One of the many topics for discussion by the World Economic Forum in recent years has been deepening income inequality. Indeed, it was identified as the most significant trend of 2015 by the forum’s experts.
It is therefore ironic that, as the world’s policy-making elite met in Davos last month, the European Central Bank introduced a policy that exacerbates inequality, with Germany finally conceding that the eurozone’s problems were significant enough to warrant a programme of Quantitative Easing (QE).
QE is money printing hidden behind a very poor disguise. Central banks create money electronically and with it, they buy assets, primarily sovereign bonds. The intention thereafter is that the institutional investors that have sold their sovereign bonds will reinvest in assets a little further up the risk spectrum. This forces the next seller to do the same and so on. Ultimately, the stated purpose of QE is to inflate the price of risk assets in the hope that, in so doing, the benefits of higher asset prices in the financial world will ‘trickle-down’ through the economy to provide a boost to activity in the real world.
Unfortunately, we have plentiful evidence from the last six years to confirm that the trickle-down simply does not work. The fruits of the policy are consumed in the financial world but the wider economy fails to benefit. On its own, QE does nothing to improve economic fundamentals.
What it does do is redistribute wealth. It makes the asset rich richer but the asset poor see no benefit and continue to be more exposed to the economy’s structural problems, such as high and rising youth unemployment, a lack of real wage growth and persistently high debt levels. Hence, we have wealth and income inequality in the western world rising to levels with which policy makers are clearly uncomfortable. Indeed, this undesirable unintended consequence of QE in the US was one of the primary reasons that the Federal Reserve abandoned it last year.