Why Does Quantitative Easing Benefit the Rich? | Hacker News Reader

Why Does Quantitative Easing Benefit the Rich?

fififinance.com

63 pointsrobinoh38 comments

I didn't see this mentioned: when interest rates are at or near zero the tax burden on the rich almost entirely disappears. Why? Because you can borrow money for essentially nothing instead of realizing a gain or repatriating money from tax free havens.

It has a name too: buy, borrow, die.

Why die? Because beneficiaries inherit many things at a stepped up basis. Example: you buy a house in 1985 for $100,000. Now it's $3 million. If you sold it, you'd pay capital gains on $2.9 million. If your children inherit it, the cost basis gets reset to $3 million.

Why we're giving such massive tax breaks to the wealthy is beyond me. Actually what's really beyond me is why so many poor and middle class people are willing to defend such a practice.

As for QE, it's meant to benefit the government too. Why? Because inflation wipes out national debt. There'll be a point in the future where the $30T debt we have now (or whatever it is) just won't seem like that much money.

Thing is, none of the predictions about QE and inflation have come true, at least not yet. This is interesting and possibly concerning.

Financial engineering and planning is great.

> none of the predictions about QE and inflation have come true, at least not yet

Depends on what counts as inflation. If we exclude stocks, house prices and food, not much inflation.

Adjustment: You would typically pay capital gains on only around $2M of that. You’d likely qualify for the $250K per person exclusion on a primary residence and have several hundred thousand dollars of capital improvements that you’d made over that 35 year period.

Thank you for saying this! As a Realtor, I am constantly talking with people who are scared to sell a house because they are so sure they are going to be taxed to death, all while completely ignoring the big wad of cash that they will receive when they sell. People have an absolutely irrational fear of taxes to the point they do crazy things. Yes, I'm sure there are markets where if someone has lived in a house for decades they might have to be vaguely aware of capital gains, but in my market, practically speaking, nobody is lucky enough to have this as a problem.

> People have an absolutely irrational fear of taxes to the point they do crazy things.

I've always wondered how/why otherwise smart people fall into this trap. There are calculators out there for anything and everything tax-related under the sun. See also: I don't want a raise because then I'll go up a tax bracket and make less money!

Then again, there are people who won't get married due to (legitimate) increased tax burden. There are also people who run otherwise successful businesses into the ground specifically to avoid paying taxes. I think some people are just really, really adverse to the idea of paying taxes. Like the idea hits them at some core, fundamental level.

It's pretty funny, in a cosmic sense, that when you have enough money, states will loan you money at negative interest. The amount of effectively zombie business entities that have persisted due to this is probably staggering and it's clearly been letting them devour competition.

Devour competition by offering higher wages? It doesn't sound like something that has been happening for the last 10 years.

> Why we're giving such massive tax breaks to the wealthy is beyond me.

Is this not obvious? In a mostly unregulated capitalist economy, wealthy have the keys to the kingdom.

QE benefits those who already have assets. The rich generally have assets like real estate and stocks.

QE leads to asset-price inflation making those with assets wealthier than those without assets.

The rich get richer and the poor get relatively poorer. The poor get priced out of assets as their incomes do not keep pace with the rise in asset prices.

It is big transfer of wealth from the poor to the rich.

On a side twist. In poor third world countries and banana republics the governments in inflationary countries will transfer wealth to the rich from the poor through means of financing "strategic" projects and loans that are below the real inflation rate.

yes, QE is inflationary, and inflation relatively benefits assets, but that’s a minor effect. the major effect is that assets are the means of production, and those are inflation protected, since prices on the outputs of production will adjust accordingly. that doesn’t happen with wages, because the wealthy will use the opportunity, whether explicitly or implicitly, to squeeze profits out of their productive assets, which almost always includes labor wages.

basically all macro changes to the economy benefit assetholders because of this mechanism (of owning productive assets), except those specifically targeted at circulating their wealth (e.g., wealth/estate taxes).

For those who are into an inflation of inflationary quotes this a true gem:

One frequently quoted passage from the work of John Maynard Keynes is that

“the best way to destroy the capitalist system [is] to debauch the currency.”

The passage, attributed to Vladimir Ilyich Lenin, appears in Keynes’ book The Economic Consequences of the Peace, which became an international bestseller when it was published in 1919.

i genuinely believe we should be clamping inflation to the sub-1% range (perhaps 0.1-0.3%), rather than 2-3%, so that gains would largely go to productive innovation rather than financialization. you’d still have slight pressure on capital to find productive uses, but not so much to relatively deflate labor income over a lifetime. rather than destroying capitalism, that would promote a more pure form of it (greed being redirected into the common good being a pillar of capitalism).

How are you going to introduce negative interest rates?

are you implying that the (imputed) risk-free rate (which ideally the inflation rate would track exactly) is naturally higher than the fed rates would imply, so then we need set fed rates negative to induce a lower than 'natural' inflation rate? or is it just ambiguity around the use of dashes, which look like minus signs?

Just think about what 0% inflation means. It means your money never loses value. That's frankly impossible. It's as if you built some sort of pocket dimension that can store everything without decay.

During recessions people will try to acquire this magical storage instrument to shield themselves from losses in the real economy because a yield of 0% is greater than a company stock that is crashing. The people who end up unemployed don't store their labor in money. That labor is simply gone and so is the value of the money and that loss must be represented through a negative interest rate.

> "Just think about what 0% inflation means. It means your money never loses value. That's frankly impossible."

your causation is backwards. inflation is an emergent property of the economy, and can be negative or zero if it wants (e.g., japan).

> "That labor is simply gone and so is the value of the money and that loss must be represented through a negative interest rate."

this makes no sense. what interest rate must become negative when unemployment rises?

Negative interest rates are easy for the US Treasury to institute. They can only offer t-bonds that can be redeemed for less than the bonds were purchased for.

Businesses and such will have to go along because there's nowhere to store $10-$100 billion dollars in short-term, cash-equivalents. I'm willing to be that most companies auto-renew their short-term t-bonds at market rates. Thus, if negative yield t-bonds went on offer, they'd be bought up by the tens of billions. It would be news-worthy, but companies would be unlikely to really act any different as a result.

Long term, some companies might move currency to the treasury of another country, but that introduces risks involved with exchange rates which would greatly overshadow any potential interest gains.

If you look at the €/USD over the past ten years, it's pretty clear that storing USD in Euros to earn 0.2% in interest is for fools; the lowest ratio (ever) is like 0.87 and the highest was 1.58, and these two events occurred only 8 years apart. Even the month-to-month changes are rather dramatic. American companies doing business in USD are going to continue to hold USD regardless of negative interest rates.

inb4: "inflation helps people in debt and the poor are in debt"

- the most poor in society don't have banking and can't be in debt. They're usually also VERY price sensitive.

- typically the poor who have weak access to financial products are participating in e.g. payday lending, which has very high "APR"s and this debt is not intended to be amortized on "inflationary" timescales (you're supposed to pay back at the end of the month).

Above them, much debt is revolving debt at high rates (double-digit APR) and those rates are still both intended for money to be kept at for short periods and not helped by inflation.

Just about the only "class" of "poor" folks who are helped by inflation are those that own houses that were purchased by a mortgage, and we are clearly seeing that homeownership is being pushed further and further upmarket. I guess there are some "poor" people on some sort of banking small business loan, but my gut feeling is that is sort of "princess and the frog" thing is today a very quaint notion, and not actually that common anymore.

The rich, also greatly benefit from easy money and lending with low interest rates. Not directly, but, because they are able to maximize their return on capital through financial instruments like shorts, Forex, etc, whose mechanisms require "lending" in some form or another. These instruments would be more expensive in a regime with less QE.

> "inflation helps people in debt and the poor are in debt"

Inflation helps with your debt when 1) there is asset backing the debt, in which case it is really leverage that you are getting or 2) if the debt is unsecured, the income servicing the debt would need to be subject to the inflation to reduce the burdeon.

Inflation has occured in assets but not so much in incomes.

But inflation also causes the underlying assets to increase, usually at rates far beyond average inflation.

Yeah, the real cost of a mortgage will go down slightly over time. But the biggest benefits to getting a mortgage is to establish a cost basis which is no longer fixed to the cost of housing in a region (which can go up faster than inflation/wages).

Unsecured debt often has interest rates well beyond inflation, unless subsidized. So there's no win for consumers there.

Here's a nice related FT opinion article, "The rich get richer and rates get lower": https://archive.is/rMTnV

It explains a sort of feedback loop taking place here (with regards to excess of money looking where to invest => "This pushes rates down directly, when those savings are invested, driving asset prices up and yields down; and indirectly, by sapping aggregate demand.")

The article doesn't explain why those savings aren't used for investments and why yields on investments are going down.

Quite frankly, it's because population growth is slowing down. Children used to be an exponentially growing consumer market.

Hm, but the idea (in the article as well) is that savings _are_ being used for investments and overwhelmingly so; and because of this, investment returns are going down. Does this part need further justifying? If you have a finite amount of assets and instruments where money can be invested and you have more money being invested into them, you'll have lower returns in the end. Why this is in particular I guess depends on the asset class in question - e.g. as more money goes into index funds, the prices (of shares and therefore their indices) will rise, therefore lowering overall dividend yields (relative to share price). RE prices will rise, etc.:

"Atif Mian, Ludwig Straub and Amir Sufi agree with partisans of the demographic view, such as the economists Charles Goodhart and Manoj Pradhan (whose view I have spent fair amount of space on here), that a key contributor to falling rates is higher savings. Savings chase returns, so when there are more savings and the same number of places to put them, rates of return must fall.

Mian, Straub and Sufi disagree, however, about why there are ever more savings sloshing around. It is not because the huge baby-boom generation is getting older and saving more (a trend that will change direction soon, when they are all retired). Rather, it’s because a larger and larger slice of national income is going to the top decile of earners. Because a person can only consume so much, the wealthy few tend to save much of this income rather than spend it. This pushes rates down directly, when those savings are invested, driving asset prices up and yields down; and indirectly, by sapping aggregate demand."

> Quite frankly, it's because population growth is slowing down.

I thought the article dispelled this particular myth in particular, but maybe I'm wrong?

I find it odd that the article makes no mention of Richard Cantillon or the Cantillon effect. To summarize the Cantillon effect, whenever the money supply is increased those who first receive the new supply of money can purchase goods at the pre-inflationary rate/price and therefore gain the benefit of extracting more value from the money before the rest of the economy begins to notice and thus inflate their prices to correspond to the new supply. The result of this early receivers get more wealth from later receivers of the money, it's basically economic rent.

QE may make "the rich" seem richer in nominal terms, but in reality they are generally poorer. Here is what I mean:

If the house I paid $250,000 for ten years ago is now "worth" $1,000,000 due to asset inflation arising from quantitative easing, I still own the same house. I am not really richer in a real sense as long as I still hold the house. I have $750,000 more nominal dollars in assets, but the dollar is just a unit of accounting. The house has not changed!

If I then try to actually realize some of that nominal dollar gain by selling the house, I will pay about $250,000 "capital gains" tax on $750,000 even though I have not really seen any real-world gain (the house did not change). The government primarily benefits from this tax paid. So maybe I actually get to see $500,000 in nominal gain, after I pay the tax.

But then I can use the post-tax "gain" of $500,000 to buy fun things, like better food or a cool car or a better house? Not really, if the food or car or house has also doubled in price over that interval. In fact, by assumption houses have tripled in price over this interval, and with tax losses I am worse off if I put the money in a new house, because now my $500,000 in gain plus the $250,000 I started with won't even buy as good a house as my old $250,000 house was, which now costs $1,000,000. [Edited to include the $250,000 I started with. The concept is unchanged.]

The same argument applies to increasing stock values. QE inflation makes people seem nominally richer, but in reality capital gains taxes actually make them poorer if they try to utilize these nominal gains.

There are subtleties to this argument and the step-up basis issue is a real thing (which would only prevent the frictional loss of taxation!) but the main point above does not seem to be appreciated.

that’s because the primary house of an assetholder is a non-productive asset. this factor is one of the reasons why housing (especially single-family homes) being considered an investment is fraught. only income-producing assets (excluding rents, because that’s not income but rather deadweight loss) should be considered investments.

As I said, this concept also applies to other asset classes inflated by QE, such as stocks. I didn't say the house was the primary house (in which case there is some capital gain exclusion complicating matters anyway).

So, no.

The Fed tracks inflation using the CPI, the price of things that are consumed. Food is an example of a consumed good. Housing is not, that is an investment. The portion of housing in the CPI is of the rent of the time that is now in the past you consumed on it.

Housing is increasing in value faster than food or cars. So yes, you are better off. Housing is increasing at equal rates with housing, but you can leverage, so you are better off.

You didn't pay $250k for that house, you paid $50k and another ~100k over that 10 years. When you sell, you realize that $750k profit, which yes you will be taxed on some of that, but you can now take that $500k and put it into a $2.5M home. That $2.5M home will be better than your $250k home.

Leverage is risk, yes. But in a QE environment, not leveraging is the ultimate risk.

The poorer/richer argument only makes sense in the context of a specific consumption basket. If your main goal in life is to buy as many bananas as you can (for example), then you would measure the house appreciation in bananas. Can you get more bananas for your house now (at $1M - 250k) than you could when you got it? Then you're "richer", otherwise you're not.

Usually we use CPI as a proxy for it. However, most people when evaluating houses ignore the implied rent paid; owning a house means not having to pay rent - and that has a specific price on it, depending on your local rental market. So in a relative sense, you owning that house makes you richer relative to the people that did not own a house (who did not get the same nominal appreciation at all and are much worse off), and leaves you at the same place with other people owning the house. You're unlikely to be worse off (on a relative standing) than if you hadn't gotten the house. So I'm not sure richer/poorer makes sense without considering the alternatives (i.e. renting & investing)

Well, that's the stuff unicorns are made of, folks.

First, it's not at all clear that QE benefits the rich. The Fed insists that QE lowers interest rates, but the evidence of that is mixed. Here is a study: https://www.frbsf.org/economic-research/files/KrishnamurthyV...

Basically they argue that in some fixed income markets, QE can lower rates because of "technical" reasons -- e.g. there is a captive market for the bonds. But not corporate bonds.

Moreover, QE results in a beautiful policy schizophrenia, where the same person can simultaneously believe all of the following:

* Raising interest rates benefits the rich who are coupon clippers and want hard money

* Lowering rates is good as it euthanizes the rentier and reduces immoral interest

* Lowering rates is bad as it hurts the poor with high house prices and helps the rich get richer from asset bubbles.

* Lowering rates is good because it causes inflation that helps debtors rather than creditors

* raising interest rates is good for the banks because they earn more interest on deposits

* lowering interest rates is bad for the banks because they are not able to earn much on the assets they purchase

Beyond the effect of interest rates, does QE do anything? I don't think so.

QE does not increase money in circulation. Money in circulation goes up when the policy rate is zero because there is little incentive to keep your money in a savings account when those pay basically nothing. This indifference on the part of households is not economic stimulus. People don't run out and start spending money as a result of QE.

But there may be another channel -- perhaps it freaks people out enough that they change their spending behavior as a result of being bothered by QE.

Thus being aware that almost no one understands what QE does may be the key to knowing how it works. It's dadaist monetary policy, where the public is thrown into fear and confusion.

The key, then, is to control the confusion.

* If you want people to spend a lot of money on consumption, then play up how QE is "money printing" that will cause massive inflation.

* If you want people to spend money on investment, then promise asset bubbles and capital gains.

* If you want QE to discourage investment, then play up how the long durations make investments highly sensitive to very distant returns and so probably everything is mispriced and too volatile. Stay away from the asset markets!

Whatever you need, QE is the answer.

If quantitative easing did not benefit the rich, it would not be adopted so long, it is as simple as that

True though that may be, it does not answer the question - why?

This article strikes a very particular faux-neutral tone that should raise warning flags even if you tend to agree with where they're coming from. When you see lines like:

> ultimately, their main goal: higher inflation.

> It hopes that enough money would trickle down so the economy improves and inflation increases (so that basic stuff get more expensive for ordinary Joe).

> While the central banks increase the overall money supply and utilize low interest rates (or even negative rates), this process is creating ‘bubbles’ into the economy.

That's not an attempt to provide honest information or generate productive discussions, but an attempt to get everyone pointlessly riled up so they'll share the article. Don't fall for it!

I agree with you as a concept, but "higher inflation" is actually a stated goal of most central banks. They try to keep it in the 2-3 % range.

The explanatory "basic stuff get more expensive for ordinary Joe" is a little deceptive, but still speaks to the point? It gets more expensive for everyone, but "ordinary Joe" who has less money as his lack of assets didn't go up with price, ends up paying more relative to his net worth.

It also _is_ creating bubbles in the economy, but that is _not_ a stated purpose and he isn't saying it is.

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I agree overall that this article is quite biased and not one I feel like I can honestly read.

Yes, that's the faustian bargain we've got when we decided journalism should be free on the internet.

It is annoying, regrettable, but is just the way things are today: clickbait or die.

But let's not this detail detract from the argument as it is solid and with serious possible implications that merit being discussed.

Clickbait, subscriptions or die. The FT are doing pretty well for themselves, and they definitely don't provide clickbait.

I've learned this lesson the hard way, but it's not a minor detail we can skip over. The article is shaped to ensure that we'll start yelling at each other if anyone tries to challenge the argument or question its implications. You can't bootstrap a respectful discussion on top of an article trying to get you riled up - it just doesn't work.

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