Market Overview

The Winners and Losers with QE

Earlier today, on his blog at the New York Times, Paul Krugman attempted to dispel the rising notion that quantitative easing benefits the so-called "one percent" at the expense of everyone else. Basically, Krugman argues that the Fed, through quantitative easing, is working in the best interests of the masses at the expense of the elites.

Krugman's conclusion is flat out wrong, and his supporting arguments are weak.

The actual politics is utterly the reverse of what's being claimed. Quantitative easing isn't being imposed on an unwitting populace by financiers and rentiers; it's being undertaken, to the extent that it is, over howls of protest from the financial industry. I mean, where are the editorials in the WSJ demanding that the Fed raise its inflation target?

Krugman makes the claim that the financial industry is upset with quantitative easing. Business Insider's Wiesenthal, who Krugman references, makes the same claim, noting that Bill Gross (one the richest people in the world) has been one of the most vocal critics of the Fed's QE.

I would challenge this anecdotal claim on its face. As someone who follows the financial media at all hours of the day, the claim that the financial industry as a whole is united against QE is absurd. There are plenty of QE apologists. While there are notable critics of QE, they just happen to be more vocal, not the absolute majority. (And Bill Gross is a bond guy...what do you expect?)

Second, actions speak much louder than words. Note the powerful rallies in equities whenever QE is even hinted at, and the equally powerful sell offs whenever the Fed talks down more easing (or even if they just don't mention it at all).

Perhaps the 1%ers who oppose QE do it on the grounds that they know it is bad for the general economy in the longer-term. They know what happens when the music stops.

The bottom 80% of Americans own roughly 7% of the financial assets. The top 1% own about 42%. Who benefits more when the market rallies 2% in a day on the hint of more QE?

Fed policy isn't some kind of giveway to the banks, it's just an effort to give the economy what it needs. Furthermore, Fed efforts to do this probably tend on average to hurt, not help, bankers.

In many cases it is, in fact, a giveaway to the banks. The Fed buys assets because they don't, by definition, like the current market value. Further, while rate compression may harm banks in the absolute sense, it's the rough equivalent of getting a shot to fight off a deadly infection.

Sure it may sting, but would you rather take a little pain or die? Without the Fed's liquidity injections, the major banks and financial institutions may not be alive at all.

The typical retired American these days relies largely on Social Security — which is indexed against inflation.

Even for workers qualifying for the maximum payout, social security benefits are relatively modest. Those who rely on them for their livelihood are (generally speaking) lower income.

On average, lower income Americans spend a significant percentage of their income on food and fuel. The poorest Americans spend about a quarter of their income on food and almost 9% of their income on fuel.

While core inflation may have stayed stable in the face of QE, the price of food and fuel has been on the move. As income declines, the percentage spent on these goods increases, thus the inflationary effects of QE disproportionally hurts the lower income.

Thus, the populist opposition to the Fed's recent actions isn't some foolish belief. QE is not in the interest of the vast majority of Americans.

Posted-In: Bonds News Futures Commodities Politics Forex Econ #s Markets General Best of Benzinga

 

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