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| 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.
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