The Federal Reserve's policies continue to create a wedge between rich and poor. This time, it's being manifest in inflation.
As if anyone needed more proof that the pandemic has disproportionately impacted the most vulnerable, Bloomberg found some. Inflation has accelerated for the bottom 10% more than the top. For the Federal Reserve, that’s business as usual.
In the United States, record levels of employment have long been padded by shaky part-time service work. Unfortunately, and rather predictably, the pandemic’s hallmark has been massive layoffs in the largest and most brittle portion of the American economy.
Astonishingly, for a large swathe of these workers, there are two significant headwinds in their pursuit of happiness.
The first is a simple fact that blue-collar workers are more likely to contract the virus. If you can’t work remotely and you haven’t been laid off, chances are you’re headed into work and putting yourself at risk every day.
Secondly, even if you’ve avoided getting laid off and haven’t gotten sick, there’s more relentless pressure on your finances. Inflation has risen more aggressively for the bottom 10% than the top 10% in the economy.
This means prices for necessities like groceries and housing are now on the rise. If you’re wealthy, you don’t worry about the cost of food as much, while a rising housing market is great if you own a home.
Federal Reserve policy is one cause of this inequality, as the financial establishment likes to focus on maintaining the status quo. Ultra-low interest rates and QE help to boost confidence, but they also result in money flowing mainly into financial assets.
The argument that Wall Street loves is there are no jobs if you don’t bail out the corporations. In turn, this preserves sky-high home prices, and the stock market enjoys a V-shaped recovery.
Imagine a forest full of dead trees—no life, no growth, just towering piles of deadwood. In nature, a natural forest fire comes through and burns them to the ground, and new growth comes from the ashes.
The Fed has painted the trees with flame retardants.
Many calling for “cancel rent” or additional stimulus to help cover the cost of housing don’t realize they are trying to perpetuate the cycle that has contributed to vast wealth inequality in urban centers.
If you don’t allow foreclosures and evictions, prices will stay unsustainably high forever. If you do, the initial pain will be replaced by lower costs more in-line with stagnant wage growth. The same applies to the propping up of a stock market that is light-years away from fair value.
How many K-shaped recoveries will the bottom 10% endure before someone lets the free market reset? If Dalio is right, it may never happen.
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. The author holds no investment position in the above-mentioned companies.
Last modified: September 23, 2020 2:02 PM