Monday, July 24, 2017

Monetary Policies has helped the Rich

Monetary policy is a very blunt instrument. Central Banks can raise and lower interest rates. They can buy or sell securities. They cannot have a direct impact on the economy. In other words, it is very different from Fiscal policy; if there is a desire to help the unemployed, they can increase unemployment benefits, put money directly into people's hands. They can't do that with Monetary Policies.

So what has happened is the Fed and other Central Banks have been very stimulative, they knocked their reference rates down to essentially Zero in response to the great recession but that didn't have much effect because credit worthy borrowers had plenty of money and the banks didn't want to lend to the rest. 

Then they went into Quantitative Easing, where they were buying all these securities, pumping money into the economy. What happens is these securities were owned by Financial Institutions or High Net Worth Individuals. And what did the Financial Institutions do with that money, they took that money and reinvested them in equities. And I think that's what basically drove up equities starting in March 2009. It was entirely the Fed. It wasn't the economy, the economy has been limping along.

Okay those equity portfolios go up, upscale individuals are not going to increase spending that much.