The Federal Reserve: The Real Cause of Wealth Inequality


Wednesday, March 13, 2019

Wealth inequality has become a major talking point for those primarily on the left who are vehemently against capitalism. Often espoused by leftist professors, lawmakers, and think tanks, the increasing disparity in wealth among Americans has been a growing concern– and their concerns ought to be heard.

Wealth inequality is an issue that both sides should be willing to tackle because it can cause terrible consequences for a functioning society. While the left is correct in their concerns, they are ignoring a major cause of the rampant, growing inequality in America– the Federal Reserve– and instead tend to blame a market-based economy.

Researchers from the Center for Economic Studies set out to analyze how widespread inequality affects nations. The study sampled 114 different countries over a 27-year time horizon and found that those countries with higher of inequality tend to be associated with more terrorism. This is because if inequality is ramped up, those at the bottom of the distribution ladder have a proclivity to “flip the system,” so to speak, thus causing destabilization, terrorism, and large amounts of crime.

The sociological theory of relative deprivation explains this situation perfectly. Essentially, relative deprivation is the theory that humans take action in order to acquire something that they believe they are entitled to such as opportunities, wealth, etc. Conservatives and liberals should be having a conversation that accepts the basic facts of inequality, that our society needs innovation and incentives in order to be productive. This system is paid for by a level of inequality, BUT we need to keep that inequality in-check because, if not, things will destabilize.

The Federal Reserve chairman, Jay Powell, announced in late January that the Federal Reserve will act dovish towards raising interest rates. In order to fully comprehend this major announcement in the financial world, we need to flashback to the financial crisis of 2008– and even before that.

A lot can be told about some of the biggest financial events in the past two decades just by looking a historical chart of US interest rates/Federal Funds Rates. In 2000-2001, the US went through what was coined the “dot com bust” where many internet-based companies were overvalued and peaked before a hefty crash. Once the bubble popped and investors lost a significant amount their assets, the Fed jumped in to save the day by lowering interest rates (note the graph below).

After a few years of historically low rates, the Fed decided to incrementally raise them which affected millions of Americans who could no longer afford their mortgage payments with a higher rate– cue the mortgage crisis of 08-09. The Fed, again, saved the day by lowering interest rates to almost zero for the next decade.

Interest rates affect low-income earners and young savers more than they may realize. With interest rates at near-zero, those who may be in their twenties and thirties have a difficult time saving for a house or a family without taking on unnecessary investment risk.

For a recent college graduate saving for a house, depositing money in a savings account earning less than one percent interest is not ideal. In fact, after inflation is accounted for, this money could be losing its value. So what should young savers do at this point? Unfortunately, in order to accumulate any type of return on savings (hopefully), the only route is to invest it in the market.

Take this same college graduate, for example. If he/she/zi were financially-savvy enough to realize this, would he/she/zi be able to make smart investment choices? Gallup research shows that only half of the American adult population are able to correctly identify the safest investment type when given four options to choose from.  

While most Americans are suffering from not being able to save, the wealthiest among us are reaping the benefits of low interest rates. In an environment of cheap money, corporations and wealthy individuals are able to take out almost-free loans to purchase capital and assets for their companies. Many large corporations use cheap loans for share buybacks, too. This is when companies purchase shares of their own stock which raises the stock’s value. Below is a historical chart of the S&P 500 index. Compare this with the previous chart regarding interest rates.

The issue here is not that we have wealthy individuals in our society– it is that our central banking system seemingly operates to serve these wealthy individuals at the peril of most Americans who are not well off. All the while, free market capitalism is blamed by half of the country. Financial literacy is key for younger Americans looking to make smart fiscal decisions.  

Dan is a recent graduate of Suffolk University in Boston, MA with a degree in Finance. He is currently working toward becoming a financial adviser but also has plans to eventually run for political office.

The views expressed in this article are the opinion of the author and do not necessarily reflect those of Lone Conservative staff.

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About Daniel Pelosi

Suffolk University

Dan is a recent graduate of Suffolk University in Boston, MA with a degree in Finance. He is currently working toward becoming a financial adviser but also has plans to eventually run for political office.

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