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Federal Reserve Chairman Ben S. Bernanke recently expressed his concern about the growing inequality in economic outcomes, i.e. wages, incomes, consumption and wealth.[/LEFT]
Ben Bernanke mentioned several hypotheses which explain that trend. For example, technological progress could have raised the productivity of high-skilled workers more than that of low-skilled workers, or unskilled immigrants could have reduced the relative wages of the less-skilled workers.
The Chairman wisely avoids to talk about the role of monetary policy in the redistribution of wealth. Indeed, monetary policy has often been a huge redistributor of wealth. Unexpected inflation favors the debtor, while unexpected disinflation favours the creditor. In recent years, a slight variation of the “unexpected disinflation”-theme has taken place. US monetary policy since the 1990s and especially since 2002 is responsible for the biggest ever redistribution of wealth, by inflating asset prices all around the world. Everything which exists only in limited supply has at least doubled in price since 2002; just think of beachfront real estate, paintings by Vincent Van Gogh, bottles of 1990 Château Margaux, a Ferrari 250 GTO, equities and precious metals.
By increasing asset prices, monetary policy has redistributed wealth and consumption in favour of the rich. The ‘haves’, i.e. the owners of assets, have seen their wealth increase at the pace of monetary inflation, i.e. at double digits annually, while the ‘have-nots’ have seen their salaries rise at the pace of consumer price inflation, which was basically zero. For an individual, wealth is just a claim on future consumption. However, the future production potential of the economy is not enhanced by printing money. Therefore, if the relative claims of the ‘haves’ on future consumption have increased, the relative claims of the ‘have-nots’ must have decreased, as total future production is unchanged.
Some part of the malaise of the middle classes in many western countries in recent years can therefore probably be attributed to Sir Alan’s monetary policy. It’s a pity that the middle classes did not read Sir Alan’s remarks on “Gold and Economic Freedom” from 1966, where he writes:
[INDENT]"As the supply of money increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods."