How the Federal Reserve's Monetary Policies Drive the Wealth Gap, Racism & Social Unrest
Traditionally about 30 to 50 percent of most business schools’ graduating MBA classes have gone on to careers in the financial services industry. To prepare for these careers, all MBA students complete coursework in managerial economics, financial management, and corporate finance. During these classes, students learn that in 2020, the principal determinant of the prices of financial assets—like stocks and bonds—is no longer strictly market economics. Instead, these days those prices are largely determined by the market operations of the United States’ mostly-private central bank: the Federal Reserve System.
But what students aren’t taught is how the Fed promotes racism and social unrest by inequitably favoring wealthy financial asset investors over disadvantaged groups who do not participate in the financial markets. And MBAs, before they accept internships and job offers with financial services firms, deserve to understand how the Federal Reserve appears to be exploiting the companies and employees within the financial services industry to advance objectives that in many ways are destroying the stability of American society.
Our report that follows is based in part on a provocative June 2020 analysis released by two influential commentators who hold MBA degrees from prestigious business schools. They are Dr. Chris Martenson, who has an MBA from the Johnson Graduate School of Management at Cornell University, and Adam Taggart, who has an MBA from the Stanford Graduate School of Business.
Unfairness: From Economic Inequality to Political Instability
Experiments with a variety of animal species including dogs, birds, and chimpanzees have consistently demonstrated that subjects who receive less satisfying rewards (the “have-nots”) react with agitation and obvious displeasure when they observe neighboring species members who receive more satisfying rewards (the “haves”).
Recently this effect was shown in a profound TED video by Emory University’s Dr. Frans de Waal, who described a famous experiment first conducted by Dr. Sarah Brownian of the Georgia Institute of Technology. Known as “Capuchins Reject Unequal Pay,” the experiment shows two Capuchin monkeys in adjacent plexiglass cages who can see each other, along with an experimenter standing in front of the two cages.
In exchange for the monkeys’ “work” of handing over small stones, the experimenter first “pays” both monkeys cucumber slices as food, resulting in calm and routine interactions on both sides. But next, the experimenter pays the monkey in the left cage cucumber slices, but pays the other monkey sweet grapes, a much more tasty and desirable reward.
When the monkey on the left realizes the inequity that his neighbor is receiving much better payments for the same work, things suddenly get crazy. The deprived monkey throws the cucumbers back at the experimenter and violently rattles and pounds on his cage door.
Capuchin monkeys care a lot about fairness. And humans care about it even more. That inequitable economic rewards lead to political instability has been understood for millennia. Two thousand years ago, the Greek Platonist philosopher Plutarch stated, “An imbalance between rich and poor is the most fatal ailment of all republics.”
More recently, Peter Valentinovich Turchin, a professor with appointments in three departments at the University of Connecticut, wrote in his Bloomberg essay “Blame Rich, Overeducated Elites as Our Society Frays:”
How does growing economic inequality lead to political instability? Partly this correlation reflects a direct, causal connection. High inequality is corrosive of social cooperation and willingness to compromise, and waning cooperation means more discord and political infighting. Perhaps more important, economic inequality is also a symptom of deeper social changes, which have gone largely unnoticed.
Increasing inequality leads not only to the growth of top fortunes; it also results in greater numbers of wealth-holders. The “1 percent” becomes “2 percent.” Or even more. There are many more millionaires, multimillionaires and billionaires today compared with 30 years ago, as a proportion of the population. Let’s take households worth $10 million or more (in 1995 dollars). According to the research by economist Edward Wolff, from 1983 to 2010 the number of American households worth at least $10 million grew to 350,000 from 66,000.
Citing Turchin’s quote, Dr. Martenson concurs that snowballing income inequality is a destructive:
See that? That growing economic inequality? That’s a bad thing. It’s a bad thing if you care about your republic. It’s a bad thing if you want social stability. It’s a bad thing if you want to live in a peaceful, and quiet, and non-tumultuous period of time. But having giant wealth and income gaps is a good thing if you want instability, protests, and things like that.
How the Federal Reserve System is Destroying American Society
On May 25, 2020 in Minneapolis, a white police officer murdered Black citizen George Floyd by kneeling on Floyd’s neck for almost nine minutes. That murder preceded episodes across the nation of reckless police brutality caught on smartphone video. Those incidents included an Atlanta case where another white cop murdered Black citizen Rayshard Brooks—who posed no immediate threat—by shooting him twice in his back, then standing on him and failing to offer first aid for two minutes while the blood drained from Brooks’ body.
Dr. Martenson argues that the murders only served as the “tip of the iceberg” triggers that, even in the middle of a pandemic, drove millions of Americans out into the streets across the nation in communities large and small. He argues that the root causes of the protests have more to do with seething rage fueled by the economic unfairness that has become epidemic throughout American society.
And who is driving that economic unfairness that is destabilizing society? The Federal Reserve System plays a large role. Two ways that the Fed appears to be destroying American society include the way the central bank maximizes society’s unfair wealth distribution, along with the ways that the Fed actively chooses society’s economic winners and losers.
How the Federal Reserve Maximizes an Unfair Wealth Distribution
Even before COVID-19 fears collapsed the financial markets in late March 2020, the Fed had been creating and injecting trillions of dollars into the American economy. As all MBAs know, the Fed wields a variety of mechanisms they use to perform these “money printing” liquidity injection operations. Right now, the Fed is doing just that, which in effect is dumping trillions and trillions of dollars into the U.S. economy. One way is that the Fed has the direct capability to buy up all kinds of financial assets, which bids up their prices.
When the Fed does this in the debt markets by buying up government and corporate bonds—including poor quality “junk” bonds—it bids up the prices of those bonds, effectively preventing price collapses from lack of demand. In equities, the Fed’s market operations also indirectly help the stock market by signaling to anxious investors that the Fed continues to support the financial markets. Those signals encourage investors to buy stocks—and as with all auction markets, every stock purchase further bids up a stock’s price.
Keep in mind that the Fed ostensibly isn’t in the business of buying up individual stock offerings on American exchanges in order to bid up stock prices and support market averages. Nevertheless, inferences based on evidence suggest that some key players affiliated with the Fed indeed wield such capabilities. They include the President’s Working Group on Financial Markets, usually known as the Plunge Protection Team (PPT). They also include proxy organizations and central banks based in other rich industrial democracies, like the Swiss National Bank, that maintain cooperative partnerships with the Federal Reserve.
Now, consider the peculiar and remarkable effects the Fed’s market operations have created. Some have called this the most massive wealth preservation effort on behalf of elites in the history of the United States.
During a period when unemployment is at the highest levels since the Great Depression, the NASDAQ 100 average just closed at 10,674 on July 27, 2020. That is substantially above the 6,500 level during the collapse in March 2020. And it is also well above the 7,000 level about 14 months ago in May 2019.
This is one way the Fed distorts the functioning of financial markets. Those gains in stock prices are predominantly artificial. They’re artifacts mostly created by the Fed’s liquidity injection and market operations that have propped up the equity markets.
But what is the effect of the Fed’s actions on the investors who hold those stocks? As all MBAs know from their GMAT and GRE prep courses, percent increases or decreases are always calculated by dividing “the difference by the original whole.” In this case—and this is not by any means a misprint—the percentage of America’s wealth held by those investors has skyrocketed by 64 percent during only 17 weeks. In other words, measured by the NASDAQ, the investors suddenly own a 64 percent greater share of the wealth of the United States.
In the bond market, one can observe a similar effect. Look at corporate bond yields. They’re at an all-time low, and since in bonds there’s an inverse relationship between yields and prices, that means bond prices are at an all time high. Why? It was because the Federal Reserve effectively bailed out the bond market starting in the third week of March 2020, and is continuing to do so. The Fed is buying up bonds—bidding up those bond prices—to limit investors’ exposures to losses.
Business Insider reported on June 30 a particularly outrageous round of bond purchases by the Fed. Believe it or not, the Federal Reserve’s Secondary Market Corporate Credit Facility, or SMCCF—an emergency lending project set up because of COVID-19—bought bonds issued by investor Warren Buffet’s firm Berkshire Hathaway. That’s a company worth about $426 billion, including $43 billion in cash. Buffet alone controls a personal fortune of about $70 billion, ranking him as the fourth-richest individual in the world.
What’s more, the Fed also bought bonds issued by several firms in Berkshire’s stock portfolio: Coca-Cola, General Motors, Procter & Gamble, and United Parcel Service. CNN Business reported that the Fed also bought bonds from Boeing, ExxonMobil, Walmart, and AT&T. None of these firms faces a risk of bankruptcy, nor do they have any trouble raising money in the capital markets. Certainly they don’t need the Fed’s help. The only rationale that makes sense seems to be that the Fed is trying to shield billionaires, like Buffet and other Wall Street investors, from losses.
In other words, everybody but wealthy investors are suffering the effects of brutal capitalism. Workers barely getting by—among the 24 percent of the U.S. labor force who lost their jobs in the pandemic—could see their cars repossessed because they can’t make the payments, not to mention the looming evictions crisis. But billionaire stock and bond investors are protected from losses. Although those billionaires don’t need the help, they benefit from socialism—courtesy of the Federal Reserve System.
“Monetary policy has now reached a new low in the U.S.,” wrote Bleakley Advisory Group’s Chief Investment Officer Peter Boockvar to his clients the morning after the Fed’s bond purchase disclosures. “Warren Buffett, don’t worry, the Fed’s got your back.”
How the Fed Chooses Society’s Economic Winners and Losers
Now consider how the composition of household wealth in the United States relates to the wealth class of those households.
The wealth class comprising the bottom 80 percent of U.S. households has about 70 percent of their wealth tied up in their home equity. They only have about ten percent of their wealth invested in financial assets.
But the story is completely different among the top 1 percent’s wealth class. Although many own opulent houses, the super-rich on average have less than 10 percent of their wealth tied up in their home equity. But they have more than 75 percent invested in financial assets.
When the Fed drives the prices of financial assets way up, the Fed is picking the wealthiest 1 percent of households as their winners. Driving up those prices drives up the value of the investments held by that top 1 percent. The much higher stock and bond prices make the owners of those financial assets much wealthier.
Think about it: the Fed isn’t driving up the values of the houses and vehicles in which the bottom 80 percent keeps most of their wealth. And they’re certainly penalizing savers who are almost exclusively found among the bottom 80 percent, since because of the Fed’s policies, savings accounts at banks and money market funds are currently paying zero interest.
Essentially, the Fed is at best ignoring the bottom 80 percent, but dramatically favoring the top 1 percent.
Why the Federal Reserve’s Actions are Inherently Racist
Here’s where Dr. Martenson’s analysis becomes disturbing. Consider the share of American households with direct stock ownership, or indirect stock ownership through a proxy like a pension fund.
In 2016, about 55 percent of white households owned stock. What’s the percentage of Black stock-owning households? The Black proportion is only about a quarter (26 percent).
In other words, by driving stock prices higher, the Federal Reserve is enabling a wealth gap. That’s because the Fed is disproportionately benefitting white over Black households.
The Fed absolutely knows based on economic statistics that their monetary policies are benefiting whites over Blacks. The central bank unequivocally understands this fact. Yet the Fed continues to formulate and implement those racist policies anyway.
But that analysis only accounts for the share of Black and white households who own stock. To really appreciate how profound this racial gap is, compare some 2016 U.S. Census reports that value total household wealth from all sources.
The portrait that emerges is nothing short of economic apartheid, right here in the United States.
The average net worth of white, non-hispanic households is $143,600. However, the average net worth of Black households is only $12,920. That difference means that on average, white households are eleven times as wealthy as Black households. In other words, on average it takes the combined wealth of eleven Black families to equal the wealth of only one white family.
So when the Fed “prints” money that drives up the values of financial assets, the Fed favors white households over Black households.
The Federal Reserve’s Disinformation Campaign
To maintain legitimacy, the Federal Reserve appears to be struggling to convince an outraged American public that their policies intend to serve ordinary working Americans instead of Wall Street corporate interests and the wealthy. Nothing, of course, could be further from the truth.
At his alma mater Princeton University on June 1, Federal Reserve Chair Jerome “Jay” Powell said that the Federal Reserve’s policies “absolutely” don’t add to inequality. Although we’ve heard a lot of lies in national politics since the 2016 election, this former Wall Street lawyer’s statement amounts to one of the most disingenuous and deceitful bald-faced lies ever told by an American public figure.
Powell’s disinformation campaign roared along on June 13: “Inequality is something that’s been with us increasingly for more than four decades and it’s not really related to monetary policy,” Powell said in a press conference.
But who does he think he’s fooling, anyway? When the nation’s richest people saw their wealth explode thanks to a roughly 54 to 64 percent stock market increase in only 84 days while 40 million were unemployed, an assertion like that is sheer and utter nonsense. Because the Fed’s monetary policy is driving those asset prices into the stratosphere, Powell’s statement amounts to a fabrication that deserves ridicule.
To add insult to injury, Powell set the smallest small business loan available from the Fed’s new Main Street emergency lending program at a whopping $250,000. That’s a level well beyond the reach of most small businesses in the United States who employ the bulk of the nation’s employees. Incredibly, Powell originally set the minimum loan size at half-a-million dollars, but slashed it following criticism.
The Federal Reserve Should Admit Fueling Inequality
In summary, complex human societies can easily fray because growing economic inequality leads to political instability. As Professor Turchin observes, high inequality is corrosive to social cooperation and the willingness to compromise. Moreover, history is littered with the failures of republics destroyed by economic inequality. And even tightly controlled animal studies show how economic unfairness leads to rage and violence.
Instead of acknowledging how growing economic unfairness is leading to political instability across the United States—and taking emergency measures to reduce that unfairness—what does the Federal Reserve do? In short, deny and lie. Despite all evidence to the contrary, first Powell denied that his central bank’s policies have propelled inequality. Then, two weeks later, he lied about doing so.
Nevertheless, when the top 1 percent owns such a disproportionately larger share of financial assets that are distributed so unevenly across racial lines, how can one not conclude that the Fed is fanning the flames of the economic inequality and racism that’s fueling social unrest?
And finally, why isn’t the press pointing out these effects to Powell? Why isn’t the media asking him how long he thinks he can get away with denying and lying about driving the dangerous inequality and racism behind all the riots and demonstrations across America?
About the Peak Prosperity Team
Peak Prosperity is a community of some of the most astute economic analysts and commentators online. Dr. Chris Martenson and Adam Taggart have served as this community’s leadership team for more than a decade.
The main source for our analysis in this article, Dr. Martenson, is arguably one of the smartest economic futurists in the world. He’s one of the very few professionals to not only hold an MBA but also a PhD degree in pathology from an elite medical school after he graduated from the Duke University School of Medicine. This combination makes Dr. Martenson particularly well-suited to offer analysis and commentary on public health and healthcare industry issues in the wake of the pandemic.
Previously, Dr. Martenson forecasted years in advance the housing industry collapse that kicked off the Great Recession, and detailed that analysis in his 2011 book, The Crash Course. He also served as a vice president at a Fortune 300 firm, and spent more than a decade in strategic consulting and corporate finance.
After graduating from the Stanford Graduate School of Business, Taggart worked for the Internet startup MySimon, which CNET Networks bought for $700 million and sold to CBS Interactive. He then served as a vice president at Yahoo in Silicon Valley for almost a decade. Today he serves as Peak Prosperity’s president.
The team’s literature review and analysis that forms the foundation for the above article appears in this YouTube video.