The coexistence of asset inflation for the wealthy and consumer deflation for the poor is a defining characteristic of modern economies. This phenomenon is rooted in the fundamental way our financial system operates: money is created through credit, and access to that credit is inherently unequal.
First, it is crucial to understand that modern central banks do not simply “print money” and distribute it. Instead, they expand the money supply by creating credit, a process that requires corresponding assets and collateral. The central bank lends to large commercial banks, which then lend to smaller banks and, finally, to businesses and individuals. This chain of credit is a system of interlocking debt, and at every stage, a borrower’s ability to secure a loan is primarily judged by the quality of their assets. This is the core of the problem: those with substantial assets—the wealthy—have a significantly greater capacity to obtain credit than those who lack collateral—the poor.
During economic downturns, central banks often respond with aggressive monetary expansion, injecting substantial amounts of cheap credit into the system. This leads to asset inflation for the wealthy, as they are the primary recipients of this newly created currency. However, this is not an increase in their profits from core business operations; it is a surge in borrowing capacity. In a struggling economy, a rational business owner’s priority is not to raise wages or expand operations. Instead, they will use this cheap, abundant credit to speculate on assets like real estate or stocks, which promise higher returns than their underperforming businesses.
This speculative behavior is the direct cause of asset price bubbles, which primarily benefit the wealthy. Conversely, because this newly created money is not being channeled into wages or consumer spending, the purchasing power of the poor stagnates or declines, leading to consumer deflation. This drop in consumption further harms corporate profits, creating a vicious cycle where the wealthy continue to prioritize speculation over productive investment.
Ultimately, while central banks can make credit more available and manage the credit cycle, they cannot magically create wealth or eliminate the economic cycle. The design of our fiat monetary system, based on credit creation, inevitably leads to this unequal distribution of the effects of monetary expansion. The resulting gap between asset inflation and consumer deflation is not a bug in the system; it is a direct consequence of how the system is designed.