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 above 2.5% 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.

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

Agents

Central Bank / FED

Banks

Richest Stock Owners