How extreme monetary policy has changed our world – for the worse

Central banks' extreme monetary policy is transferring massive wealth to the ultra-rich, says Merryn Somerset Webb.

Inequality is as much in the news as ever. Here's an infuriating piece from The Guardian telling us about the ludicrous amounts of money we pay star (and perfectly ordinary) fund managers. And here's one from The Daily Mail on the grotesque overpayment of university vice-chancellors.

There are all sorts of reasons for rising income and wealth inequality, and I've written about it a great deal before.

There is the way executive compensation works, the lack of effective competition in the financial industry, the pathetic inactivity of long-term shareholders when it comes to remuneration (although clearly we can't expect over-paid fund managers to effectively police overpaid investment bankers and corporate CEOs).

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Then there is the tax system across the West, which taxes income way more than wealth and has pretty much abandoned the idea of using estate taxes to force a modicum of equality of financial opportunity within societies.

There has also been a long and unchallenged trend to 'oligopolisation' in big business. And finally, of course, there is quantitative easing which has ended up doing little more than pushing up asset prices such that anyone holding the right assets (US equities, London houses, etc) has been made significantly richer than they might have been, through no effort of their own.

But within this inequality debate, a few very important points have been missed. The first is that the new wealth has accrued to very few people. There is much talk about the 1%. But the 1% doesn't actually exist in this context. It is more about the 0.1%.

There is an excellent article on the matter here, but the key point is that for the vast majority of the people at the top of the income tree, not much has changed. They are still making more than everyone else, but in much the same proportion has they always have.

However, within the 1% there is a tiny group of people for whom incomes and wealth have risen exponentially, making them not just very well off relative to everyone else, but very rich relative to everyone else.

Its worth looking at the charts to see the point at which the 0.1% really started to shift away from the rest of us. The year in which Alan Greenspan took over at the Fed and started the long process of responding to every crisis or potential crisis with an interest rate cut see the chart here.

"Long story short," says the Atlantic, "this group, comprised mostly of bankers and CEOs, is riding the stock market to pick up extraordinary investment income. And it's this investment income, rather than ordinary earned income, that's creating this extraordinary wealth gap." Monetary policy has changed our world.

We've written before that extreme monetary policy is a (bad) fiscal policy in that works as a regressive redistribution policy - transferring massive wealth to asset owners. There is now no doubt of that.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.