The Central Banks Face Unwelcome Realities: Their Policies Boosted Wealth Inequality and Failed to Generate “Growth”
When the Fed ended its $3.7 trillion experiment of vastly expanding its money creation and bond buying in early 2014, bank credit expansion took off, soaring by roughly $2 trillion.
This was the policy goal: The Fed would keep the credit and the financial markets from imploding, and eventually private-sector credit would expand enough to fuel a self-sustaining recovery.
While measures of employment and production are higher, productivity, profits and wages for the bottom 95% have all stagnated. Is it coincidental that corporate profits began weakening when QE3 ended? What about the stagnation of household median income during the Fed’s expansion, and the rise of private bank credit from 2014 to the present?
Returns on expanding credit are diminishing. The Fed’s QE didn’t ‘trickle down’ to the bottom 95%, and the huge expansion of bank credit isn’t driving corporate profits higher.
Other factors are at work; a global slowdown in trade, a rise in energy costs and a stronger US dollar. All of these affect credit, profits and the share of GDP flowing to labour in wages, salaries and benefits.
The positive results of credit expansion have reached the top of the S-curve and are now declining. Expanding credit, via central bank monetary policy or private-sector bank credit, is no longer boosting profits or wages.
Even the cheerleaders of central bank gimmickry now admit that QE enriched the rich and impoverished everyone else.
What happens if central banks unleash new torrents of cash? If the returns on new credit have plummeted, rapid expansion by central banks may well quicken the S-curve’s slide, the opposite of what conventional economists expect.
Rather than be seen as further enriching the rich, central banks will start closing the spigots. If the returns on their ‘free money for financiers’ are diminishing while public anger at rising wealth inequality is growing, why put the central bank’s credibility and political independence on the line for a policy that has visibly failed Main Street?