The Great Wealth Illusion

The comments below are an edited and abridged synopsis of an article by Jesse Felder

For the past 15 years, the Federal Reserve has created a wealth effect by boosting asset prices. In 2010, Fed Chair Ben Bernanke said that higher stock prices would boost consumer wealth and help increase confidence, which would spur spending; increased spending would lead to higher incomes and profits that would support economic expansion. He began printing money with the explicit purpose of inflating asset prices, a policy continued by his successors.

The Great Wealth Illusion - BullionBuzz - Nick's Top Six
A businessman performing a magic show by pulling a dollar sign with rabbit ears from a hat

Quantitative easing (QE) has boosted asset prices but not the economy. Household net worth relative to the economy soared to record highs during the QE era. If it had worked as Bernanke hoped, after a surge in the ratio, it would have flattened out as growth in the economy caught up to growth in asset prices. That didn’t happen.

The Fed did accomplish the first half of Bernanke’s mission (boosting wealth) even if it didn’t accomplish the second half (boosting economic growth). But the rise in household net worth relative to growth in the money supply was an illusion. Net worth has declined relative to M2 since 2008 and is now at levels not seen in 20 years. When measured this way, there has been no real wealth created.

And when you deflate GDP by growth in the money supply, the picture is even more damning. Since QE began in 2008, the trajectory of the economy in relation to growth of M2 has been more deeply negative than that in household net worth. There has been no real growth in the economy since 2008 when measured this way; in fact, the economy has been in decline relative to the money supply for decades, a phenomenon that has only worsened during the QE era.

After decades of disinflation the most recent round of money printing has led to the return of inflation. History could have told us this would be the likely outcome long before Bernanke fired up the printing press. Failure to heed the warnings of history may explain why confidence in the Fed is now at an all-time low.

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