Gold News

How the Fed Cheats the Poor

The rich do much better than everyone else out of Fed "stimulus" measures...

EVERYOBDY'S on the edge of his seat, writes Bill Bonner in his Daily Reckoning.

Except for us. We fell off years ago.

Investors are waiting to hear from the Fed. They think Bernanke could say something important, something that will make their stocks go up.

Oil, stocks and gold have all gone up recently in anticipation.

What will the Fed do? More QE? More Twists? More money printing?

More miracles? More heroism? More saving civilization?

Maybe. Maybe not.

And what does it matter? Can more 'stimulus' from the Fed really create prosperity? Can it put people to work? Can it bring about a real recovery?

Nah... forget it. Rates are low because people don't want to borrow. As this Great Correction continues, they could go lower. We're still in a deflationary correction... following the credit bubble of '05-'07. The Fed isn't going to change things much by pushing rates down further.

And when the Fed prints money to buy bonds it spooks gold and commodity investors. That's why gold is now back over $1,700... and looks like it might go to $1,800 before the end of the year. Gold is the ultimate money. It goes up when the Fed adds to the base money supply. It may have already gone up in anticipation of the Fed's next move.

Meanwhile, oil is sensitive to the Fed's money printing too. When the central bank stimulates with more QE... the price of oil goes up. Other commodities tend to jump too. Which defeats the whole purpose.

The Fed prints... and prices rise for the people the Fed action pretends to help. The first round of QE drove food prices up 20% and oil up 59%. Then, QE2 pushed up oil another 30%, while food rose 15%.

So, how does it help the economy when essential consumer prices go up? Of course, it doesn't. Instead, every $10 increase in the price of oil takes 0.3% off US GDP.

In other words, key consumer markets are wise to the central bankers. They know the new 'stimulus' money is phoney. When QE is announced... or expected...they push up prices for oil... soybeans...corn... and gold. And stocks.

But here is where it gets interesting. Because QE does not fall evenly, like manna from heaven, on rich and poor alike. It favors the rich. Their stocks go up a lot. Their living costs go up a little.

Bloomberg reports:

"The 40 richest people on the planet added $25.3 billion to their collective net worth last week as global equities soared."

And this from Yahoo! Finance:

"The wealth gap between the richest Americans and the typical family more than doubled over the past 50 years.

In 1962, the top 1% had 125 times the net worth of the median household. That shot up to 288 times by 2010, according to a new report by the left-leaning Economic Policy Institute.

That trend is happening for two reasons: Not only are the rich getting richer, but the middle class is also getting poorer.

Most Americans below the upper echelon have suffered a decline in wealth in recent decades. The median household saw its net worth drop to $57,000 in 2010, down from $73,000 in 1983. It would have been $119,000 had wealth grown equally across households.

The top 1%, on the other hand, saw their average wealth grow to $16.4 million, up from $9.6 million in 1983. This is due in large part to the growing income inequality divide, as well as the sharp rise in value of stocks over the period."

Not that we are bleeding heart egalitarians. We don't care whose ox gets gored... as long as it's not ours! Still, you can't help but feel sorry for the poor schleps. They voted in the last election for 'justice', 'fairness', and 'change'. The only change they got was loose change... small change...or no change at all.

Poorer families spend more of their incomes on food and fuel than rich families. So, when the Fed drives up prices for fuel and fruit crispies, the poor feel more pain.

They then cut back on their purchases elsewhere, undermining the whole stimulus effort. Instead of stimulating the economy, the Fed's new money depresses it.

Rich families, on the other hand, have stocks. The stocks go up, too, when the Fed inflates. That's where stimulus seems to work.

The Fed drives stock prices. The rich hold stocks. Do we need to spell it out? More 'stimulus' from the Fed helps the rich get richer and the poor get poorer.

Which is not a good way to create general prosperity. Or jobs. Or a happy population.

Instead, the majority begins to feel that it has been badly used. Which is exactly what is going on. The politicians love to talk about taxing 'the rich'. And the hoi polloi like to hear it. They're not rich and they don't expect to be.

But the rich didn't get rich by being stupid. They tend to be insiders.

Remember, the role of government is to transfer wealth and power from the outsiders to the insiders. Central banks are just one way of doing it.

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Bill Bonner has co-authored a number of New York Times Bestsellers including Financial Reckoning Day, Empire of Debt and Mobs, Markets and Messiahs. In his own opinion, Bill's most recent title, A Modest Theory of Civilization: Win-Win or Lose, is his best work yet. Bill also founded The Agora, a worldwide community for private researchers and publishers, in 1979. Financial analysts within the group have exposed and predicted some of the world's biggest shifts since that time, starting with the fall of the Soviet Union back in the late 1980s, to the collapse of the Dot Com (2000) and then mortgage finance (2008) bubbles, and more recently the election of President Trump.

See full archive of Bill Bonner articles

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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