Tags: Roach | Fed | QE | wealthy

Stephen Roach: QE Is Really Only Helping the Wealthy

By Michael Kling   |   Friday, 27 Sep 2013 08:41 AM

The wealthy are the ones who are mainly benefitting from the Federal Reserve's quantitative easing (QE) program, alleges Stephen Roach, former chairman of Morgan Stanley Asia and the firm's chief economist, in an article for Project Syndicate.

The Fed's QE program of buying $85 billion of bonds a month, is employing the "wealth effect" by pushing up equity and home prices that mostly benefit the wealthy, writes Roach, a senior fellow at Yale University’s Jackson Institute of Global Affairs.

The Fed's own Survey of Consumer Finances in 2010, the last year for which data are available, shows that the top 10 percent of income earners had median holdings of $267,500 of equity. That's almost 16 times the median holdings of $17,000 for the rest of the population.

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Most (90.6 percent) of households in the top 10 percent income group owned stocks. That was twice that of the remaining 10 percent, he notes.

Plus, the top 10 percent's median holdings of all financial assets totaled $550,800, or 20 times the holdings of the other 90 percent. Meanwhile, the top 10 percent held nonfinancial asset, including their homes, with a median value of $756,400, almost six times the value held by the other 90 percent.

Despite substantially increases in asset values, the overall economy has benefited little, he asserts.

Research generally shows that only 3 to 5 percent of asset appreciation eventually translates into larger personal consumption. That means huge increases in asset prices, which risk creating bubbles, are needed to improve the economy.

"Wealth effects that benefit a small but extremely affluent slice of the U.S. population," Roach states, "have done little to provide meaningful relief for most American families, who remain squeezed by lingering balance-sheet problems, weak labor markets, and anemic income growth."

And there's no reason to think the wealth effects will trickle down to the overall population.

Many other economists say the Fed's stimulus has benefited consumers and the overall economy by pushing down interest rates. Although the recovery has been slow, it probably would have been much worse without QE.

The economy has been steadily adding jobs this year despite the expiration of the payroll tax cut, higher tax rates and government spending cuts, notes Matthew Yglesias, business editor for Slate, calling that "a testament to the success of the Fed’s QE4 policy adopted last December."

"Rather than talking about doing less quantitative easing in light of the relatively healthy labor market, the Fed should be talking about doing more quantitative easing in light of the restrained inflation situation," Yglesias writes.

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