. This isn't the fault of central bankers, and there's no way they can restructure their operations to promote short-term equality in wealth.

How long can this short-term inequality last? I can't see it lasting longer than a year. Maybe two. But we've seen so many years of QE now that I don't think we can attribute the gap between the rates of increase in stock prices and wages to stickiness. The most likely explanation is the one in my third paragraph: on the whole, QE has done very little to affect prices, whether they be financial or not. Wages have been stagnant because QE is irrelevant, or at least close to it, and the S&P 500's rise from around 700 to 2090 has been by-and-large achieved of its own accord. Without QE, where might the S&P be? Maybe 2060, or 2065?

Central banks aren't like King John, nor is there anyway we can turn them into Robin Hoods.
Labels:

Comments

Post a Comment

Popular posts from this blog

Shadow banks want in from the cold

Remember when shadow banks regularly outcompeted stodgy banks because they could evade onerous regulatory requirements? Not any more. In negative rate land, regulatory requirements are a blessing for banks. Shadow banks want in, not out. In the old days, central banks imposed a tax on banks by requiring them to maintain reserves that paid zero percent interest. This tax was particularly burdensome during the inflationary 1970s when short term rates rose into the teens. The result was that banks had troubles passing on higher rates to savers, helping to drive the growth of the nascent U.S. money market mutual fund industry. Unlike banks, MMMFs didn't face reserve requirements and could therefore offer higher deposit rates to their customers. To help level the playing field between regulated banks and so-called shadow banks, a number of central banks (including the Bank of Canada) removed the tax by no longer setting a reserve requirement. While the Federal Reserve didn't go as f...
Post a Comment
Read more

The bond-stock conundrum

Here's a conundrum. Many commentators have been trying to puzzle out why stocks have been continually hitting new highs at the same time that bond yields have been hitting new lows. See here , here , here , and here . On the surface, equity markets and bond markets seem to be saying two different things about the future. Stronger equities indicate a bright future while rising bond prices (and falling yields) portend a bleak one. Since these two predictions can't both be right, either the bond market or the stock market is terribly wrong. It's the I'm with stupid theory of the bond and equity bull markets. I hope to show in this post that investor stupidity isn't the only way to explain today's concurrent bull market pattern. Improvements in financial market liquidity and declining expectations surrounding the pace of consumer price inflation can both account for why stocks and equities are moving higher together. More on these two factors later. 1. I'm with...
Post a Comment
Read more

Does QE actually reduce inflation?

There's a counterintuitive meme floating around in the blogosphere that quantitative easing doesn't do what we commonly suppose. Somehow QE reduces inflation or causes deflation, rather than increasing inflation. Among others, here are Nick Rowe , Bob Murphy , David Glasner , Stephen Williamson , David Andolfatto , Frances Coppola , and Bill Woolsey discussing the subject. Over the holidays I've been trying to wrap my head around this idea. Here are my rough thoughts, many of which may have been cribbed from the above sources, though I've lost track from which ones. Let's be clear at the outset. Inflation is a rise in the general price level, deflation is a fall in prices. QE is when a central bank purchases assets at market prices with newly issued reserves. In equilibrium, the expected returns on all goods and assets must be equal. If they aren't equal then people will rebalance towards superior yielding assets until the prices of these assets have risen high...
Post a Comment
Read more