The Role of the Federal Reserve in Wealth Inequality: A Closer Look at the Rich Getting Richer
Wealth inequality has long been a hot topic of discussion, and a recent study released by the Federal Reserve has only fueled the flames. According to the study, the wealth of the top 1 percent in America has reached a staggering $45 trillion, a 50 percent increase from the previous year. This surge in wealth can be attributed to the unprecedented amount of money printing by the Federal Reserve in response to the pandemic. In just two years, the Fed pumped out $6 trillion in freshly printed dollars, causing a tidal wave of money to flow into financial markets.
It’s no secret that when the Fed prints money, it primarily goes into financial markets. Stocks saw a $10 trillion increase during this period, while trillions more poured into bonds and government debt, such as Treasuries. But why does the money gravitate towards financial markets? The answer lies in how the Fed operates. Rather than physically printing new dollars and distributing them, the Fed buys financial assets and subsidizes lending. This process, known as Quantitative Easing, involves purchasing assets directly, but most of the new money is actually created by banks when they make loans.
In fact, since the repeal of reserve requirements during the pandemic, banks now have the freedom to lend any amount they desire. This has resulted in new money flowing to financial markets and wealthy individuals through bank loans. The money then slowly trickles down to the rest of America, often long after prices have already skyrocketed. This phenomenon is known as the Cantillon effect.
The Cantillon effect can be explained through a simple example. Let’s say a rich individual takes out a loan to build a swimming pool. The bank essentially creates money out of thin air and charges interest on it. The rich individual hires workers for the construction, who then spend their wages at various establishments. At each step, the newly created money spreads wider and wider, driving prices higher. Unfortunately, this inflationary effect disproportionately affects the last recipients of the money, such as Social Security recipients and pensioners, who are left with reduced purchasing power.
While the Cantillon effect is not a new concept, the pandemic has exacerbated its impact. The amount of money printed during this time was simply too much, leading to soaring prices for essential goods and services. For instance, the cost of owning the median home in America has doubled since the pandemic, making it increasingly unaffordable for many. In some cities, the dream of homeownership has become virtually unattainable.
It should come as no surprise that the Federal Reserve plays a significant role in driving wealth inequality. In fact, central banks are designed to serve this purpose. The Federal Reserve was established in 1914, largely at the behest of Wall Street, with the intention of benefiting the financial elite. The consequences of this arrangement are clear: as long as we have a central bank, the rich will continue to get richer while the poor bear the brunt of inflation.
Looking ahead, the Federal Reserve’s recent announcement of potential inflation in 2022 suggests that America’s wealthy should prepare for another windfall. Meanwhile, the rest of the population must brace themselves for the fallout. It is crucial to recognize that the views expressed in this article are the opinions of the author and do not necessarily reflect those of The Epoch Times. However, they raise important questions about the role of the Federal Reserve in perpetuating wealth inequality and the impact it has on society as a whole.
