Warsh contends that post-crisis quantitative easing primarily inflated asset prices (stocks, housing) rather than stimulating the real economy through traditional credit channels. This created a system where sophisticated investors profited by "playing the game," while wage earners lagged behind, questioning the policy's efficacy and fairness.
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While necessary to refinance national debt, lowering interest rates has a severe side effect: it fuels a "K-shaped" economy. The resulting inflation enriches those who own assets like stocks and real estate while simultaneously punishing wage earners and savers, thus widening the wealth gap.
The primary driver of wealth inequality isn't income, but asset ownership. Government money printing to cover deficit spending inflates asset prices. This forces those who understand finance to buy assets, which then appreciate, widening the gap between them and those who don't own assets.
Modern monetary policy is a deliberate trade-off: prevent a 1929-style depression by accepting perpetual, slow-moving inflation. This strategy, however, systematically punishes savers and wage-earners while enriching asset owners, creating a 'K-shaped' economy where the wealth gap consistently widens.
Kevin Warsh argues that Quantitative Easing (QE) disproportionately benefits the wealthiest citizens. By working primarily through asset price inflation (stocks, housing), it creates significant wealth for the sophisticated investors who understand the central bank's strategy, while the real economy, where most people earn their income, underperforms.
There are two distinct economies operating simultaneously. Those with a capital base (equities, real estate) can use financial engineering and leverage to thrive. Meanwhile, individuals relying solely on wages are being crushed by inflation, as their income fails to keep pace with rising costs.
Printing money doesn't create value; it inflates the price of finite assets like stocks and real estate. Those who own these non-inflatable assets see their net worth skyrocket, while those holding cash or earning wages are robbed of purchasing power, creating a widening wealth gap.
Increasing the money supply doesn't lift all prices uniformly. It flows into specific sectors like finance or real estate first, creating asset bubbles and exacerbating wealth inequality, as those closest to the "money spigot" benefit before wages catch up.
There are two distinct forms of economic stimulus. One targets financial markets, lifting asset prices. The other targets Main Street, boosting consumption. Because the latter demographic holds few financial assets, policies aimed at them may not translate into the market gains investors expect.
By engaging in large-scale asset purchases (QE) for too long, the Federal Reserve inflated asset prices, creating a two-tier economy. This disproportionately benefited existing asset holders while wage earners were left behind, making the Fed a major, albeit unintentional, contributor to wealth inequality.
The majority of the $7 trillion COVID-19 stimulus was saved, not spent, flowing directly into assets like stocks and real estate. This disproportionately enriched older generations who own these assets, interrupting the natural economic cycle and widening the wealth gap.
