Thursday, February 18, 2010
I was thinking more about the Guardian's conversion to monetarism, and their dedication to an expansionary monetary policy. It occurs to me that it is also an engine of inequality. The argument below applies, mutatis mutandis, to a contractionary monetary policy, and is not intended to argue for either expansionary or contractionary monetary policies. Indeed, I think it best for us to pursue neither.Real assets — for these purposes including houses, commodities, equity in businesses, you might even count index-linked bonds — are hedged, at least to some degree, against inflation. People who have debts will find that inflation erodes the value of their debt. By the same token, cash and savings have their value eroded by inflation.Since we do not all have the same asset profile, some people will necessarily lose out and others will gain. It is not even a matter of personal net worth. Some wealthy people are financially in debt with lots of real assets (property nuts and businesspeople, for example): they will be better off. Some wealthy people hold mostly financial assets (pensioners!): they will be worse off. Within wealth groupings, the effects are unequal; between wealth groupings, the magnitude of the effects alters (smaller amounts of money are affected less in absolute terms) but the potential for differentials does not.Thus inequalities are created by monetary policy. Wealth is taken from those with financial assets and distributed to those with financial debts. (The people who receive the new money also receive some of the wealth.) Note that the larger the financial asset or debt, the greater the effect. Hence, the biggest losers can be the financially wealthy, but the biggest gainers are the real-asset wealthy. This is not about transferring money form the poor to the wealthy, but about transferring from people with one asset profile to people with another asset profile.I imagine there are studies on this: the effects of monetary policy on on the wealth Gini. I'm guessing that the effects at the upper level probably wash out, while the heavily-indebted are given a break with inflation; so probably Gini is inversely correlated with expansionism . Nevertheless, monetary policy's scattershot redistribution surely must give pause for thought to anyone who thinks that the State ought not to treat people unequally simply because the way they have arranged their personal assets is different. Here is a paper which says my conclusion is right, although note that inflation is bad for inequality in the long-term (link).