QE doesn't increase private sector purchasing power. It is an asset swap where the Fed buys Treasuries and provides cash-like deposits. This pushes investors into riskier assets like stocks and corporate debt, causing financial asset inflation, but not necessarily consumer price inflation.
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Quantitative Easing (QE) forced massive, often uninsured deposits onto bank balance sheets when loan demand was weak. These deposits were highly rate-sensitive. When the Fed began raising rates, this "hot money" quickly fled the system, contributing to the banking volatility seen in March 2023.
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.
On paper, the Fed is shrinking its balance sheet to cool the economy (quantitative tightening). In reality, rate cuts and other channels are injecting liquidity into the financial system faster than it's being removed. This contradictory policy means that despite official tightening, actual liquidity conditions are already easing, fueling asset prices.
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.
Despite official rhetoric, the Fed is creating money out of thin air to buy short-term government debt. Labeled "reserve management purchases," this is functionally quantitative easing, designed to keep the government's borrowing costs from exploding.
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.
The financial industry rarely criticizes loose monetary policy. This is because the initial flow of new money enters the financial system, inflating asset prices and directly increasing Wall Street's revenue through commissions and management fees.
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.
