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The Federal Reserve’s latest Survey of Consumer Finances, according to Federal Reserve Governor Brainard, shows that the share of income held by the top 1 percent of households has risen from 17 percent in 1988 to 24 percent in 2015, and that the wealth held by that same group rose from 30 percent in 1989 to 39 percent in 2016.

There are many explanations of why the gap between the rich and the poor widens. Governor Brainard attributes some of it to labor market disparities relating to geography and to race and ethnicity. She and Robert Frank say it results from the wealthiest households being much more likely to invest additional money received than those in other income groups. Vincent Del Giudice and Wei Lu blame automation and robotics. John Tamny says it is a consequence of the explosion in entrepreneurship that has benefited us all. A Tax Policy Center report concludes that it will widen even more if the president’s income tax overhaul is enacted.

The Brookings Institute held a conference to explore whether monetary policy widens the wealth gap. Mainstream economists support expansionary monetary policy because the income gap closes after mortgage payments are lowered when homes are refinanced at lower interest rates. However, a conference panelist and former Federal Reserve (Fed) board member Kevin Warsh referred to the Fed’s monetary policy during the financial crisis as being “reverse Robin Hood.” This view has merit because the Fed’s purchases of securities push interest rates down and expand the money supply. The expansion of money then inflates the prices of financial assets, which are disproportionately owned by the rich.

In a previous article for Mises Wire, I discussed data that seems to support both sides of the Brookings debate.

…click on the above link to read the rest of the article…

What’s Driving Social Discord: Russian Social Media Meddling or Soaring Wealth/Power Inequality?

November 2, 2017

What’s Driving Social Discord: Russian Social Media Meddling or Soaring Wealth/Power Inequality?

The nation’s elites are desperate to misdirect us from the financial and power dividethat has enriched and empowered them at the expense of the unprotected many.

There are two competing explanatory narratives battling for mind-share in the U.S.:

1. The nation’s social discord is the direct result of Russian social media meddling– what I call the Boris and Natasha Narrative of evil Russian masterminds controlling a vast conspiracy of social media advertising, fake-news outlets and trolls that have created artificial divides in the body politic, or exacerbated minor cracks into chasms.

2. The nation’s social discord is the direct result of soaring wealth/power inequality– the vast expansion of the wealth and power of the nation’s financial elites and their protected class of technocrat enablers and enforcers (the few) at the expense of the unprotected many.

Core to this narrative is the view that the elites and technocrats have engaged in a massive, coordinated official/media propaganda campaign of fake newsaimed at persuading the bottom 95% that their prosperity and financial security are expanding when the reality is they have lost ground they will never be able to recover.

This propaganda campaign includes official (i.e. gamed/distorted) statistics such as unemployment and inflation, a reliance on the manipulated stock market to “signal widespread prosperity” and a steady drumbeat of corporate media coverage promoting the Boris and Natasha Narrative as the primary source of all our troubles.

The reality the elites must mask is that the few (the elites) have benefited at the expense of the many. The rising tide of financialization, globalization and neofeudal-neocolonial neoliberalism has not raised all boats; the yachts have floated higher while the rowboats have either sunk or are leaking badly.

The Boris and Natasha Narrative is the primary propaganda tool of the ruling elites and their technocrat/ corporate media enablers.

…click on the above link to read the rest of the article…

Observations on Wealth-Income Inequality (from Federal Reserve Reports)

October 27, 2017

Observations on Wealth-Income Inequality (from Federal Reserve Reports)

There’s a profound difference between assets that produce no income and those that produce net income.

To those of us nutty enough to pore over dozens of pages of data on wealth and income in the U.S., the Federal Reserve’s quarterly Z.1 reports and annual Survey of Consumer Finances (SCF) are treasure troves, as are I.R.S. tax and income reports.

Allow me to share a few observations on family wealth and income drawn from my review of these documents:

Changes in U.S. Family Finances from 2013 to 2016 (42 pages)

Financial Accounts of the United States (198 pages)

Corporate profits clock in at $2.135 trillion annually, around 11% of the nation’s GDP (gross domestic product). (Page 10 of Z.1) This has changed very little over the past few years; corporate profits totaled $2.140 trillion in 2014.

Most people who follow financial matters closely probably know corporate profits have been around $2 trillion annually for awhile.

But how many know that proprietors’ income from small businesses ($1.375 trillion) and rental income of persons–i.e. not corporations–($740 billion) together equal corporate profits? ($2.115 trillion for small biz/rentals, $2.135 trillion for corporate profits.

How many financially savvy people know that proprietors’ income and private rental income rose by $189 billion since 2014, while corporate profits flatlined?

Clearly, the families that own the proprietorships and rentals pulling down $2.1 trillion in annual profits are doing a bit better than OK.

As the charts below reveal, most of this profitable business equity is owned by the top 10% of families. There are a few clues that suggest that family-owned business equity is distributed along a power-law curve, i.e. the majority of wealth and income is held by the top and the rest is distributed over the rest of the owners.

…click on the above link to read the rest of the article…

Here’s You and Here’s the Top Ten Percent

October 25, 2017

Here’s You and Here’s the Top Ten Percent

Family Net Worth graph of change from 2007 to 2017

In a nutshell, here is a graph that summarizes everything you need to know about the unsustainable US economy. Unless you’re in the top ten percent of income producers in the nation — or, at least, living in their neighborhood — you are living in a dingy bedroom economy that has only seen its net worth decline since the Great Recession began. Those who are in the top ten percent, on the other hand, profited astronomically from the Great Recession. It’s the best thing that ever happened to them, and you helped them do it with tax-backed or even tax-funded bailouts and by allowing them a perpetual cycle of savings on their capital gains.

Clearly the only ones who “recovered” are at the top

Insanity is repeating the same thing over and over and expecting different results

Now you can see how those bailouts have trickled down to you as well as how capital-gains tax breaks have trickled down. Are you now going to go for Trump’s third-and-greatest-ever round of trickle-down economics?

Lower taxes for corporations may be a good idea (why tax the economic engines and rob them of fuel) if they also come with the end of loopholes (corporate welfare) and with a provision that the corporation cannot be engaged in any corporate buybacks during that tax year or the following. (Without that provision, lower corporate taxes will just fuel useless stock buybacks, making the rich richer, but doing nothing to grow the corporation and grow jobs).

Capital-gains tax breaks, on the other hand, have always been a terrible idea. The notion that such breaks cause people to reinvest their tax savings into creating new factories and jobs is not only proven wrong by thirty-plus years of history (see chart above for just the last decade of decline), but it is ludicrous in concept (even without historic proof):

…click on the above link to read the rest of the article…

Low Interest Rates Subsidize Wealthy Households

October 22, 2017

Low Interest Rates Subsidize Wealthy Households

When the economy begins to sink into recession, politicians, mainstream economists, policy wonks, and the Federal Reserve begin beating the economic stimulus drum.

Politicians, however, disagree over the type of stimulus to implement. The center-left party proposes greater expenditures on public assistance programs. The center-right party supports permanent tax rate reductions. The center-left party opposes tax cuts because they say it benefits the rich. The center-right party opposes raising government expenditures because it increases government debt. This discord generally results in a temporary compromise where government expenditures are boosted and tax rates are cut. This compromise is called “discretionary fiscal stimulus.”

While the debate over discretionary fiscal stimulus has to overcome Senate filibusters and heated House debates, the central bankers at the Fed quickly implement monetary stimulus. Boosting aggregate demand is the intended purpose of it and discretionary fiscal stimulus. In mainstream economic theory, greater aggregate demand lowers unemployment and raises GDP. In spite of grave warnings from Austrian-school economists, the Fed pursues these goals by lowering interest rates via an expansion credit.

Although the political parties disagree over the type of fiscal stimulus to implement, both support the Fed’s monetary stimulus. Perhaps they do so because lower interest rates lower the cost of the budget deficits their discretionary fiscal stimulus produces. The lower interest rates also reduce the interest Americans pay on their debts. The total of this debt is unevenly distributed across the richest 1 percent, the next 9 percent, and the bottom 90 percent of Americans (as ranked by wealth), according to the following table.

Total household debt averaged $11.295 trillion dollars over the four quarters in 2013, according to the Federal Reserve Bank of New York. Multiplying this value by the percentages in the above table indicates that the richest 1 percent, the next 9 percent, and the bottom 90 percent have aggregate debts of $610 billion, $2.383 trillion, and $8.302 trillion, respectively. These values are listed in the Total Debt column below.

…click on the above link to read the rest of the article…

The Koyaanisqatsi Economy

September 29, 2017

The Koyaanisqatsi Economy

KoyaanisqatsiThe film Koyaanisqatsi was released in 1982. The title means ‘life out of balance’ in the language of the Hopi, a Native American tribe who live(d) mainly in what is now north-east Arizona. It is directed by Godfrey Reggio with music by Philip Glass and cinematography by Ron Fricke. There are no actors, and no dialogue. Philip Glass’s music underlies a series of film fragments that contrast the beauty of American nature with the noise and pollution mankind has added to it. Wikipedia:

The film consists primarily of slow motion and time-lapse footage of cities and many natural landscapes across the United States. The visual tone poem contains neither dialogue nor a vocalized narration: its tone is set by the juxtaposition of images and music. Reggio explained the lack of dialogue by stating “it’s not for lack of love of the language that these films have no words. It’s because, from my point of view, our language is in a state of vast humiliation. It no longer describes the world in which we live.”

Due to its initial success, Reggio and Glass made two sequels to the film, Powaqqatsi (1988), meaning “parasitic way of life” or “life in transition”, and Naqoyqatsi (2002) which means “life as war”, “civilized violence” and “a life of killing each other”. If you haven’t seen them, they come highly recommended.

Koyaanisqatsi is an fitting term to describe not only our world in general, but also our economies. They are severely out of balance, and getting more so every day. But economies, like nature, need at least a minimum in balance. If that disappears, this lack of balance will tip them over. It is somewhat strange that this is not being recognized, and not even discussed.

…click on the above link to read the rest of the article…

Why Governments Expand the Gap Between Rich and Poor

September 8, 2017

Why Governments Expand the Gap Between Rich and Poor

QUESTION: Mr. Armstrong; You said at your Frankfurt the ECB policy of negative interest rates is actually creating a wider gap between the poor and the rich. Could you elaborate on that comment?

Thank you. Hop you come back to Frankfurt. You do realize that you get twice the crowds here than anyone.

ANSWER: Lowering interest rates to negative was really brain-dead. The rich can move their move and export it to the USA. The poor, lack the sophistication and cannot export their labor no less their meager savings. The people who drive the economy have different roles. The rich provide the capital and create jobs. The middle class to poor are the people who form the foundation and it is their consumer spending that create the underlying economic growth. Attacking the rich always reduces investment and jobs, but lowering the interest rates to negative causes the rich to leave and the poor to middle class suffer lacking the sophistication export both their labor and savings.

The key message from President Mario Draghi’s press conference of the ECB was ro say he was getting ready to slow its QE stimulus, but he’s not in a rush.

Draghi tried to be as vague as possible, because he is trapped. He knows this cannot go on forever. He realizes that once he stops, the bond market crash and there is a risk that the Eurozone government are forced to pay real interest rates and that will blow out the entire EU budget system. Draghi does not know what to do. He confirmed that the governing council had begun ‘very preliminary’ talks about how the quantitative easing might be changed; how much longer it might run, and how much it might pump into the euro economy. He actually said:

…click on the above link to read the rest of the article…

How Central Banking Increased Inequality

August 16, 2017

How Central Banking Increased Inequality

Although today high levels of inequality in the United States remain a pressing concern for a large swath of the population, monetary policy and credit expansion are rarely mentioned as a likely source of rising wealth and income inequality. Focusing almost exclusively on consumer price inflation, many economists have overlooked the redistributive effects of money creation through other channels. One of these channels is asset price inflation and the growth of the financial sector.

The rise in income inequality over the past 30 years has to a significant extent been the product of monetary policies fueling a series of asset price bubbles. Whenever the market booms, the share of income going to those at the very top increases. When the boom goes bust, that share drops somewhat, but then it comes roaring back even higher with the next asset bubble.

The Cantillon Effect

The redistributive effects of money creation were called Cantillon effectsby Mark Blaug after the Franco-Irish economist Richard Cantillon who experienced the effect of inflation under the paper money system of John Law at the beginning of the 18^th century.1 Cantillon explained that the first ones to receive the newly created money see their incomes rise whereas the last ones to receive the newly created money see their purchasing power decline as consumer price inflation comes about.

Following Cantillon and contrary to Fisher and other monetary theorists of his time, Ludwig von Mises was the first to emphasized these Cantillon effects in terms of marginal utility analysis. With an increase in the stock of money, the cash balances of the early receivers of the newly created money increase.

…click on the above link to read the rest of the article…

Why We’re Doomed: Our Economy’s Toxic Inequality

August 16, 2017

Why We’re Doomed: Our Economy’s Toxic Inequality

Anyone who thinks our toxic financial system is stable is delusional.

Why are we doomed? Those consuming over-amped “news” feeds may be tempted to answer the culture wars, nuclear war with North Korea or the Trump Presidency.

The one guaranteed source of doom is our broken financial system, which is visible in this chart of income inequality from the New York Times: Our Broken Economy, in One Simple Chart.

While the essay’s title is our broken economy, the source of this toxic concentration of income, wealth and power in the top 1/10th of 1% is more specifically our broken financial system.

What few observers understand is rapidly accelerating inequality is the only possible output of a fully financialized economy. Various do-gooders on the left and right propose schemes to cap this extraordinary rise in the concentration of income, wealth and power, for example, increasing taxes on the super-rich and lowering taxes on the working poor and middle class, but these are band-aids applied to a metastasizing tumor: financialization, which commoditizes labor, goods, services and financial instruments and funnels the income and wealth to the very apex of the wealth-power pyramid.

Take a moment to ponder what this chart is telling us about our financial system and economy. 35+ years ago, lower income households enjoyed the highest rates of income growth; the higher the income, the lower the rate of income growth.

This trend hasn’t just reversed; virtually all the income gains are now concentrated in the top 1/100th of 1%, which has pulled away from the top 1%, the top 5% and the top 10%, as well as from the bottom 90%.

The fundamental driver of this profoundly destabilizing dynamic is the disconnect of finance from the real-world economy.

The roots of this disconnect are debt: when we borrow from future earnings and energy production to fund consumption today, we are using finance to ramp up our consumption of real-world goods and services.

…click on the above link to read the rest of the article…

If We Don’t Change the Way Money Is Created, Rising Inequality and Social Disorder Are Inevitable

June 27, 2017

If We Don’t Change the Way Money Is Created, Rising Inequality and Social Disorder Are Inevitable

Centrally issued money optimizes inequality, monopoly, cronyism, stagnation and systemic instability.

Everyone who wants to reduce wealth and income inequality with more regulations and taxes is missing the key dynamic: central banks’ monopoly on creating and issuing money widens wealth inequality, as those with access to newly issued money can always outbid the rest of us to buy the engines of wealth creation.

History informs us that rising wealth and income inequality generate social disorder.

Access to low-cost credit issued by central banks creates financial and political power. Those with access to low-cost credit have a monopoly as valuable as the one to create money.

I explain why in my book A Radically Beneficial World: Automation, Technology and Creating Jobs for All.

Compare the limited power of an individual with cash and the enormous power of unlimited cheap credit.

Let’s say an individual has saved $100,000 in cash. He keeps the money in the bank, which pays him less than 1% interest. Rather than earn this low rate, he decides to loan the cash to an individual who wants to buy a rental home at 4% interest.

There’s a tradeoff to earn this higher rate of interest: the saver has to accept the risk that the borrower might default on the loan, and that the home will not be worth the $100,000 the borrower owes.

The bank, on the other hand, can perform magic with the $100,000 they obtain from the central bank. The bank can issue 19 times this amount in new loans—in effect, creating $1,900,000 in new money out of thin air.

…click on the above link to read the rest of the article…

Want to Understand Rising Wealth Inequality? Look at Debt and Interest

May 19, 2017

Want to Understand Rising Wealth Inequality? Look at Debt and Interest

“Governments cannot reduce their debt or deficits and central banks cannot taper. Equally, they cannot perpetually borrow exponentially more. This one last bubble cannot end (but it must).”

I often refer to debt serfdom, the servitude debt enforces on borrowers. The mechanism of this servitude is interest, and today I turn to two knowledgeable correspondents for explanations of the consequences of interest.

Correspondent D.L.J. explains how debt/interest is the underlying engine of rising income/wealth disparity:

Here is a table of the growth rate of the GDP.

If we use $16T as the approximate GDP and a growth rate of, say, 3.5%, the total of goods and services would increase one year to the next by about $500B.

Meanwhile, referencing the Grandfather national debt chart with the USDebtClock data, the annual interest bill is $3 trillion ($2.7 trillion year-to-date).

In other words, those receiving interest are getting 5-6 times more than the increase in gross economic activity.

Using your oft-referenced Pareto Principle, about 80% of the population are net payers of interest while the other 20% are net receivers of interest.

Also, keep in mind that one does not have to have an outstanding loan to be a net payer of interest. As I attempted to earlier convey, whenever one buys a product that any part of its production was involving the cost of interest, the final product price included that interest cost. The purchase of that product had the interest cost paid by the purchaser.

Again using the Pareto concept, of the 20% who receive net interest, it can be further divided 80/20 to imply that 4% receive most (64%?) of the interest. This very fact can explain why/how the system (as it stands) produces a widening between the haves and the so-called ‘have nots’.

In other words, the wealthy own interest-yielding assets and the rest of us owe interest on debt.

…click on the above link to read the rest of the article…

The Root of Rising Inequality: Our “Lawnmower” Economy (hint: we’re the lawn)

April 12, 2016

The Root of Rising Inequality: Our “Lawnmower” Economy (hint: we’re the lawn)

This predatory exploitation is only possible if the central bank and state have partnered with financial Elites.

After decades of denial, the mainstream has finally conceded that rising income and wealth inequality is a problem–not just economically, but politically, for as we all know wealth buys political influence/favors, and as we’ll see below, the federal government enables and enforces most of the skims and scams that have made the rich richer and everyone else poorer.

Here’s the problem in graphic form: from 1947 to 1979, the family income of the top 1% actually expanded less that the bottom 99%. Since 1980, the income of the 1% rose 224% while the bottom 80% barely gained any income at all.

Globalization, i.e. offshoring of jobs, is often blamed for this disparity, but as I explained in “Free” Trade, Jobs and Income Inequality, the income of the top 10% broke away from the bottom 90% in the early 1980s, long before China’s emergence as an exporting power.

Indeed, by the time China entered the WTO, the top 10% in the U.S. had already left the bottom 90% in the dust.

The only possible explanation of this is the rise of financialization: financiers and financial corporations (broadly speaking, Wall Street, benefited enormously from neoliberal deregulation of the financial industry, and the conquest of once-low-risk sectors of the economy (such as mortgages) by the storm troopers of finance.

Financiers skim the profits and gains in wealth, and Main Street and the middle / working classes stagnate. Gordon Long and I discuss the ways financialization strip-mines the many to benefit the few in our latest conversation (with charts): Our “Lawnmower” Economy.

…click on the above link to read the rest of the article…

“The Game Is Rigged”: From Luxurious Lake Como Villa, Finance Professor Admits “QE Adds To Inequality”

April 8, 2016

“The Game Is Rigged”: From Luxurious Lake Como Villa, Finance Professor Admits “QE Adds To Inequality”

While attending the ultra-exclusive Ambrosetti Workshop, University of Chicago finance professor Luigi Zingales took a few minutes to discuss income inequality in an interview with Bloomberg.

We were delighted that the irony of being at a luxurious villa on the shores of Lake Como discussing income inequality wasn’t lost on the Booth PhD: “First of all it’s a bit funny to discuss about income inequality here at this luxurious villa in Como next to George Clooney’s villa”

As Jeb Bush might say, “Please laugh.”

Moving on: when asked if central bank policy is making people feel that they’ve really lost out, Zingales reiterates what we’ve known all along, namely that the real consequences of central bank actions don’t matter, what matters is simply how people perceive the central bank and its actions. If people are told enough by smart people on television that the economy has been fixed, and the market is a reflection of the fundamentals, then they’ll blindly support anything the fed does. After all, as long as whatever voodoo is going on over at the Eccles building is pushing 401k balances higher, then it must be right.

He then goes on as far as stating that capitalism in the U.S. has failed and been converted into a perverted, mutant, crony version and that “the game is rigged.”

“I think that people are willing to support capitalism if capitalism is providing growth, providing better income for everybody, and also if it has some at least appearance of being fair. Unfortunately, none of these conditions are in place today in the United States. I think that growth is limited, and disproportionately goes to a small fraction of the population. And there is a sense that the game is rigged.”

…click on the above link to read the rest of the article…

Why we have a wage inequality problem

March 30, 2016

Why we have a wage inequality problem

Wage inequality is a topic in elections around the world. What can be done to provide more income for those without jobs, and those with low wages?

Wage inequality is really a sign of a deeper problem; basically it reflects an economic system that is not growing rapidly enough to satisfy everyone. In a finite world, it is easy for an economy to grow rapidly at first. In the early days, there are enough resources, such as land, fresh water, and metals, for each person to get a reasonable-sized amount. Each would-be farmer can obtain as much land as he thinks he can work with; fresh water is readily available virtually for free; and goods made with metals, such as cars, are not expensive. There are many jobs available, and wages for most people are fairly similar.

As population grows, and as resources degrade, the situation changes. It is still possible to grow enough food, but it takes large farms, with expensive equipment (but very few actual workers) to produce that food. It is possible to produce enough water, but it takes high-tech equipment and a handful of workers who know how to use the high-tech equipment. Metals suddenly need to be lighter and stronger and have other characteristics for the high tech industry, thus requiring more advanced products. International trade becomes more important to be able to get the correct mix of materials for the advanced products needed to operate the high-tech economy.

With these changes, the economic system that previously provided many jobs for those with limited training (often providing on-the-job training, if necessary) gradually became a system that provides a relatively small number of high-paying jobs, together with many low-paying jobs. In the United States, the change started happening in 1981, and has gotten worse recently.

…click on the above link to read the rest of the article…

Joseph Stiglitz – “American Inequality Didn’t Just Happen…It Was Created.”

March 16, 2016

Joseph Stiglitz – “American Inequality Didn’t Just Happen…It Was Created.”

Yesterday, I came across an excerpt from a book written by economist Joseph Stiglitz, which touched upon many crucial points regarding the U.S. economy. I think it’s an important read since it helps explain the roots of the current rebellion taking place within the political system.

Americans aren’t angry because other Americans are fabulously wealthy. Americans are angry because the economy is intentionally rigged to benefit a small group of individuals known as “insiders.” They’re angry because rather than add value to society, these insiders parasitically take from society. Rent-seeking is what economists call their destructive behavior, and the public is fed up with it.

No one would be outraged if genuinely innovative entrepreneurs and creators were the ones cleaning up in the modern economy. Unfortunately, this is not the way things work. Indeed, it’s an unfortunate fact that a disturbingly large number of America’s so-called “economic winners” in 2016 are little more than corrupt, scheming hacks and political types unconscionably profiting from the ongoing destruction of the Republic. “The people” have finally started to wake up.

Now here are a few excerpts from Evonomics:

American inequality didn’t just happen. It was created. Market forces played a role, but it was not market forces alone. In a sense, that should be obvious: economic laws are universal, but our growing inequality— especially the amounts seized by the upper 1 percent—is a distinctly American “achievement.” That outsize inequality is not predestined offers reason for hope, but in reality it is likely to get worse. The forces that have been at play in creating these outcomes are self-reinforcing.

…click on the above link to read the rest of the article…

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