Recently the Bank of England released its plans to combat weakness in the economy in the aftermath of Brexit.

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Their plan:

  • Lower interest rates to 0.25%
  • Lend £100B to the banks
  • Buy £60B in government bonds
  • Buy £10B in corporate bonds.

This news inspired me to write this short piece on the driving force behind inequality.

Imagine, if you will, how much money you could make if a bank was willing to loan you 100K at 0.25%? At this rate, the interest payments would only be 250. Now imagine 100B. This is the deal the Bank of England is giving the commercial banks. But what amounts to £100B in basically free money for the likes of HSBC and Barclays comes at a cost in higher prices.

Through the process of fractional reserve banking, this £100B in newly created money can be multiplied to a much higher number depending on the subsequent loans from the banks. This newly created money leads to higher prices (“more money chasing fewer goods”), first in assets where the new money will mostly likely be directed, such as stocks, bonds, and real estate, and then later on in consumer goods, like food and energy, when the new money filters throughout the economy.

This kind of monetary policy is the number one driver of inequality in developed nations, as it’s the well-connected corporations and financial institutions who prosper from having access to the extremely low rates and the wealthy who are more likely to own a substantial amount of those assets that are rising (stocks, bonds, and real estate), while those in the middle and lower class are the ones that have a harder time coping with the increase in the cost of living.

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Don’t believe me? Even the “central bank of central banks,” the Bank of International Settlements, released a research paper on this very topic:

Current Interest Rates

U.K. 0.25%
America 0.50%
Canada 0.50%
EU 0.00%
Japan 0.00%
Sweden -0.50%
Switzerland -0.75%

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