This is a trusted article among many in the financial world. The Federal Reserve’s low interest rate policy and other measures aimed at boosting the economy are pushing up the value of stocks and other assets to the month and are therefore a major cause of wealth inequality. .. ..
The idea can be heard in many segments of documentaries, newspaper opinion pieces, and cable financial news. It may be behind.
New evidence suggests that the cause of low interest rates and high asset prices that have become apparent in recent years is not the result, but the high inequality. This is the provocative implication of a new study presented Friday at the Kansas City Federal Reserve Bank of Kansas City’s annual Jackson Hole Economic Symposium (conducted for a pandemic).
How the new concept relates to the market boom, and seeing the risk to financial stability after each end, is why interest rates are so low, financial asset prices are so high, and It means working on what the FRB has to do with it.
Developed countries have experienced low interest rates for over a decade. These can be seen as the result of powerful global forces pushing down the central bank, not the result of the central bank’s decision, and the corresponding surge in asset prices.
In effect, global savings glut has caused a decline in the “natural rate of interest,” also known as r * (and pronounced r-star). This is an interest rate that neither stimulates nor slows the economy.
In this story, a central banker is like a highway driver who has to adapt speed to road conditions. The Fed has kept interest rates low for the past decade. Because these interest rates stabilized the economy. If it tried to make them higher, the result would have been recession.
MIT economist Kristin Forbes said in a presentation at the symposium, “The central bank has admitted that r-star has fallen, which means that its ability to tighten monetary policy in the future will be limited. “.
But it raises the question of why this savings glut exists altogether.
This paper by Atif Mian of Princeton, Ludwig Straub of Harvard, and Amir Sufi of the University of Chicago focuses on two main explanations. The fact that the rich save a large part of their income than the middle class and the poor.
They found that the role of higher inequality was far more important than the role of demographics.
High-income earners did not raise their savings rates. Rather, they were winning a larger part of the economic pie. Researchers have calculated that the proportion of income in the top 10% of income earners has risen from about 30% in the early 1970s to more than 45% in recent years.
As a result of high-income earners earning more and thus saving more, additional savings amounted to trillions of dollars over the years, accounting for 30% to 40% of personal savings from 1995 to 2019. I am.
Therefore, whatever causes the increase in income inequality, it is probably a combination of technological changes. Declining union power; Globalization; Tax system changes; And market dynamics where winners rob everything — it has soared the asset value of those wealthy people.
“As the rich get richer in terms of income, it creates a savings glut,” said Professor Mian. “Excessive savings force us to lower interest rates, which makes the rich even wealthier. Inequality creates inequality. It’s a vicious circle and we’re stuck in it.”
Their treatise was not definitive, and other economists at the symposium pointed out some issues. For example, the decline in the natural rate of interest is a global phenomenon, occurring in countries with different trends in income inequality than in the United States. state. Harvard economist Jason Furman said the increase in inequality was the most severe in the years before 2000, and the decline in the natural rate of interest has occurred most since then.
However, the Fed and other central banks around the world are in a difficult situation, regardless of how strong income inequality is, which drives low interest rates, high asset prices and wealth inequality.
“These forces pushing down r-stars were probably so powerful that the Fed couldn’t fight them,” Sufi said in an email.
And whatever the cause, it has created a situation where even the slightest reversal of interest rates can burden debt and cause unpredictable spillovers.
“Given that many asset value and debt sustainability assessments are built on very low interest rates, the transition to a higher interest rate environment can be quite bumpy,” said Yuan. Vice-Chair Donald Korn said. The Fed, now at the Brookings Institution, is calling for more proactive action to stop risks in the financial system in a speech at the symposium.
If nothing else, the new treatise provides more evidence of how some of the world’s most persistent economic problems intersect in complex ways. And that means that what happens next about interest rates, inflation, growth, and everything else about the future of the economy is more interrelated than initially seen.