OPINION
April 19, 2012
How the Fed Favors The 1%
A major issue in this year's presidential
campaign is the growing disparity between rich and poor, the 1% versus the 99%.
While the president's solutions differ from those of his likely Republican
opponent, they both ignore a principal source of this growing disparity.
The source is not runaway entrepreneurial
capitalism, which rewards those who best serve the consumer in product and
price. (Would we really want it any other way?) There is another force that has
turned a natural divide into a chasm: the Federal Reserve. The relentless
expansion of credit by the Fed creates artificial disparities based on
political privilege and economic power.
David Hume, the 18th-century Scottish
philosopher, pointed out that when money is inserted into the economy (from a
government printing press or, as in Hume's time, the importation of gold and
silver), it is not distributed evenly but "confined to the coffers of a
few persons, who immediately seek to employ it to advantage."
In the 20th century, the economists of the
Austrian school built upon this fact as their central monetary tenet. Ludwig
von Mises and his students demonstrated how an increase in money supply is
beneficial to those who get it first and is detrimental to those who get it
last. Monetary inflation is a process, not a static effect. To think of it only
in terms of aggregate price levels (which is all Fed Chairman Ben Bernanke
seems capable of) is to ignore this pernicious process and the imbalance and economic
dislocation that it creates.
As Mises protégé Murray Rothbard explained,
monetary inflation is akin to counterfeiting, which necessitates that some
benefit and others don't. After all, if everyone counterfeited in proportion to
their wealth, there would be no real economic benefit to anyone. Similarly, the
expansion of credit is uneven in the economy, which results in wealth
redistribution. To borrow a visual from another Mises student, Friedrich von
Hayek, the Fed's money creation does not flow evenly like water into a tank,
but rather oozes like honey into a saucer, dolloping one area first and only
then very slowly dribbling to the rest.
The Fed doesn't expand the money supply by
uniformly dropping cash from helicopters over the hapless masses. Rather, it
directs capital transfers to the largest banks (whether by overpaying them for
their financial assets or by lending to them on the cheap), minimizes their
borrowing costs, and lowers their reserve requirements. All of these actions
result in immediate handouts to the financial elite first, with the hope that
they will subsequently unleash this fresh capital onto the unsuspecting
markets, raising demand and prices wherever they do.
The Fed, having gone on an unprecedented
credit expansion spree, has benefited the recipients who were first in line at
the trough: banks (imagine borrowing for free and then buying up assets that
you know the Fed is aggressively buying with you) and those favored entities
and individuals deemed most creditworthy. Flush with capital, these recipients
have proceeded to bid up the prices of assets and resources, while everyone
else has watched their purchasing power decline.
At some point, of course, the honey flow
stops—but not before much malinvestment. Such malinvestment is precisely what
we saw in the historic 1990s equity and subsequent real-estate bubbles (and
what we're likely seeing again today in overheated credit and equity markets),
culminating in painful liquidation.
The Fed is transferring immense wealth from the
middle class to the most affluent, from the least privileged to the most
privileged. This coercive redistribution has been a far more egregious source
of disparity than the president's presumption of tax unfairness (if there is
anything unfair about approximately half of a population paying zero income
taxes) or deregulation.
Pitting economic classes against each other
is a divisive tactic that benefits no one. Yet if there is any upside, it is
perhaps a closer examination of the true causes of the problem. Before we start
down the path of arguing about the merits of redistributing wealth to benefit
the many, why not first stop redistributing it to the most privileged?
Mr. Spitznagel is the founder and chief
investment officer of the hedge fund Universa Investments L.P., based in Santa
Monica, Calif.
A version of this article appeared April
20, 2012, on page A13 in some U.S. editions of The Wall Street Journal, with
the headline: How the Fed Favors The 1%.
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