Who Benefits When Money is too Cheap?

It seems to me that there is a non-trivial dependency of increasing concentration of wealth in the top 10% and the expansion of tradable contract rights such as stocks, bonds, derivatives, ETFs, futures contracts, options. Parallel with the expansion of financial opportunity in the buying and selling of such contracts has been government generated expansion in money and credit. Central banks have become expert in using fiat currencies and the provision of credit to pump liquidity into national economies. Qualitative easing has kept the OECD economies growing; China has funded much of its remarkable growth with government provided loans. There is so much liquidity in the E.U. that some instruments have negative interest rates.

Thus, when I read last Friday that the Dow Jones Industrial Average hit a record by closing above 27,000 for the first time, I was not overjoyed.

That day, the S&P 500 index climbed above 3,000 for the first time.

And this happened when, as Corrie Driebusch reported for the Wall Street Journal that “Second-quarter earnings are shaping up to be a challenge, but the stock trajectories of some companies that have already reported show that investors are forgiving. A handful of companies that reported disappointing earnings in June are now in a surprising place—their shares are near or above their levels prior to reporting results.”

My first questions was: what is driving stock prices up? Low interest rates making money cheap for those who have it?

My second question was: cui bono? – “For whose benefit?”

This was Cicero’s insight into explaining human behavior: finding out who benefits from an action will lead us to understand the cause of what happened.

Then, on Saturday, the Wall Street Journal ran a story that “prospects of a Fed rate cut propel stocks, oil prices.” So those with the means to speculate are made more wealthy by government policy.

And with low interest rates, savings – most important to the middle classes and even the poor – are discouraged. Asset accumulation is titled towards the rich.

As has long been said of financial capital: “Those that have, get.”