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Here’s ONE of the many reasons the WEALTH GAP gets wider during RECESSIONS
Ok so a recession hits, doom & gloom. People lose jobs, businesses stop investing etc etc etc
https://abs.twimg.com/emoji/v2/... draggable="false" alt="👇" title="Down pointing backhand index" aria-label="Emoji: Down pointing backhand index">
Asset prices fall:https://abs.twimg.com/emoji/v2/... draggable="false" alt="🏠" title="House building" aria-label="Emoji: House building"> https://abs.twimg.com/emoji/v2/... draggable="false" alt="📉" title="Chart with downwards trend" aria-label="Emoji: Chart with downwards trend"> https://abs.twimg.com/emoji/v2/... draggable="false" alt="💷" title="Banknote with pound sign" aria-label="Emoji: Banknote with pound sign">
Ok so a recession hits, doom & gloom. People lose jobs, businesses stop investing etc etc etc
Asset prices fall:
Central banks usually respond by slashing interest rates to make it ‘cheap to borrow’ so that businesses continue to invest and consumers consume
Central banks usually kick off a bond buying program which places cash in the hands of companies & governments at cheap rates
Central banks usually kick off a bond buying program which places cash in the hands of companies & governments at cheap rates
EFFECTS
1) consumers borrow cash to make ends meet, but the sight of cheap debt also pushes people to spend beyond their means DEBT RACKS UP
2) companies suddenly have tons of cash to invest, which they might a little, but not all cos the economy is messy
1) consumers borrow cash to make ends meet, but the sight of cheap debt also pushes people to spend beyond their means DEBT RACKS UP
2) companies suddenly have tons of cash to invest, which they might a little, but not all cos the economy is messy
2.1) remember interest rates are now hella low, so companies use it as an opportunity to pay off their debts at a lower rate https://abs.twimg.com/emoji/v2/... draggable="false" alt="😉" title="Winking face" aria-label="Emoji: Winking face">
2.2) they still have cash left over cos the bond buying programs are huge. So they BUY BACK THEIR OWN STOCK and/or RAISE DIVIDENDS = asset priceshttps://abs.twimg.com/emoji/v2/... draggable="false" alt="📈" title="Chart with upwards trend" aria-label="Emoji: Chart with upwards trend">
2.2) they still have cash left over cos the bond buying programs are huge. So they BUY BACK THEIR OWN STOCK and/or RAISE DIVIDENDS = asset prices
3) many people will now have negative equity on their mortgages i.e. their debt is higher than their house value. Many people lose their house cos they can’t maintain repayments.
3.1) rich people / companies who have access to cheap debt hoover up underpriced assetshttps://abs.twimg.com/emoji/v2/... draggable="false" alt="👆" title="Up pointing backhand index" aria-label="Emoji: Up pointing backhand index">https://abs.twimg.com/emoji/v2/... draggable="false" alt="🏠" title="House building" aria-label="Emoji: House building">
3.1) rich people / companies who have access to cheap debt hoover up underpriced assets
So how are we left now?
Poorer people now have higher debt and less assets
Companies now have lower debt and more assets
Richer people have now used cheap debt to acquire underpriced assets
Shareholders benefit from the buybacks (pushes stock prices higher) and dividends
Poorer people now have higher debt and less assets
Companies now have lower debt and more assets
Richer people have now used cheap debt to acquire underpriced assets
Shareholders benefit from the buybacks (pushes stock prices higher) and dividends
Ok cool, so the economy begins to improve and interest rates start to go back up
EFFECTS:
1) the debt of those poorer people becomes more expensive
2) companies do better, stock market goes higher, good for shareholders (of whom are usually richer people)
EFFECTS:
1) the debt of those poorer people becomes more expensive
2) companies do better, stock market goes higher, good for shareholders (of whom are usually richer people)
3) bond buying slows down soooo gradually (we’re talking years) so companies are still high off the cheap cash
4) asset prices GO BACK UP, remember who bought them underpriced?
5) poorer people can’t really participate in all this because they lost/don’t have assets
4) asset prices GO BACK UP, remember who bought them underpriced?
5) poorer people can’t really participate in all this because they lost/don’t have assets
DID YOU NOTICE THE PART WHERE THE ECONOMY GOT SCREWED AND THE RICHER COME OUT AS WINNERS
we only looked at one small component. We didn’t even look at tax incentives etc etc
Anyway, in a super generalised way, that’s one way recessions widen the wealth gap
https://abs.twimg.com/emoji/v2/... draggable="false" alt="➡️" title="Rightwards arrow" aria-label="Emoji: Rightwards arrow"> @nizzynomics https://abs.twimg.com/emoji/v2/... draggable="false" alt="⬅️" title="Leftwards arrow" aria-label="Emoji: Leftwards arrow">
we only looked at one small component. We didn’t even look at tax incentives etc etc
Anyway, in a super generalised way, that’s one way recessions widen the wealth gap
Whether we like it or not, we are all participants in the economy and everyone says they want to secure the bag but long term positioning is just as important
@nizzynomics is active deyahttps://abs.twimg.com/emoji/v2/... draggable="false" alt="🤟" title="Love-you gesture" aria-label="Emoji: Love-you gesture">
@nizzynomics is active deya
