Monetary stimulus is said to have been a boon for the rich. It is not so simple
JOHN MAYNARD KEYNES once fantasised about a world of permanently low interest rates. In the final chapter of “The General Theory” he imagined an economy in which abundant available capital causes investors’ bargaining power, and hence rates, to collapse. In such a world markets would reward risk-taking and entrepreneurial talent, but not the mere accumulation of capital. The result would be the “euthanasia of the rentier”.
Who is right? Do low rates spell euthanasia or euphoria for those who live off capital? And should concerns about inequality determine which policy lever to pull in a downturn? Now consider a penniless millennial. She sees no capital gain when low rates boost asset prices. But she does have assets that will yield income in the future: education and skills. Were this human capital valued on financial markets, it too would rise in value when interest rates fall. She too could change plans and spend more today, but by borrowing cheaply rather than selling assets.
The third channel concerns asset prices. It is wrong to claim that asset-holders generally benefit when rates fall, says Mr Auclert. What matters is the full picture of an individual’s assets and liabilities. The latter he defines to include future consumption plans . Only by looking at an individual’s balance-sheet in full can you judge whether he wins or loses from low rates—or whether, in the jargon, he has “unhedged interest-rate exposure”.
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