The Trump administration has tried to cultivate a reputation for preferring “Main Street over Wall Street.” Unfortunately, this image is belied by the administration’s push for artificially low interest rates and monetary inflation. By embracing these policies, Trump has put himself squarely in the camp of “Wall Street over Main Street.”
This is because a policy of monetary inflation and low interest rates favors wealthy owners of assets while imposing higher prices and fewer income gains on people of more modest means. The Trump policies of inflation and low interest rates fuels levels of inequality far greater than would exist under relatively free market conditions. This is because the low-interest-rate policy increases disposable income far more rapidly for people at higher income levels than it does for people at lower income levels.
Contrary to the longstanding leftist myth that poor people benefit most from cheap money, it’s actually the wealthy who most reap the rewards of low interest rates and inflationary policy. The assumption behind the myth is that poor people go into debt more than wealthy people, and therefore, it’s the poor who benefit when they pay back debts in devalued currency.
That version of things is false on every level, however. First of all, the wealthy take out loans far more than the poor. When it comes to home mortgages, for example, the top ten percent (in terms of wealth) has more debt than the bottom fifty percent. So, which group will get an outsized benefit from paying back debts in cheaper money? It’s the top ten percent, not the bottom fifty percent.
Second, easy money fuels asset price inflation, and that’s only helpful if one owns a lot of assets. It’s not so great if—like most lower-income people—one doesn’t own a lot of assets.
As a growing number of empirical studies have shown, the net benefits of low-interest-rate policy for lower income groups—when there is any benefit at all—is very slight while the benefits for higher-income groups are far greater. We’re forced to conclude that Trump’s current drive for lower interest rates and more easy money is doing little or nothing to help the working-class people Trump claims he represents. In fact, his policies are probably hurting them, and his policies are definitely helping to enrich the highest income levels the most.
The Empirical Evidence
We don’t need new empirical studies to know that inflationary monetary policy, such as low-interest rate policy, favors the regime and its wealthy friends first. We can deduce this from the work of Richard Cantillon who showed that new money enters the economy unevenly and is most beneficial to those who get access to the new money first. Those who get it first can spend it before prices adjust upward to reflect the devaluation.
While those observations certainly ring true, we also have empirical studies to add some details and how Cantillon’s ideas they apply both in the United States and abroad.
For example, a November 2023 study from Raghuram G. Rajan noted that while central bankers, national governments and other sophisticated financial-sector players clearly benefitted from covid-era easy-money policies, “the unsophisticated, and the relatively poor get drawn in at the tail end of an asset price boom, creating problematic distributional consequences that the central bank has some responsibility for.” Put another way, loose monetary policy created asset-price inflation, but ordinary people mostly just felt the effects of rising prices.
Another recent empirical study on the effects of low interest rates and easy money is Karen Petrou’s 2021 book Engine of Inequality.
Looking at this policy as implemented in the United States, Petrou notes the effect of this policy has been extremely beneficial for the wealthy. Because so much money has been injected into the financial sector, stock prices have skyrocketed, and the prices of other assets—especially real estate—have soared.
Petrou shows that if we look at the data, however, we find that this economic boon hasn’t done much for those who don’t already have robust stock market portfolios and real estate assets—the lower half of the US in terms of wealth and income. In fact, from 2001 to 2016, the median wealth of Americans in the bottom 80 percent of income earners fell. Trump now supports the same monetary policy behind that trend. (I’ve written a full review of the book here.)
Also of interest is an October 2023 article in the Journal of Finance by Asger Lau Andersen, Niels Johannesen, Mia Jørgensen, and José-Luis Peydró.1 The study is a very large-scale examination of household-level data covering the entire population in Denmark over the period 1987 to 2014. The authors conclude that while low-interest-rate policy clearly helps boost the wealth of wealthier segments of the population, the average gains for people at the lower end are far smaller, or in some cases “negligible” or “precisely zero.”
Specifically, the authors, write that that low-interest-rate policy “generally increases the value of household portfolios of stocks, but that these gains are highly concentrated at the top of the income distribution. The estimated gain created by a 1 percentage point decrease in the policy rate is around 15% of disposable income in the top income group and entirely negligible below the median income level.”
They also conclude:
The results imply that a 1 percentage point decrease in the policy rate increases disposable income by around 1% in the middle of the income distribution, which compares to more than 4% for the top income group and almost precisely zero for the lowest incomes
Although many advocates of easy-money policy say it fuels greater employment, the authors are skeptical of its benefits for the lowest income groups stating: “the results also highlight that the most disadvantaged groups, who have very low employment rates through the business cycle, do not appear to reap any gains through the labor channel.”
Even when lower-income groups benefit somewhat, the wealthy reap far larger benefits:
There are some clear winners and losers. When rates fall, disposable income rises for high and low earners, but it’s households within the top one per cent of income who benefit most. We found a one percentage point drop in interest rates boosted the incomes of these top earners by five per cent over two years, while the lowest earners saw only a 0.5 per cent rise. Those in the middle saw an increase of 1.5 per cent in their income.
Taking all this into account, it easy to see why higher net-worth individuals, and of course, the financial sector, are always clamoring for lower interest rates. Lower interest rates are a boon for those with sizable portfolios. Those who own few assets, on the other hand, are lucky to eke out even a small gain from the policy.
So, when we see Trump pushing the Federal Reserve to further lower interest rates, we can see that he is coming down squarely on the side of Wall Street and the wealthiest households who so clearly benefit from ongoing monetary inflation and low interest rates.
If Trump gets his way and manages to get the lower interest rates from the Federal Reserve, he will be further widening the inflation-fueled gap between the haves and have-nots. This will happen as Trump and his inflationist allies consign working class and lower income households to more of the same slow slog through rising prices and stagnating wealth that has been—as noted by Petrou—so characteristic of the era of ultralow interst rates and quantitative easing.
Trump supporters, no doubt, will conjure up new excuses and explanations for why these policies are actually a good thing and all part of Trump’s game of 6-D chess. Meanwhile, the easy-money addicts on Wall Street will see their wealth balloon even more as Trump ensures our financial bubbles just keep getting bigger.
- 1
Asger Lau Andersen, Niels Johannesen, Mia Jørgensen, and José-Luis Peydró, “Monetary Policy and Inequality,” Journal of Finance 78, no. 5, (October 2023): 2945-2989.
