Low interest rates help to bring working and middle-class prosperity. Inequality will drop if only people could borrow more years of their income today. At least that’s the narrative society was sold on for the past 100 years. It turns out there’s no evidence to show that’s true. In fact, the evidence indicates it was an outright lie.
De Nederlandsche Bank (DNB) researchers studied the impact of falling interest rates on wealth. The researchers found low interest rates allow the rich to capture a greater share of the economy. It may produce a small wealth bump for middle-class folks with assets, but they were worse off than before. The gap between the rich became even wider, producing greater inequality.
Conversely, they found the opposite was also true. Raising interest rates helped to reverse the share of wealth held by top incomes. But you totally don’t want to do that, because of some reason a super-rich person told you. Let’s take a quick dive into the numbers.
Lowering Interest Rates Help The Rich Capture Up To 6% More of A Country’s Wealth
The Dutch central bank studied twelve advanced economies from 1920 to 2015. The 95 years of data show low interest rates result in the rich getting a bigger share of a country’s wealth. Most of this occurs as a result of low interest rates helping to produce much higher asset prices.
The top ten percent of households captured a significantly larger share of wealth. They found a more “potent” impact in the tails of the income distribution. In other words, higher wealth brackets received a bigger share of the cut of total wealth.
It gets really big at the top of the income distribution too. The study found the top one-percent of incomes capture one to six percent more of the national wealth. Since the impact was higher at the tails, the top 0.1% got a bigger cut than the rest. Researchers suggest central banks become more aware of their contribution to wealth inequality. After all, they are one of the biggest drives of it.
Higher Interest Rates Lower The Share of Wealth Held By The One-Percent
The average person is largely convinced higher interest rates are bad for them. If the cost of debt rises, they have to spend more to service it. However, the central bank found it helped to reverse the share of wealth held by the one-percent. In other words, people may pay a few more dollars on a loan, but the wealth inequality is smaller. That person paying a slightly higher interest rate sees an increased quality of life. Of course, many people don’t care about their qualify of life. They just want to have slightly more money than their friends and neighbors.
The research is unlikely to shock anyone in finance that’s picked up a book in the past 10 years. It may come as a surprise to the general population though. They’ve been sold on the narrative lower interest rates will boost their wealth. By borrowing future income on the cheap, they can spend more on things today. Those things are generally sold by wealthier people. Middle-class people get access to more debt, and the rich collect that debt. Super complicated and difficult to understand, apparently.
Most people are so fixated on earning a couple of extra dollars, they are unaware of their relative position. Sure, low interest rates give a teardown bungalow you bought for $200,000 a price tag of $2.4 million in just a few years. However, you’re still living in a teardown bungalow. Meanwhile, a rich person now lives in a home with an 8-digit price tag.
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