Federal Reserve Chairman Ben Bernanke testified this week before the Senate Budget Committee to provide an update on the economy and his policies. He presented the Fed's outlook on unemployment, inflation, the situation in Europe, and more rhetoric on what Fed policy can do to improve the American economy.
If you're like a majority of Americans out there, you may be wondering why more than $2 trillion of printed Fed money and trillions more of government debt spending over the past three years has done little, if anything, to help you. You see that the S&P 500 more than doubled since the financial crisis bottomed, and that S&P companies posted their highest quarterly profits ever recorded last fall. Yet with all this seemingly good news, you've largely not benefitted. Why is that?
The reason is that if you're not part of the wealthiest 10 percent in America, all this money being pumped into the system is not directed at you. As money is injected through Fed purchases and programs, it first reaches financial institutions and the balance sheets of large corporations boosting stock and bond prices and the individuals holding them. By design it's meant to help out those at the top and slowly make its way to you as the economy grows. But even if the economy bounces back with all the new money, you'll still be worse off than if that money had simply remained ink and paper.
The flawed logic goes that as money is provided to businesses and the wealthy, their investments will improve the economy as a whole and so benefit the poorer Americans.
Economists have disproved the theory repeatedly since long before the founding of our nation -- even before the works of Adam Smith, the father of modern economics. Richard Cantillon, a French economist and banker, whose contributions influenced both Adam Smith and modern economics, theorized in the early years of the 18th century that as the supply of money increases, only those whose incomes rise early will benefit, while "workmen or fixed wage-earners who support their families on their wages" will not only not benefit but will actually be harmed as a result.
Bernanke's current Fed policy is harming savers whose primary assets are their deposit accounts, homes and vehicles while benefitting those with substantial stock, bond and real estate holdings and business assets.
According to the most recent Federal Reserve Survey of Consumer Finances, 90 percent of all income earners held on average less than $10,000 in stocks and less than $25,000 in bonds. And they're primarily dependent on their wages to support themselves and their families. The other 10 percent can augment their spending with income from sources other than wages like stocks, bonds and other productive assets. Those lacking a significant source of revenue apart from their job wages will not benefit from the Fed's money printing and zero percent interest rates.
The reason is that as the economy returns to growth, prices of both goods and wages will rise but the former faster than the latter. And the stocks and productive assets of the top ten percent of income earners will have appreciated at such a pace that they control a larger percentage of wealth than prior to the Federal Reserve's easy money policies. This is especially true and more pronounced under extremely low interest rates and high issuance of currency like at present and throughout the crisis.
So while the average American may be able to tuck away a sliver of wealth by keeping his or her job, following six years of money supply super expansion, the American elite will control a greater percentage of it.
Bernanke may not acknowledge the wealth disparity his policies are contributing to, but he clearly believes in this monetary trickle-down theory.
Following the latest Federal Open Market Committee (FOMC) decision last week, Greg Robb of MarketWatch asked Chairman Bernanke to comment about the affect his policies have on "individuals with fixed-incomes who have an inability to invest and make money with their funds." He responded:
"The savers in our economy are dependent on a healthy economy in order to get adequate returns. ...If our economy is in really bad shape then they're not going to get good returns. ...when the economy goes into a very weak situation, then low interest rates are needed to help restore the economy to something closer to full employment and to increase growth. That in turn will lead ultimately to higher returns for savers."
Savers right now are losing both to a 3 percent erosion of their money and to a decreasing ability to grow and build wealth. Though many changes to Fed policy and the Federal Reserve System in general are in desperate need, the immediate first step should be to raise interest rates to at least 1 to 1.5 percent. The move would allow savers to protect their savings while not hindering business investment and allow the middle class to better participate with the wealthy by growing their wealth and actually benefitting with the improving economy. Without a change to policy soon, a majority of Americans will continue to suffer and lose ground as asset markets soar and companies continue to hoard cash.
The Dow Jones Industrial Average is currently at its highest level since May 2008 only 8 percent off its all-time high, and has nearly doubled since the financial crisis bottomed. Nonfinancial corporate businesses are awash in cash holding $2.21 trillion in cash and short-term securities, the highest levels ever recorded by the Fed's Flow of Funds Account. So -- how are you doing?
James Groth is a research associate at Reason Foundation, a nonprofit think tank advancing free minds and free markets.