share this article!

I read Walter Scheidel’s book “The Great Leveler” around two years ago, which recounts the history of how disasters and mass violence have historically reduced economic inequality. The book’s conclusion is that mass mobilization warfare, transformative revolutions, state collapse, and devastating plagues are to blame for the destruction of the rich’s fortunes. What causes this politically charged term of “inequality” to become vulnerable to leveling forces in the first place? And, when this cycle of growing wealth distributions begins to turn inward, can we gaze out and try to predict market reactions? I’ve seen a lot of thoughtful debates about how government policies enhance or diminish the wealth divide. However, until today, finding enough facts to decisively prove either side has been difficult. Many of the facts have now been published in a number of well-researched publications, two of which I shall discuss below. The authors of Credit Suisse’s recently released Global Wealth Report present ample evidence that central banks’ actions have resulted in a tremendous wealth boom for the wealthy, partly because the stimulus has gone into asset prices such as equities, bonds, and homes. The State of the Nation’s Housing 2021, a recent publication from Harvard University’s Joint Center for Housing Studies, concludes that “Households that escaped the financial crisis unscathed are snapping up the limited supply of available homes, driving up prices and further excluding less affluent buyers from homeownership. Renters with low incomes and persons of color make up a disproportionately significant fraction of these at-risk households “The figures are mind-boggling. Despite the fact that global economies experienced a shock in 2020, easy monetary and fiscal policies increased global wealth by over $28 trillion (coincidentally, global central bank balance sheets expanded by roughly the same amount), which was not evenly distributed.
I hasten to emphasize that I do not believe there is any hidden agenda or conspiracy at work here. If central banks are indirectly to blame for today’s rise in economic inequality, it’s because all problems appear to them to be ones that can be fixed by pumping more money into the system. Every liquidity injection during a crisis presents a chance for those, including this writer, who can take advantage of the flow of money through asset accumulation, lending resonance to the saying “let no crisis go to waste.” Hundreds of billions of dollars of bonds are being purchased by the Fed and the ECB, despite the fact that the global economy is growing and asset values are setting new highs.
The main risk of the central banks’ liquidity inundation philosophy is that the financial plumbing isn’t quite set up to direct the massive amount of liquidity and pipe it to the proper places, so it both overflows and is sucked off in directions it wasn’t intended to go, and it’s almost impossible to stop once it’s started. Central bank actions have not only raised asset prices, increasing the wealth of individuals who own assets, which was probably not the aim, but they have also created a situation in which central banks are deathly scared of disrupting asset markets by withdrawing liquidity. However, if they ultimately fall in to data, such as if the current Fed’s song “inflation is transitory” changes, the next crisis might be triggered, presenting new possibilities for asset owners to become more wealthier.
Before we go into the investment possibilities that this dynamic recommends, here are some key points from the Credit Suisse report:
. Rich countries and regions (the United States and Europe) have become wealthier, while impoverished countries (India, Latin America, and Africa) have been poorer. Countries who were hit the hardest by COVID-19 and could afford it had the most disproportionate response from their central banks, resulting in the highest wealth gains.
EVEN MORE FOR YOU. The distribution of wealth within a country was likewise exceedingly uneven. The wealth disparity between the ultra-wealthy and the ultra-poor has reached new heights. This disparity can also be seen in the wealth growth rates of women and minorities.
The research accurately concludes that asset wealth provides individuals with assets with a reserve, or insurance, that allows them to better withstand future hardships and financial downturns. The consequence is that individuals without the necessary precautionary savings are more vulnerable to downturns, resulting in a growing need for government-provided catastrophic insurance, whose only source is some form of redistribution from the wealthy to the poor.
So, what does this observation say about the likely policy and market outcomes?

The pendulum is swinging back in favor of equitable re-distribution.
First, let’s talk about policy. “Simply put, central banks are losing their status as the putative only game in town,” as my good friend and former Pimco colleague Paul McCulley wrote in the afterword to my new monograph, and “Sovereign governments are relearning the verity that central banks are their own creation and should be harnessed to maximize the collective welfare of their citizenry, serving as the handmaiden of frugality.”
Or, as Bassetto and Sargent put it in their paper, “”From the perspective of sequences of government IOUs called bonds and money, institutional arrangements that delegate decisions about bonds and money to people who work in different agencies are details,” says Shotgun Wedding: Fiscal and Monetary Policy. Central bank independence is either a myth or a convention.”
In other words, central banks have become government tools whose mission in the next years will change away from generating growth and toward assisting in redistributing and realigning resources. I don’t have a horse in this race, and I have no grudge towards anyone. In most democratic systems, the people are the chosen government. So, if people are indirectly responsible for permitting central banks to magnify inequality now, people will have to re-distribute wealth through their power in order to create the need for improved safety nets when leveling processes speed in the future.
The simplest approach to re-distribute income is to raise taxes on the rich, which is currently being proposed by the present White House. “What the Fed gives, the taxman takes,” and betting differently, at least for the next four years, is probably not a sensible bet.
The simplest scenario is for asset prices to grow even further, particularly in equities, so that new tax policies can tax a large amount of the gain in asset values that would otherwise be allocated to non-asset owners. The fact that yields are so low now does not allow for considerable tax receipts on income in bond markets, but bond prices rise as yields fall, so there is plenty of room for taxation of increasing asset values, which might be problematic for many global bond markets with negative yields. So any tax on the value of bond holdings could be a second source of wealth loss over extended time horizons; and don’t forget about inflation, another hidden tax.
The lack of transparency in illiquid assets like real estate makes valuation and consequently taxation difficult. As a result, real estate, like many digital assets such as Bitcoin, is likely to provide investors with safe havens of value, but at the expense of liquidity and transparency. I can see raw material and consumption commodity prices rising as a result of increased re-distribution via helicopter drops of money, however the prospect of wealth taxation resulting in storage commodities (such as gold) will put downward pressure on these commodities.
The competing goals of asset taxation for re-distribution versus allowing free money flow across international borders will result in different consequences for the world’s global currencies. For example, households now own “only” 38 percent of the $70 trillion in US equities, or $26 trillion, while foreign investors own nearly 16 percent, or $11 trillion, of US equities (Source: Goldman Sachs and Fed data), the highest recorded share of foreign ownership of US equities (Source: Goldman Sachs and Fed data). Any taxation on the equities market’s value will thus be largely supported by foreigners, which could be detrimental for the US dollar overall if they choose to invest elsewhere. Because of the large quantity of foreign ownership of US bonds, demand for US fixed income assets may suffer as a result.
Observing very lengthy cycles of wealth distribution divergence and re-convergence, it looks to me that the pendulum is about to start swinging back toward the middle as the leveling process re-starts. These kind of inflection points are frequently disruptive and volatile. This time, I’m hoping the leveling processes aren’t as brutal. We may look back a decade from now and wonder why it took us so long to learn that central bank activities had negative effects for wealth distribution. My view is that we all recognize the link but don’t give it much thought because practically everyone feels a little bit wealthier, and the relative disparities aren’t yet great enough to obscure the rising absolute level of wealth. But, since asset prices are the primary cause of widening wealth distributions, and central banks are the primary cause of asset price increases, we shouldn’t be shocked if asset prices, and indirectly the actions of other government agencies, are also the primary drivers./nRead More

share this article!