How do the rich get richer?

Central banks have basically kept “zero” interest rates without interruption since 2009 in order not to let economies plunge into crisis. Who is it good – the Danish scientists asked themselves? It turns out, monetary loosening is best for the rich. And it deepens really massive inequalities.

Soft monetary policy brings profits to the rich. In our age characterized by ultra-soft monetary policy and extremely low rates, the poor or low-income families lose out. On the other hand, the wealthy achieved strong growth in income, wealth and consumption, and the largest – the richest – was identified by Asger Lau Andersen and Niels Johannesen and Mia Jorgensen of the University of Copenhagen and José-Luis Peydró of the University of Copenhagen. Pompeo Fabra University in Barcelona.

Let’s say what is monetary policy. Interest rate cuts or increases have a very strong effect on the economic situation. When it slows down, the cuts make it cheaper to pour money into it, so it’s easier to get a loan and invest. When the economy overheats, high interest rates dampen the appetite for money and thus is also a hindrance to inflation. Much in theory – to simplify. But we have known this for a long time. What do we not know?

Do we not know if monetary policy has an effect not only on the economy as a whole, but on the incomes of specific people? And if so, what type? We know, for example, that it has an impact on demand – lower rates mean cheaper credit and lower interest rates on savings, so there is an incentive to consume. But a household’s consumption depends on its wealth – differently, something else that the rich buy and something else the poor buy. Is it also affected by monetary policy?

After the previous global financial crisis in 2009, global central banks lowered official interest rates to zero or nearly zero to prevent the economy from sliding into recession for years to come. Although the US Federal Reserve had raised interest rates since the end of 2015, it lowered them again after the outbreak of the pandemic. Interest rates in the Eurozone are negative. Who wins and who loses it?

The study authors looked at the tax records of all Danes and detailed information on their income (not only from business but also from capital) and assets from 1987 to 2014. For each year the average was 70 million data. They also examined Danish property, such as real estate and debt, as well as more important purchases (such as cars). In this way, they built an overall picture of high income, wealth, consumer spending, and above all the changes that have occurred over more than a quarter of a century.

As the Danish central bank changes interest rates in the wake of a move by the European Central Bank, shifts in household income in Denmark are essentially the same as in other eurozone countries. So what is the effect of this policy on the disposable income of the family?

It turns out that a more loose monetary policy increases the disposable income of everyone – rich and poor alike. But the rich make much more money. A 1 percentage point decrease in the interest rate increases disposable income by less than 0.5% over a two-year period. In the case of the poorest and more than 10 times in the case of 1 percent. The richest – the scholars counted.

An easy monetary policy reduces companies’ financing costs, so many companies remain afloat. In this way, it slows down the high unemployment rate, which was indicated by former European Central Bank President Mario Draghi. But this does not mean that it improves the income of those who may lose their jobs. On the other hand, it greatly improves the profits from the business, allows you to have a higher income in the stock exchange and, in the end, greatly helps those who owe their profits to benefit, i.e. cheap credit. So, in general, it allows the poor not to fall into more poverty, but it brings real profits to the rich.

Not only from business or business income. Lower rates mean higher returns on capital at the same time. Such is the case with rising real estate prices and stock prices. The owners of these assets are also the rich. A decrease in the interest rate of 1 percentage point increases the value of the assets by approximately 20%. In the case of the poor, who do, however, have some assets (such as an apartment after their grandmother) and about 75 percent. In the case of the richest. It also means that a more loose monetary policy allows you to earn much more income from assets held than it allows you to earn income from working, for example.

A softer monetary policy also means cheaper credit. Who benefits from it? Of course, those who can afford cheap loans and therefore have greater creditworthiness, thanks to higher income or greater wealth. 1 percent People with higher incomes benefit from monetary easing more than any other income group.

What is the overall effect of lowering interest rates for us? It exacerbates inequality.

The authors of the study wrote in their review on the portal: “(…) a softer monetary policy clearly increases income inequality.”

If you take into account direct and indirect income from work, from business, from capital, from assets owned and the benefits of cheaper credit, cutting the interest rate by one percentage point increases total disposable income by 1% in two years. The richest is about 3.5 percent. It reduces it by approximately 2 percent. For people with low incomes. In this way, the rich get richer and the poor get poorer.

Jacek Ramotovsky

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