How QE Favours the Rich

Everyone is on the edge of his seat.

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 all went up yesterday in anticipation.

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

More miracles? More heroism? More saving civilisation?

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 favours 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.


Bill Bonner
for Markets and Money

From the Archives…

The ECB’s Outright Monetary Madness
07-09-2012 – Greg Canavan

Who Knows What’s Going on in China’s Centrally Planned Economy?
06-09-2012 – Greg Canavan

The Australian Dollar is Not the Euro
05-09-2012 – Dan Denning

Australia’s Unbalanced Boom
04-09-2012 – Dan Denning

Why a Monarchy Beats Modern Democracy
03-09-2012 – Bill Bonner

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities.

Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and MoneyDice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill's daily reckonings from more than a decade: 1999-2010. 

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5 Comments on "How QE Favours the Rich"

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The rich ……carry.

They print and print and there is no significant change in jobs or inflation or hard asset prices.

Where does it go? Carry!

And derivative plays on commodities…..

The AUD and the KIWI is about the only thing not ringfenced so despite the commodities weakness til now it should soar for a few days longer if the EU doesn’t blow up meantime.

The problem is that the central bankers run the governments — they have designed and operate the system Bill Bonner purports to understand. We have been brainwashed that Federal Reserve Notes are US Dollars, but of course they are not. FRNs are private scrip that only holds its value through the enforcement of a criminal police state. If the USA pulled all of its bases and turned its fleet of thermonuclear warheads into silly putty, the value of our retirement funds would fall to zero. Charging interest really just adds insult to injury, as the bankers steal the principal as… Read more »

” If the USA pulled all of its bases and turned its fleet of thermonuclear warheads into silly putty,”

explain why this is likely? are peace loving gandhians about to take over the military establishment?

When the US Defence Secretary is photographed standing on a map of the globe the size of a football field or two in some secret indoor location in rural Virginia, with all the Defence and Intelligence establishment bearing funny little force, asset, and transportation infrastructure signs; what was his explanation? His leadership was concerned that his management were not sufficiently aware of the logistical complexities of marshaling force response given the current overreach in deployment of their assets. In all the scenarios he put forward, what do you think his greatest challenge would be? Pulling his forces and assets home… Read more »

You could take the banks out of the partnership equation in the USA power structure if you wanted but then the government would just print the money themselves since it is not in the nature of men to concede such power without a very good reason.

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