Well, that's the stuff unicorns are made of, folks.
Why Does Quantitative Easing Benefit the Rich?
11–20 of 39 posts
Re: Why Does Quantitative Easing Benefit the Rich?
#12QE may make "the rich" seem richer in nominal terms, but in reality they are generally poorer. Here is what I mean:
If the house I paid $250,000 for ten years ago is now "worth" $1,000,000 due to asset inflation arising from quantitative easing, I still own the same house. I am not really richer in a real sense as long as I still hold the house. I have $750,000 more nominal dollars in assets, but the dollar is just a unit of accounting. The house has not changed!
If I then try to actually realize some of that nominal dollar gain by selling the house, I will pay about $250,000 "capital gains" tax on $750,000 even though I have not really seen any real-world gain (the house did not change). The government primarily benefits from this tax paid. So maybe I actually get to see $500,000 in nominal gain, after I pay the tax.
But then I can use the post-tax "gain" of $500,000 to buy fun things, like better food or a cool car or a better house? Not really, if the food or car or house has also doubled in price over that interval. In fact, by assumption houses have tripled in price over this interval, and with tax losses I am worse off if I put the money in a new house, because now my $500,000 in gain plus the $250,000 I started with won't even buy as good a house as my old $250,000 house was, which now costs $1,000,000. [Edited to include the $250,000 I started with. The concept is unchanged.]
The same argument applies to increasing stock values. QE inflation makes people seem nominally richer, but in reality capital gains taxes actually make them poorer if they try to utilize these nominal gains.
There are subtleties to this argument and the step-up basis issue is a real thing (which would only prevent the frictional loss of taxation!) but the main point above does not seem to be appreciated.
Re: Why Does Quantitative Easing Benefit the Rich?
#13This article strikes a very particular faux-neutral tone that should raise warning flags even if you tend to agree with where they're coming from. When you see lines like: > ultimately, their main goal: higher inflation. > It hopes that enough money would trickle down so the economy improves and inflation increases (so that basic stuff get more expensive for ordinary Joe). > While the central banks increase the overa…
Yes, that's the faustian bargain we've got when we decided journalism should be free on the internet. It is annoying, regrettable, but is just the way things are today: clickbait or die. But let's not this detail detract from the argument as it is solid and with serious possible implications that merit being discussed.
Clickbait, subscriptions or die. The FT are doing pretty well for themselves, and they definitely don't provide clickbait.
Re: Why Does Quantitative Easing Benefit the Rich?
#14I didn't see this mentioned: when interest rates are at or near zero the tax burden on the rich almost entirely disappears. Why? Because you can borrow money for essentially nothing instead of realizing a gain or repatriating money from tax free havens. It has a name too: buy, borrow, die. Why die? Because beneficiaries inherit many things at a stepped up basis. Example: you buy a house in 1985 for $100,000. Now it's…
Financial engineering and planning is great.
> none of the predictions about QE and inflation have come true, at least not yet
Depends on what counts as inflation. If we exclude stocks, house prices and food, not much inflation.
Re: Why Does Quantitative Easing Benefit the Rich?
#15I didn't see this mentioned: when interest rates are at or near zero the tax burden on the rich almost entirely disappears. Why? Because you can borrow money for essentially nothing instead of realizing a gain or repatriating money from tax free havens. It has a name too: buy, borrow, die. Why die? Because beneficiaries inherit many things at a stepped up basis. Example: you buy a house in 1985 for $100,000. Now it's…
Adjustment: You would typically pay capital gains on only around $2M of that. You’d likely qualify for the $250K per person exclusion on a primary residence and have several hundred thousand dollars of capital improvements that you’d made over that 35 year period.
Re: Why Does Quantitative Easing Benefit the Rich?
#16inb4: "inflation helps people in debt and the poor are in debt" - the most poor in society don't have banking and can't be in debt. They're usually also VERY price sensitive. - typically the poor who have weak access to financial products are participating in e.g. payday lending, which has very high "APR"s and this debt is not intended to be amortized on "inflationary" timescales (you're supposed to pay back at the e…
> "inflation helps people in debt and the poor are in debt"
Inflation helps with your debt when 1) there is asset backing the debt, in which case it is really leverage that you are getting or 2) if the debt is unsecured, the income servicing the debt would need to be subject to the inflation to reduce the burdeon.
Inflation has occured in assets but not so much in incomes.
Re: Why Does Quantitative Easing Benefit the Rich?
#17QE benefits those who already have assets. The rich generally have assets like real estate and stocks. QE leads to asset-price inflation making those with assets wealthier than those without assets. The rich get richer and the poor get relatively poorer. The poor get priced out of assets as their incomes do not keep pace with the rise in asset prices. It is big transfer of wealth from the poor to the rich. - On a sid…
yes, QE is inflationary, and inflation relatively benefits assets, but that’s a minor effect. the major effect is that assets are the means of production, and those are inflation protected, since prices on the outputs of production will adjust accordingly. that doesn’t happen with wages, because the wealthy will use the opportunity, whether explicitly or implicitly, to squeeze profits out of their productive assets, which almost always includes labor wages.
basically all macro changes to the economy benefit assetholders because of this mechanism (of owning productive assets), except those specifically targeted at circulating their wealth (e.g., wealth/estate taxes).
Re: Why Does Quantitative Easing Benefit the Rich?
#18QE may make "the rich" seem richer in nominal terms, but in reality they are generally poorer. Here is what I mean: If the house I paid $250,000 for ten years ago is now "worth" $1,000,000 due to asset inflation arising from quantitative easing, I still own the same house. I am not really richer in a real sense as long as I still hold the house. I have $750,000 more nominal dollars in assets, but the dollar is just a…
that’s because the primary house of an assetholder is a non-productive asset. this factor is one of the reasons why housing (especially single-family homes) being considered an investment is fraught. only income-producing assets (excluding rents, because that’s not income but rather deadweight loss) should be considered investments.
Re: Why Does Quantitative Easing Benefit the Rich?
#19QE benefits those who already have assets. The rich generally have assets like real estate and stocks. QE leads to asset-price inflation making those with assets wealthier than those without assets. The rich get richer and the poor get relatively poorer. The poor get priced out of assets as their incomes do not keep pace with the rise in asset prices. It is big transfer of wealth from the poor to the rich. - On a sid…
yes, QE is inflationary, and inflation relatively benefits assets, but that’s a minor effect. the major effect is that assets are the means of production, and those are inflation protected, since prices on the outputs of production will adjust accordingly. that doesn’t happen with wages, because the wealthy will use the opportunity, whether explicitly or implicitly, to squeeze profits out of their productive assets,…
For those who are into an inflation of inflationary quotes this a true gem:
One frequently quoted passage from the work of John Maynard Keynes is that
“the best way to destroy the capitalist system [is] to debauch the currency.”
The passage, attributed to Vladimir Ilyich Lenin, appears in Keynes’ book The Economic Consequences of the Peace, which became an international bestseller when it was published in 1919.
Re: Why Does Quantitative Easing Benefit the Rich?
#20QE may make "the rich" seem richer in nominal terms, but in reality they are generally poorer. Here is what I mean: If the house I paid $250,000 for ten years ago is now "worth" $1,000,000 due to asset inflation arising from quantitative easing, I still own the same house. I am not really richer in a real sense as long as I still hold the house. I have $750,000 more nominal dollars in assets, but the dollar is just a…
that’s because the primary house of an assetholder is a non-productive asset. this factor is one of the reasons why housing (especially single-family homes) being considered an investment is fraught. only income-producing assets (excluding rents, because that’s not income but rather deadweight loss) should be considered investments.
As I said, this concept also applies to other asset classes inflated by QE, such as stocks. I didn't say the house was the primary house (in which case there is some capital gain exclusion complicating matters anyway).
So, no.