The Comical Myth About Low Rates Boosting the 1 Percent
As seemingly everyone knows by now, LeBron James is set to return to the NBA's Cleveland Cavaliers. James will be the highest paid player on the team, and his basketball earnings alone will make the pay of the 12th man on the Cavaliers bench appear microscopic by comparison.
Importantly, no player in the league, and no serious NBA fan, will begrudge James his wealth. As Canadian economist Reuven Brenner has made plain for years, it's the "vital few" who power teams, leagues, businesses, and countries forward, and as James is the most vital of the very few NBA players who can change a team's trajectory the minute they suit up, his pay will reflect the value owners attach to those possessing proven ability to deliver championships.
Applying James' brilliance to the business world, CEOs are the LeBron James equivalent in commerce. Not all are as abundantly skilled in a relative sense as James is, but then many NBA players lacking James immense talent earn as much as he does. CEOs are no different. Their pay, like that of the best players in the various professional sports leagues, reflects their potential to transform the business they run. Former CEOs like Jack Welch (GE), Michael Eisner (Disney), and the late Apple CEO, Steve Jobs, are good examples of transformative company heads. That they created billions in wealth for their shareholders very much informs the pay of the modern CEO; compensation that properly dwarfs that of lower-level employees.
Of course the highest paid individuals of all tend to be those who start their own companies; that, or those who put their money behind nascent business concepts. That they have the potential to earn many billions is only logical. For taking the biggest risks, they properly earn the most in the rare instance that what begins as a concept turns into a successful enterprise. Amazon's Jeff Bezos and Michael Dell fall into this category, and soon enough so will Uber's Travis Kalanick; Bezos notably an early investor in Uber.
Interesting here is that economists, politicians and media members regularly cite the "instability" caused by inequality, they always do so without evidence, and their inability to back their musings isn't remotely surprising. Figure wealth results when the enterprising remove unease from life, great wealth results from removing massive amounts of unease from the lives of others, so assuming a few enterprising individuals were to gift us with cancer curess, road-ready self-driving cars, and low-cost private jets that would put the TSA in the rearview mirror, no "instability" would result from the billions earned by these innovators alongside rising inequality.
All of which brings us to the Federal Reserve's zero interest rate policy. Without defending this most childish of policies that laughably presumes credit can be decreed "cheap" by central bankers, right wing writers and pundits who should know better have begun making all sorts of silly claims that the Fed's low rates are driving up inequality between the haves and have nots. If only it were true what the hand wringers on the right oddly portray in a pejorative light. Figure we're all made better off when the vital few grow exponentially wealthier. Inequality is a sign that problems are being solved, that the lifestyle gap is shrinking, and that always limited capital is finding the best and brightest. Inequality is beautiful. What's important to stress is that the right-wing manifestation of unctuous liberal guilt about the wealth gap is not only wrongheaded in its negative portrayal of inequality, it's also a myth.
In a recent op-ed, Morgan Stanley senior managing director Ruchir Sharma channeled this new strain of right-wing guilt about economy-enhancing progress, asserting that today's inequality is a negative artificial construct of central bankers. About the Fed's maintenance of low rates, Sharma wrote:
"But talk to anyone on Wall Street. If they're being frank, they'll admit that the Fed's loose monetary policy has been one of the biggest contributors to their returns over the past five years. Unwittingly, it seems, liberals who support the Fed are defending policies that boost the wealth of the wealthy but do nothing to reduce inequality."
Another recent right of center editorial made a point similar to Sharma's. Correctly decrying for the wrong reasons the Fed's promise "to keep interest rates near zero as far as the eye can see," the editorial concluded that the latter "should be good news for stocks and other asset prices, if not necessarily for growth and real middle-class incomes." The right have taken a page from the left's pandering playbook, though in the right's case it's playing up the absurd notion that the Fed's rate machinations redound to stock market health, all the while harming the little people. Who needs the left when you have the guilty right?
First up about the stock market, in societies where free enterprise is broadly allowed to express itself, wealth, including stock market wealth, is going to be very concentrated at the top. This is a good thing in much the same way it's good that LeBron James earns so much more than most NBA players. The vital few across all commercial endeavors contribute the most to economic progress, because they do they're going to have the most wealth, and because they can't spend it all at once, a lot of their wealth is going to migrate toward various saving vehicles, including stock markets. This is something to rejoice.
Taking it further, it's a very good thing when the rich get richer. Lest we forget, there are no companies and no jobs without investment first, the rich by virtue of being rich have the most wealth to put to work, so if their commitments of capital are being rewarded in the form of rising stock market wealth, we're all logically made better off.
The rising net worth of the rich, net worth that can only increase as a result of saving and investment, means more and better paying job opportunities for all of us who are not rich. Why the right act as though rising inequality wrought by stock-market gains is something to frown on is one of life's mysteries.
The logical reply, one right out of the Progressive playbook, is that today's stock market wealth is artificial; as in it's a function of central bank machinations as opposed to real production. Most commonly it's said by a right that is properly skeptical of the Fed (for the wrong reasons) that the Fed's low rates have made more prosaic yield attainment difficult, and with it more difficult, money has migrated to the stock market in search of yield; hence the alleged correlation between low rates and frothy markets. Of course the problem with this supposition, one that is offered up frequently with no backing evidence, is that at least practically, for every yield-seeking buyer of stocks there must be a seller who thinks the Fed's machinations are bad for the economy, and by extension, share prices.
Beyond that, this yield-seeking supposition quite simply isn't true. If it were, then it's certainly true that stocks in Japan would have rallied by now. The Nikkei hit a high of 39,000 in the late ‘80s, it subsequently corrected downward after the U.S. forced a needless deflation on the country (the yen tripled in value versus gold in the ‘80s and ‘90s), yet for the longest time the BoJ has kept the short rate at zero, or near zero. Perhaps even more notable, yields on Japanese government bonds have been persistently lower than U.S. yields across the curve. Despite this, the Nikkei remains, 25 years later, well down from its highs.
So while Japan helps disprove the silly argument that the Fed's low rates have been the source of the market rally, even if the Japan example didn't exist sentient minds would know how wrongheaded the rate/rally narrative is. That's the case simply because market rallies, despite what you hear, cannot be decreed. Wouldn't life be simple if central planners could engineer investor interest in private companies? If so, we could abolish bear markets altogether. Happily we can't, the Fed can't decree prosperity through rate machinations, plus the very notion speaks to the opposite of prosperity. Indeed, falling markets, if left alone, can be the source of huge rebounds in much the same way that recessions left alone author major recoveries. Sometimes economies and the markets that measure their health need cleansing. Leave markets alone.
Back to inequality, the latter once again signals free enterprise at its best whereby the prodigiously talented of the LeBron James, Steve Jobs, Jeff Bezos and Henry Kravis variety are properly compensated at levels well beyond what most can expect to earn. In every instance enterprise and rare skills are being rewarded. Inequality, despite what readers hear, is a very good thing in a free society, and logically a lack of equality supposes a free society.
Importantly, the truly talented can't innovate and grow immensely wealthy unless their ideas are matched with capital. Applied to proper right-wing handwringing about the Fed for all the wrong reasons, implicit in their whining about the Fed allegedly fostering greater inequality is the laughable supposition that Janet Yellen, Charles Plosser, and Stanley Fischer are better at allocating credit toward the truly innovative than are Warren Buffett, Rob Arnott, and David Bonderman. That's the case because when the Fed fiddles with rates, it's explicitly attempting to control the destination of capital. Figure the Fed can't create credit, the latter is and can only be created in the private sector, so when the Fed acts, it's merely redistributing that which it's taken from us first.
Logic and history tell us that those who populate the Fed don't have a clue about where capital and credit can reach their highest return. If they did, they wouldn't work as central bankers; rather they'd be earning real money in the private sector. Those who can do, and those who can't work at a central bank as evidenced by Alan Greenspan's lousy forecasting record before his migration to the cushy confines of government work.
So if it's accepted that extraordinary wealth is a function of talent being matched with capital, and if it's further accepted that Fed officials are among the least qualified to allocate capital toward talent, then the only reasonable conclusion to make about the Fed's zero rate and inequality is that the latter has reduced it to all of our detriment. Of course it has.
The seen involves rising stock markets amid unfortunate Fed meddling with capital flows, while the unseen concerns how much higher stock markets would be, and how much wider the wealth gap would be, if the Fed were a low-entropy input limited to maintaining a stable dollar, all the while having nothing to do with interest rates, unemployment, and short-term loans to banks. The Fed today is a high entropy source of market-sapping intervention that blocks the natural flow of credit to its highest uses as concluded by the markets. Better yet, the Fed's actions sadly restrain the very inequality that would signal better lifestyles and better jobs for all economic classes.
When we think more about what's powered the market, it logically can't be the Fed precisely because investors tend to shun intervention from the hapless. In truth, the bigger driver of market health from a Fed perspective has been its retreat. With the thankful departure of Ben Bernanke amid growing skepticism inside the Fed about the worth of quantitative easing, the Yellen Fed will necessarily do less given a rising consensus inside the central bank (Richard Fisher in Dallas, Plosser in Philadelphia, plus the Richmond and Kansas City Feds) that its monetary machinations haven't worked. The Fed's relative quietude will be a big boost for the economy, along with markets measuring its future health.
Considering President Obama, his presidency happily ended in a legislative sense in December of 2012. Governments have no resources other than what they extract from us first, so with a cessation of major Obama initiatives, another negative risk has been removed as a factor worrying investors.
Thinking about Obama's signature legislation, the Affordable Care Act (also known as Obamacare), it's predictably dying before our eyes of its myriad contradictions; some of the market variety and some constitutional. Importantly, Obamacare's very public failure has positively awoken the electorate to the folly of governmental programs meant to create markets out of thin air, all the while redirecting trillions of our wealth.
And while Sens. Mike Lee, Jeff Flake, Ted Cruz, Marco Rubio, and Rand Paul all will have their warts and weaknesses in the eyes of small government types, what can't be forgotten is that each one with the possible exception of Flake would never have been elected amid abundant prosperity. Instead, government-authored want made their candidacies possible, and their victories clearly signal an electorate that no longer believes activist government is the path to freedom and prosperity.
It can't be repeated enough that governments, no matter one's ideology, have no resources. Stock markets are rallying at the moment because a resource-free government is being forced by the need for consensus (the Fed), historical realities about second terms (President Obama), and a change in the views of the electorate (Sens. Lee, Flake, Cruz, Rubio, and Paul) to do less. And with government meddling with what we've produced having been reduced, the economy has started to pick up; the stock market always ahead of the economy in terms of registering future prosperity.
Back to the Fed and inequality, the latter is a beautiful thing in a free society, and it's something a wise right wing movement that believes in its own rhetoric would embrace. The problem is that Fed policies, including zero rates, have been restraining inequality, not increasing it. Indeed, we'll know the Fed has gotten out of the way when inequality soars; a cessation of zero rates and QE certain to get capital flowing yet again to the talented over those with pull.
Until then, readers shouldn't be fooled. The Fed can't create economic growth, nor can it engineer stock-market rallies. The Fed can either distort to the economy's and market's detriment, or it can get out of the way.