So the Fed’s objective has been one of trickle down economics. This strategy focuses on a top down approach. That is, it makes the wealthy wealthier in hopes of them throwing the rest of us a bone as their wealth increases. I’ve written extensively on the fact that this strategy is a complete farce. But let’s look at how the trickle down actually works in practice leading to a wealthier wealthy class. It is done by allowing the very wealthy to borrow at 0% interest and then invest these borrowed funds in the stock market. Now given that the market is a risky asset class, historically using borrowed funds to invest in the market is done only by the most daring risk takers. However, a way to get around the riskiness of a random market in which you can lose as easily as you can win is to change the odds. Let’s take a look at what happens to downside risk during a trickle down program.
Essentially what we are looking at is the downside risk of the market disappearing as the Fed’s trickle down program hits full flight. Each ‘correction’ period gets smaller than the last one. Meaning downside risk in the market is slowly going away leaving only upside potential. This held true until October where we saw a 10% correction take place as QE3 was coming to an end. Why would the market selloff so drastically because QE3 was ending? Well have a look at the answer.
The above chart shows market performance during QE and no QE from 2008 to present. What it tells us is that market performance is 350% better during periods of QE than no QE. So it becomes very profitable to borrow funds at 0% interest and invest in what is no longer a random market but a place where profits are guaranteed by the Fed.
However, as QE3 was ending in October the market recognized the safety net was being pulled away and so the artificially high valuations were resetting downward in a panic selloff of 10% to more natural valuations. To prevent such an atrocity, the Fed quickly stepped in stating that QE4 is on the table. Well that’s all the reassurance the market needed. Immediately after releasing that statement the market selloff not only halted but reversed moving up 12.5% in the one month since to fresh new highs today.
And so we ask, despite being perhaps slightly criminal is a little Fed manipulation of the market such a bad thing if everyone wins? I mean what’s a little criminality and destroying the integrity of the markets if we all gain from it? Ok, well let’s assume that’s a valid argument and just look at whether it is a sound argument i.e. that we are all gaining from the Fed’s forced trickle down economic recovery. The following charts show the distribution of income among workers over time and also the distribution of wealth over time. Pay particular attention to the data since 2008.
From an income perspective it is clear that the top 1% have had increases of between 11% and 76% from 2002 to 2012 while the bottom 90% have lost 10% of their income in those 10 years.
From a capital or wealth perspective we see that the top 3% are the big winners with the next 7% staying fairly flat since 2000 while the bottom 90% again have lost wealth over the past 10 years. And to really get a detailed breakdown of the increased wealth to the wealthiest that has taken place during this trickle down recovery refer to the next chart.
The three charts above make it very clear who benefits from the Fed’s ‘trickle down’ recovery strategies. As we stated above the idea of a trickle down is to make the wealthy wealthier, from which they will bolster income and wealth improvements to the rest of us. Although it appears the strategy was successful in making the wealthy wealthier the rest of us are actually worse off. Must just be a run of bad luck I guess that things happened this way eh; I mean for the vast majority of Americans that is. Just a bit of happenstance good luck I suppose for those very wealthy folks who managed quite well from the Fed’s trickle down recovery. Certainly this wasn’t the objective of these strategies. Making the wealthy wealthier was just a necessary part of the ‘only’ strategy the Fed could come up with at the time. And well now that we are 6 years into the program it is far too late to turn back now. So as the Fed made so clear back in October when some of that wealthier wealth started to disappear as the market was crashing, QE4 is just around the corner to defend and protect – nay, to guarantee the trickle down recovery stays intact. Happy days my fellow serfs, happy days.