The Federal Reserve creates income inequality

The latest topic to dominate economic policy and election cycles is income inequality. The tired phrase “the rich get richer and the poor gets poorer” is regurgitated incessantly by most protesters, anti-poverty organizations and liberal politicians like Elizabeth Warren and Bernie Sanders.

Although prescription presented is to raise taxes on the wealthy and to increase wealth distribution, which is the wrong remedy, the Federal Reserve’s role in this trend is often omitted. Whether it’s Paul Krugman or Robert Reisch, the United States central bank is never the target of income inequality scrutiny.

Over the years, the Fed’s money printing, cheap money, record-low interest rates and overall monetary policy benefits the corporations, Wall Street and the most affluent in society. As inflation is produced, the freshly created money seeps into the pockets of the so-called one percent, but as it continues to go through the real economy, the lower- and middle-class experience currency erosion and their money buys less.

Fed Chair Janet Yellen has often disingenuously averred on the problems of income inequality, but neglected to mention that it was her predecessor as well as Alan Greenspan’s actions that created the widening income disparity in the first place.

Let’s not forget about the federal government and the central bank’s bailouts of the big banks, automakers and large corporations that received billions of dollars from taxpayers and freshly created money. The poor certainly didn’t benefit from this deal.

Here is what Frank Hollenbeck of the Mises Institute wrote earlier this year:

“The central bank does not create anything real; neither resources nor goods and services. When it creates money it causes the price of transactions to increase. The original quantity theory of money clearly related money to the price of anything money can buy, including assets. When the central bank creates money, traders, hedge funds and banks — being first in line — benefit from the increased variability and upward trend in asset prices. Also, future contracts and other derivative products on exchange rates or interest rates were unnecessary prior to 1971, since hedging activity was mostly unnecessary. The central bank is responsible for this added risk, variability, and surge in asset prices unjustified by fundamentals.

“The banking sector has been able to significantly increase its profits or claims on goods and services. However, more claims held by one sector, which essentially does not create anything of real value, means less claims on real goods and services for everyone else. This is why counterfeiting is illegal. Hence, the central bank has been playing a central role as a ‘reverse Robin Hood’ by increasing the economic pie going to the rich and by slowly sinking the middle class toward poverty.”

With certain elements of the markets experiencing setbacks, the Fed is mulling over maintaining its current QE3 or may introduce a fourth one. Of course, any sort of inflationary measures will once again only truly benefit the wealthy, while the rest of us get destroyed by Yellen and her cohorts.

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  1. There is no need to raise tax rates on the wealthy. We need to reduce taxes on the poor. Replace the job killing 15.3% payroll taxes. A combination of VAT, wealth tax and reduction in tax expenditures will produce full employment, economic growth, higher salaries and save Social Security and Medicare from a stagnant tax base.

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