The money-printing bonanza of recent years has been well covered. What doesn’t get enough coverage is the mass inequality that it leads to.
Let’s recap. There has been more money printed in the last couple of years that at any point in history. Take a look at the below graph:
This graph shows M1 money supply. That is money that is very liquid, essentially – so think cash, chequing deposits and travellers’s cheques (if they even still exist?).
Looking at M2 money supply could perhaps be more indicative here. This expands to include M1 money supply but also savings and time deposits, certificates of deposits and money market funds. So think slightly less liquid money but still, well, money (pretty much).
I have also graphed this to show the effects of COVID:
To be honest, you could argue that neither of these are the best metrics to use in this context. Perhaps the best of all is the Fed balance sheet, which let me tell you – it’s not pretty reading either.
Here comes the inflationary beast
So where does all this money go? It has to go somewhere, right? Well, the answer is inflation (something I have been crying about forever). Money becomes less. It’s simple – if you have one bar of gold, and there is no other gold in your village, I’m guessing that gold bar goes for a pretty penny.
But what happens if some punter down in the pub discovers a thousand gold bars in the back yard, and dishes them out at the local market? I’m guessing that a gold bar becomes less valuable – and the prices of real goods such as milk, bread and crunchy peanut butter now go up in gold terms.
That is the same as what has happened with money over the last year. And unless you are living under a rock, you will have noticed that inflation has now followed. It’s a very simple mathematical relationship.
What has this got to do with inequality?
So that makes sense. Print money, get inflation.
But think about this – inflation making its way into the price of everyday goods hurts those at the bottom more. This is because they spend a greater percentage of their income on everyday goods, such as food and energy.
Secondly – and more importantly – is that all the inflation also finds its way into asset prices. House prices go up with inflation, just like bread and milk. Look at what happened with all the money printing during COVID – the stock market printed absolutely outrageous gains.
In fact, the stock market rose 550% from its 2008 nadir to its peak earlier this year. And guess who owns houses and stocks and all these rising financial assets? That’s right – wealthier people. Inflation is the single biggest driver of inequality in modern society.
But this money printing just exacerbates a trend that has been happening for a long time. The below chart is a rather sad one, and for me really symbolises the death of the American middle class.
While this has been happening a long time, the divergence in the last couple of years is noticeable on the above chart.
Want another fun fact to top off how grim this situation is? The Forbes rich list added more to their wealth in 2020 than at any point since the list tracked wealth. That is because of this money printing pushing up all these financial assets. And what happened in 2020? That is right, a global pandemic, with so many starved of their paycheques, their livelihoods.
But those who could sit at home and pop on a hoodie, while logging in from their bedroom, were OK. And more than that, the ones owning assets absolutely thrived.
Like I said, money printing and inflation have a mathematical relationship. But so too does inequality – don’t forget about that.
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