In my recent posts, I attempted to show the bankruptcy of the blanket statement by Mr. Sanders that billionaires as a class should not exist. One commenter said the issue was really about how they got their money, and in James’ mind, the only way you could get that kind of money was through nefarious means. While my second post effectively refuted that line of thinking (IMHO), I was too quick to move past an area for potential agreement, and that is there are some ways that one can become absurdly wealthy through political connections and cronyism. I mentioned briefly Warren Buffett’s political connectedness (see Peter Schweizer’s book Throw Them All Out for details). However there is an even more important reason that the rich are indeed getting richer, while the poor languish behind. The simple reason is that our central bank has adopted low interest rate policies that make the rich richer, with no work needed on their part.

Unlike the progressive “socialists”, I don’t condemn the billionaires (or millionaires) who see their net worth climb dramatically with little effort. And so I have no moral reason to try to take away what billionaires own. But I have no reason to support a semi-public policy that artificially raises their wealth, i.e., lowering interest rates which differentially benefits wealthy individuals. We are almost always told that lower interest rates benefit borrowers, with the implied beneficiaries being poorer people who have to borrow for car loans, mortgages, college, etc. Yet the truly poor don’t have the ability to borrow at low interest rates (as they don’t have collateral or often income to justify a loan). Yes, many middle class benefit from lower borrowing costs as well. But if you are a saver, and many poor and middle class are savers, who unlike wealthier individuals, often have their savings in a bank–they see their savings lose money year after year in real terms with the government’s financial repression (i.e., the government inflates away the value of their currency). However, wealthier citizens are more likely to put their savings directly into claims on financial assets, and those assets’ value will rise dramatically with lower interest rates.

Bloomberg had a post recently on “Richest 1% of Americans Close to Surpassing Wealth of Middle Class”; a headline sure to stoke a young progressive’s outrage. Yet the article does clearly highlight the major driving factor in this result: rich Americans own most of the financial assets, and when low interest rate policies are pushed by the Fed, it results in increasing wealth disparity.

The top 1% of American households have enjoyed huge returns in the stock market in the past decade, to the point that they now control more than half of the equity in U.S. public and private companies, according to data from the Federal Reserve. Those fat portfolios have America’s elite gobbling up an ever-bigger piece of the pie.

Chalk up at least part of their good fortune to interest rates, said Stephen Colavito, chief market strategist at Lakeview Capital Partners, an Atlanta-based investment firm for high-net-worth investors. People can’t get much of a return on certificates of deposits and other passive investments, so they’ve pumped money into stocks and propped up the market overall, he said.

Ray Dalio, has much of this right in a Linkedin post The World has gone Mad and the System is Broken. Dalio notes that the easy money policies of the Fed:

money is essentially free for those who have money and creditworthiness, it is essentially unavailable to those who don’t have money and creditworthiness, which contributes to the rising wealth, opportunity, and political gaps. 

The irony of this is that the Federal Reserve is the most socialist part of our whole economy–and it is precisely because the government decides the price (and indirectly much of the allocation of capital–a topic for another day) of money that leads to the rising wealth inequality we see. A free market in money, with interest rates (which is the price of current consumption) being set in the market just like any other price, it is certain that interest rates would not be as low as they are, they would not be as low as long as they are, and they certainly wouldn’t be negative. So to you young socialists who hate wealth inequality–will you join my call to end socialism in money, i.e., the Fed’s campaign to drive asset prices up which benefits richer people disproportionately?