Widening the spread between rich and poor

Introduction

After global economic crisis in 2007-2009 traditional approaches for stimulating economy growth failed. As a consequence of this a new experimental approach was established, called Quantitative easing. A lot of people think that it is just 'printing money' and putting it into economy. But this is wrong and very narrow minded. In fact, the central bank of particular country buys financial assets (mostly governement bonds and mortgage backed securities, in case of US bonds are US Treasuries) from banks in exchange for new money. The thought behind quantitative easing is also pretty straightforward, however numbers say that it ceases to work. The first weakness of it is that the money is not put straight into economy (for example through government spending), but it is given to banks. Now when we are in low interest rates situation, it is not very rentable for banks to lend money to people, as with low interest rates and present inflation, they in fact get less value that they initially borrowed. So they often go and buy bonds and stocks themselves and thus overheat their prizes. And new money don't get into economy and so the growth of GDP is not promoted in a way, that it was thought. As 40% of stock market is owned by 5% of richest people in the world, it creates unequal distribution of wealth among population. Rich people get richer and poor people get even more poor and promotion of GDP growth stagnates. For example in the UK after quantitative easing of 375 billion pounds led to 1.2-2% growth of its domestic GDP, what is in numbers 23-28 bn pounds. So we can see how highly ineffective this is.

Model

For this simulation I will use US economy enviroment. In the second round of simulation, when banks will lend 90% of new money, I will observe inflation rate variable, as it is suggested, that we did not face high level inflation (or maybe hyper-inflation) because banks did not lend majority of money they got. If they would have lend, it would be expected, that inflation would be much higher, as market demand for goods and services would be much higher. When I simulate behavior of stock owner, I refer to those owners, who do not trade very often and speculate on the stock markets. I refer to those, who mostly have bigger share in companies and are somehow involved in companies and tend to hold their stocks in long term.

I start in year 2020. We can observe that quantitative easing takes place when interest rates reaches almost 0, but inflation is still very low, and there is threat of economy going into deflation spiral. After global crisis which ended in 2009, Fed used open market operations to lower interest rates, however it did not promote consumption and production enough to get US out of crisis (possibly because americans were already indebted enough and did not want to take new loans), this year there was also deflation of 0.36%. Fed then established quantitative easing, in order to promote spending and get USA out of delation and out of crisis. As of 2020, inflation started to lower again as a result of covid crisis and thus Fed started with massive quantitative easing again. As from last decade we observe that Fed used quantitative easing further after getting country out of crisis to promote economy reviving. This process went for about 5 years after crisis, so I will assume that after covid crisis rounds of quantitative easing will continue. If the inflation reaches below 0.5% or interest rates get above 2.5% Fed will re-eastablish quantitative easing (purchasing US Treasuries / mortgage backed securities) from private banks. As studies suggest, QE is strongly correlated to rise in stock prices (I expect this trend will not be applicable after I tweak rate of lending providen by private banks), however QE is of course not the only variable influencing stock prices. As when Fed balance was increasing, prices of stock always increased as well, but when Fed stopped purchasing and started to slowly decrease its balance, stock prices were still increasing (at that time it was due to Donald Trump elections and his policy of tax reliefs and domestic production promotion). These factors I will also add into my simulation. Each year will represent one round in the simulation, there will be also probability of 1:1000 that something unexpected happens and pulls economy into recession.

Before QE the valuation of US equity market was about 12 billion dollars. Now it is around 50 billion dillars [1]. For purpose of this simulation I assume that 5% of richest people own 40% of this market, what is currently 20 323 billion dollars. This is also my target group for investigation. I create group of 1000 stock owner, each of them will own 20.3 billions dollars. I will use them when deciding whether to buy new stocks, or sell.

Variables

Global variables

Inflation - starts at 1.2%, what is official number given by https://www.usinflationcalculator.com/inflation/historical-inflation-rates/.

Interest rates (short-term, fed-fund) - starts at 0.25%, taken from https://tradingeconomics.com/united-states/interest-rate

Time after crisis - this variable will hold the information about how long after crisis it is, if it is more than 5 years Fed will keep its reserves, slowly declining it, buying new assests only after old ones expire. When an crisis occur the number will be minimized to 0 (I will assume that crisis will appear either after some unexpected news, when applying QE only because of low inflation and interest rates it won't be done in 5 year interval but rather until inflation is up at about 3% again). Variable starts at 0, because 2020 is the start of pandemic crisis.

Agents

Central Bank / FED

Balance_change - I don't actually care for asset balance on FED's accounts, I need annual change to be able to predict stock prices change. As studies shown stocks prices changes are dependend on Fed policy, but there also other external factors that influence its development (in USA it was Donald Trump's strategy towards domestic producers for example). On the other hand studies show that when Fed's reserves were raising, stock were always raising and when QE stopped stock prices either stopped or raised or slumped a little bit. So I will assume that there is only 1:500 probability that stock don't raise, when Fed applies QE, but 1:10 stock prices don't follow, when Fed stopped the QE actions. Based on annual change in Fed reserves stock prices will follow with log-normal distribution with mean same as QE change and std 10.

Banks

Richest Stock Owners

References

http://web.b.ebscohost.com/ehost/pdfviewer/pdfviewer?vid=0&sid=b0ab3804-b496-4672-85d2-6fc1a1f1caf8%40sessionmgr101

http://web.b.ebscohost.com/ehost/pdfviewer/pdfviewer?vid=0&sid=ed7f3ec8-7c2b-4a07-8f7c-6cc54d92e27c%40pdc-v-sessmgr01

https://search.proquest.com/docview/1039275454/C82BA7C8A9474B3FPQ/1?accountid=17203

https://www.thebalance.com/what-is-quantitative-easing-definition-and-explanation-3305881

https://positivemoney.org/how-money-works/advanced/how-quantitative-easing-works/