Tag: COVID-19

To save the economy from collapsing, central banks slashed interest rates, thereby lowering borrowing costs and increasing the supply of money. They also pumped trillions of dollars into financial markets with the aim of encouraging companies to invest in the economy. Major central banks have infused more than $11 trillion into the global economy since 2020.

These interventions triggered a boom in the value of stocks, bonds and other financial instruments — but the rise in asset prices wasn’t accompanied by an increase in economic production.

“Instead of leading to more economic output, a bulk of the sudden infusion of money into the financial system led to a dramatic rise in asset prices, including stocks, which benefitted the rich,” Francisco Ferreira, director of the International Inequalities Institute at the London School of Economics (LSE), told Al Jazeera.

A year into the pandemic, capital markets had risen $14 trillion, with 25 companies — mostly in the technology, electric vehicles and semiconductors segment — accounting for 40 percent of the total gains, according to an analysis of stock performance of 5,000 companies by consulting firm McKinsey.

“The result is that this pandemic period has seen the biggest surge in billionaire wealth since the records began,” Oxfam America’s Director of Economic Justice Nabil Ahmed told Al Jazeera. “And we are still coming to terms about how extraordinary that rise has been.”

Billionaires saw their fortunes increase as much in 24 months as they did in 23 years, according to Oxfam’s “Profiting from Pain” report released in May this year. Every 30 hours, while COVID-19 and rising food prices are pushing nearly one million more people into extreme poverty, the global economy is also spawning a new billionaire.

Pre-pandemic factors

To be sure, both income and wealth inequalities have been on the rise since the 1980s when governments across the world began deregulating and liberalising the economy to allow more private sector participation. Income inequality refers to the gulf in the disposable income of the rich and the poor whereas wealth inequality deals with the distribution of financial and real assets, such as stocks or housing, between the two groups.

Among other things, the post-liberalisation period also resulted in declining bargaining power of workers. At the same time, companies increasingly started turning to financial markets to borrow money for their investments, Yannis Dafermos, a senior lecturer in economics at SOAS University of London, told Al Jazeera.

“It is the financialisation of the economy in particular that generated a lot of income for the rich, who invest in financial assets,” Dafermos said. “And whenever an economic crisis strikes, the central banks’ response is to save the financial market from collapsing because it is so much interlinked with the real economy. This helps stock and bond markets to thrive creating more wealth and inequality.”

This is what major central banks did during the global financial crisis in 2008-09 — injecting liquidity into the market through various tools and lowering interest rates to encourage companies to borrow and invest.

“The easy money policy that began after the global financial crisis led to really low to negative interest rates and big liquidity in the financial system,” Jayati Ghosh, professor of economics at the University of Massachusetts Amherst, told Al Jazeera. “So, in the past 15 years, corporations chose to reinvest the money into buying more financial assets chasing high returns, rather than increasing their production.”