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How Central Banks Cause Income Inequality
Mises Daily ^ | 2/1/14 | Frank Hollenbeck

Posted on 02/01/2014 3:58:11 PM PST by BfloGuy

The gap between the rich and poor continues to grow. The wealthiest 1 percent held 8 percent of the economic pie in 1975 but now hold over 20 percent. This is a striking change from the 1950s and 1960s when their share of all incomes was slightly over 10 percent. A study by Emmanuel Saez found that between 2009 and 2012 the real incomes of the top 1 percent jumped 31.4 percent. The richest 10 percent now receive 50.5 percent of all incomes, the largest share since data was first recorded in 1917. The wealthiest are becoming disproportionally wealthier at an ever increasing rate.

Most of the literature on income inequalities is written by professors from the sociology departments of universities. They have identified factors such as technology, the reduced role of labor unions, the decline in the real value of the minimum wage, and, everyone’s favorite scapegoat, the growing importance of China.

Those factors may have played a role, but there are really two overriding factors that are the real cause of income differentials. One is desirable and justified while the other is the exact opposite.

In a capitalist economy, prices and profit play a critical role in ensuring resources are allocated where they are most needed and used to produce goods and services that best meets society’s needs. When Apple took the risk of producing the iPad, many commentators expected it to flop. Its success brought profits while at the same time sent a signal to all other producers that society wanted more of this product. The profits were a reward for the risks taken. It is the profit motive that has given us a multitude of new products and an ever-increasing standard of living. Yet, profits and income inequalities go hand in hand. We cannot have one without the other, and if we try to eliminate one, we will eliminate, or significantly reduce, the other. Income inequalities are an integral outcome of the profit-and-loss characteristic of capitalism; they cannot be divorced.

Prime Minister Margaret Thatcher understood this inseparability well. She once said it is better to have large income inequalities and have everyone near the top of the ladder, than have little income differences and have everyone closer to the bottom of the ladder.

Rothbard, Murray N.

$10.00 $5.00

Yet, the middle class has been sinking toward poverty: that is not climbing the ladder. Over the period between 1979 and 2007, incomes for the middle 60 percent increased less than 40 percent while inflation was 186 percent. According to the Saez study, the remaining 99 percent saw their real incomes increase a mere .4 percent between 2009 and 2012. However, this does not come close to recovering the loss of 11.6 percent suffered between 2007 and 2009, the largest two-year decline since the Great Depression. When adjusted for inflation, low-wage workers are actually making less now than they did 50 years ago.

This brings us to the second undesirable and unjustified source of income inequalities, i.e., the creation of money out of thin air, or legal counterfeiting, by central banks. It should be no surprise the growing gap in income inequalities has coincided with the adoption of fiat currencies worldwide. Every dollar the central bank creates benefits the early recipients of the money—the government and the banking sector — at the expense of the late recipients of the money, the wage earners, and the poor. Since the creation of a fiat currency system in 1971, the dollar has lost 82 percent of its value while the banking sector has gone from 4 percent of GDP to well over 10 percent today.

The central bank does not create anything real; neither resources nor goods and services. When it creates money it causes the price of transactions to increase. The original quantity theory of money clearly related money to the price of anything money can buy, including assets. When the central bank creates money, traders, hedge funds and banks — being first in line — benefit from the increased variability and upward trend in asset prices. Also, future contracts and other derivative products on exchange rates or interest rates were unnecessary prior to 1971, since hedging activity was mostly unnecessary. The central bank is responsible for this added risk, variability, and surge in asset prices unjustified by fundamentals.

The banking sector has been able to significantly increase its profits or claims on goods and services. However, more claims held by one sector, which essentially does not create anything of real value, means less claims on real goods and services for everyone else. This is why counterfeiting is illegal. Hence, the central bank has been playing a central role as a “reverse Robin Hood” by increasing the economic pie going to the rich and by slowly sinking the middle class toward poverty.

Janet Yellen recently said “I am hopeful that … inflation will move back toward our longer-run goal of 2 percent,” demonstrating her commitment to an institutionalized policy of theft and wealth redistribution. The European central bank is no better. Its LTRO strategy was to give longer term loans to banks on dodgy collateral to buy government bonds which they promptly turned around and deposited with the central bank for more cheap loans for more government bonds. This has nothing to do with liquidity and everything to do with boosting bank profits. Yet, every euro the central bank creates is a tax on everyone that uses the euro. It is a tax on cash balances. It is taking from the working man to give to the rich European bankers. This is clearly a back door monetization of the debt with the banking sector acting as a middle man and taking a nice juicy cut. The same logic applies to the redistribution created by paying interest on reserves to U.S. banks.

Concerned with income inequalities, President Obama and democrats have suggested even higher taxes on the rich and boosting the minimum wage. They are wrongly focusing on the results instead of the causes of income inequalities. If they succeed, they will be throwing the baby out with the bathwater. If they are serious about reducing income inequalities, they should focus on its main cause, the central bank.

In 1923, Germany returned to its pre-war currency and the gold standard with essentially no gold. It did it by pledging never to print again. We should do the same.


TOPICS: Business/Economy; Government; News/Current Events
KEYWORDS: fed; inflation

1 posted on 02/01/2014 3:58:11 PM PST by BfloGuy
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To: BfloGuy

Austrian bump!


2 posted on 02/01/2014 4:08:53 PM PST by 4Liberty (Optimal institutions - optimal economy.)
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To: BfloGuy
Every dollar the central bank creates benefits the early recipients of the money—the government and the banking sector — at the expense of the late recipients of the money, the wage earners, and the poor...

Hmmm.... a phenomenon shared between the dollar and bitcoin. The nebulous founders of BTC own "tons" of BTC at dollar equivalents of pennies, now valued around $838.

3 posted on 02/01/2014 4:16:48 PM PST by C210N (When people fear government there is tyranny; when government fears people there is liberty)
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To: BfloGuy

A peculiar thing happens on the way to trying to “tax the rich”.

It is like building a dam across a flowing river (the velocity of money). The dam is made up of differential tax rates, the greater the gross income, the higher the tax rate is assessed.. Add to this various prohibitions on how the cash flow may be spent (a combination of regulations and tax “incentives”), and the flow of capital begins backing up, ending up remaining in the hands of those who already had accumulated capital, that USED to flow downstream, but now no longer does. Result, the former steady flow dries up to a mere trickle, or stops altogether. Meanwhile, a huge volume of unexpended cash is held back by these regulations and fear of excessive taxation, and seeks another outlet, which may be back upstream, spilling out into a more hospitable terrain. This is why money flees to overseas markets and production facilities.

Tax rate decreases increase the total revenues generated, by vastly spreading out the pool of taxable income in the middle and lower income ranges. And this multiplier effect not only increases the tax yield from the more fully employed recipients of this capital flow, the capital continues to flow out to more and more individuals, further broadening the taxable base, at far greater impact than merely seizing the total assets of the very wealthy.

Part of the value of money (most of it, actually) comes from the velocity with which it moves from production to consumption, and flows back to further expand production. A stack of dollar bills, or a quantity of gold bars, or an electronic entry on a balance sheet, is nothing until it is converted from its storage value to actual production of goods and services. You can have the most potent fuel in the world, but until it is consumed in the production of useful work, it is just a hazard to all who are near it.


4 posted on 02/01/2014 4:26:49 PM PST by alloysteel (Obamacare - Death and Taxes now available online. One-stop shopping at its best!)
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To: All


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5 posted on 02/01/2014 4:28:49 PM PST by musicman (Until I see the REAL Long Form Vault BC, he's just "PRES__ENT" Obama = Without "ID")
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To: BfloGuy

If the richest one percent held 99% of the wealth, that still wouldn’t mean that the remaining 99% of the population couldn’t live a very fantastic lifestyle.

The fact is, 80% of the wealth is held by the lower 99%.

80%, 99%, it’s not that big a deal.

Here we are again with the Marxists trying to explain why central government is the only way to nirvana.

F that S!


6 posted on 02/01/2014 4:31:08 PM PST by DoughtyOne (Amnesty is job NONE! It isn't even the leading issue with Hipanics.)
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To: BfloGuy

It seems to me that whenever the think tanks and sociologists examine what deprives the lower classes, particularly the middle class, of wealth, they never include government. People are taxed to death. Most families are two-income families because they have to be. And I work for a small company with three employees. Over the last 25 years, from withholding, our tiny little company of 3 employees (getting modest salaries) has sent over $1.4 million to the federal government.


7 posted on 02/01/2014 4:53:23 PM PST by MrChips (Ad sapientiam pertinet aeternarum rerum cognitio intellectualis - St. Augustine)
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To: DoughtyOne
If the richest one percent held 99% of the wealth, that still wouldn’t mean that the remaining 99% of the population couldn’t live a very fantastic lifestyle.

This is true. But what about the fact that the Middle-class is currently being totally destroyed by members of the 1% while the same 1% are getting fantastically wealthier. Arch 'capitalist' George Soros comes to mind.

It don't think any one is asking for nirvana. I think people don't want their country to end a typical Third-world hell pit were the Ruling Elites live like kings and are unanswerable to the serfs that provide them their lavish lifestyles.

8 posted on 02/01/2014 4:55:03 PM PST by Count of Monte Fisto (The foundation of modern society is the denial of reality.)
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To: BfloGuy

bookmark for later.


9 posted on 02/01/2014 5:05:20 PM PST by PieterCasparzen (We have to fix things ourselves)
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To: BfloGuy

Income inequality? Hah, humans are created equal in WORTH to God, but equal in brains, talent and ambition? Sounds like another one of Obama’s fairy tales.


10 posted on 02/01/2014 5:07:31 PM PST by cloudmountain
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To: BfloGuy
When the central bank creates money, traders, hedge funds and banks — being first in line — benefit from the increased variability and upward trend in asset prices.

Its even simpler than that. The Fed is printing money and giving it to large banks who use it to bump up the highest salaries. The Fed is also giving printed money to politicians who hand out free phones ($50 / month) to the "poor" but free loan guarantees ($500,000,000 a pop) to wealth investors in politically favored industries (e.g. "green").

11 posted on 02/01/2014 5:35:10 PM PST by palmer (Obama = Carter + affirmative action)
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To: Count of Monte Fisto
It don't think any one is asking for nirvana. I think people don't want their country to end a typical Third-world hell pit were the Ruling Elites live like king

Reread the article. All we are asking for is an end to the Fed policy of destroying small savers, pretending to grow the economy by increasing debt, and printing money to hand out to the wealthy. Once we stop doing that, the Soroses of word will dry up. Soros is not a capitalist, he is a user of the boom/bust cycle created by the Fed. Without the Fed he would have much smaller booms and busts to work with. He has reputedly "crashed" currencies, but he is only able to do that because of prior distortions by central banks.

12 posted on 02/01/2014 5:39:07 PM PST by palmer (Obama = Carter + affirmative action)
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To: Count of Monte Fisto
If the richest one percent held 99% of the wealth, that still wouldn’t mean that the remaining 99% of the population couldn’t live a very fantastic lifestyle.

This is true. But what about the fact that the Middle-class is currently being totally destroyed by members of the 1% while the same 1% are getting fantastically wealthier. Arch 'capitalist' George Soros comes to mind.

Soros is a strange person.  I'm not convinced he's the guy we should use for an example.  Personally, I think the guy deserves to be held to charges various governments have leveled against him.  That is a little different than the typical wealthy person.  I believe most of them are simply following business guidelines set down by various governments.  In that respect a lot of it is out of their hands.  On top of that, I'd say that if the government were to use sound judgement, the average middle-class person would be a lot better off.  Is it really the top 1% who are becoming wealthy at our expense, or is it the government of the U. S. that has screwed things up so badly, that the government and not the 1% benefits from it the most, and the middle class takes it in the shorts.  I'd suggest it's the latter.

Generally speaking, I think the wealthier make more money when the middle-class thrives.  Government policies that influence the wealthy against that are the focus I think we shoudl be homing in on.  Each year the federal government takes trillions of dollars from the middle-class and redistributes it across the board.  Some of it is for national defense, but a massive amount of it goes to traditional welfare, and earned income tax credits.  I don't think we have any idea how much money the government redistributes.  If we did, I think there would be almost open rebellion on that alone.

Lets take a look a that for a moment.  We have 132 million people working in the United States.  These are the only cash cows on the table.  Well, that isn't exactly true, because corporations are also cash cows.  I think there are a lot of people convinced corporations don't pay much in taxes, because they manipulate the tax code for thier shareholder's benefits.  It would be hard to deny some of that is true, although to what extent I'm not knowledgable enough to say.  In fact, what I'm saying here is merely intended to spark your interest in learning more.  I wouldn't want you to totally buy into what I am saying any more than I would want you to totally dismiss it.
.
Okay, lets continue.

Each year our government pays out at least $500 billion in welfare payments.  Any idea how much that is for each worker bee?  Well, it works out to $3,787.87.  Leaving the corporations out of it for the time being, that's $3,787.87 for each working person in the United States just to cover welfare alone.  Most folks work around 45 years in the employment treadmill.  Do you have any idea how much money would you would bank if you put that $3,787.87 away each year, and received an entirely reasoned interest rate on it?  At 4% (and yes you can get that level of interest if you invest properly), you would have very close to $460,000.00 saved up by your retirement age.  If you were frugal enough to manage your money properly and purchase a home and have it paid for by the time you were 65, imagine what kind of a retirement you could have, on that alone.  Wait a minute?  Do you know how much money the federal government spends each year?  It's not $500 billion.  It's closer to $2 trillion.  Granted the federal government deficit spends for some of this, but theWe fact is, you and your family is being ripped off massively to keep this going.  And I was just addressing one of you.  If you're married, double the figures I've laid out for you.

Now, do you think those most wealthy 1% are your number one enemy?  If you think about it, you might consider an sincere appology.


It don't think any one is asking for nirvana. I think people don't want their country to end a typical Third-world hell pit were the Ruling Elites live like kings and are unanswerable to the serfs that provide them their lavish lifestyles.

Who is living like kings, really?  Who knows what our desires are, then does whatever they hell they want to anyway?  The top 1% of the wealthy?

Are you voting them in over and over, only to take it up the..., well nevermind?

I think you get the picture.

Our elected officials want us to think it's the top 1%.  That top 1% pays out more contributions to charities domestically and globally, than any other nation's top 1% on planet earth.  Philantropy takes place because the top earners in the U. S. get to the point that simply earning wealthy doesn't give them a sense of fulfillment.  Being philantropic does.

When is the last time you heard of one of our elected officials donating half their income to anything?  When did you hear of them donating even 10% to anything?  We elect these nimrods to government when their stated wealthy is around $500 thousand to $5 million.  They get paid a decent wage, and then ten years later they're worth $10, $20, perhaps $50 million?  How does that work?

Top 1% of the wealthy?  I think you now know better than that.

13 posted on 02/01/2014 5:52:45 PM PST by DoughtyOne (Amnesty is job NONE! It isn't even the leading issue with Hipanics.)
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To: BfloGuy

Thanks for posting


14 posted on 02/01/2014 5:52:54 PM PST by all the best (`~!)
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To: Count of Monte Fisto

I agree with you there. If these oligarchs in the making were spending their money, there might be a trickle down effect, but the elites are keeping their money in offshore accounts.


15 posted on 02/01/2014 6:08:09 PM PST by CorporateStepsister (I am NOT going to force a man to make my dreams come true)
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To: BfloGuy

That’s the whole point of central banks. Looting the nation for the elites who design the system.


16 posted on 02/01/2014 6:17:00 PM PST by freedomfiter2 (Brutal acts of commission and yawning acts of omission both strengthen the hand of the devil.)
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To: BfloGuy

Monetary inflation benefits people who want to take a bigger cut of the pie without asking. That would be government, banksters, and connected cronies. It also disproportionately benefits people with enough liquid assets to take advantage of inflation hedges.

It’s regressive taxation, and it’s destroying the country.


17 posted on 02/01/2014 7:51:47 PM PST by CowboyJay (Cruz'-ing in 2016!)
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To: C210N; BfloGuy
Every dollar the central bank creates benefits the early recipients of the money—the government and the banking sector

I always loved this claim.

The Fed buys a bond, yielding say 2.6% to 4.5%, from a bank, giving them in return, cash yielding 0.25%.

How is that a benefit to the banking sector?

18 posted on 02/01/2014 9:08:14 PM PST by Toddsterpatriot (Science is hard. Harder if you're stupid.)
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To: BfloGuy

Bfl


19 posted on 02/02/2014 3:42:38 AM PST by FreedomPoster (Islam delenda est)
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To: Toddsterpatriot
I always loved this claim.

Oh, and I suppose you're now going to claim that inflation is just a natural phenomenon and that it happens all at once equally for every good and every consumer. For Pete's sake, that was understood to be false some four centuries ago.

The Fed buys a bond, yielding say 2.6% to 4.5%, from a bank, giving them in return, cash yielding 0.25%.

Gee! Why did the stupid banks agree to that?

20 posted on 02/02/2014 4:13:14 PM PST by BfloGuy ( Even the opponents of Socialism are dominated by socialist ideas.)
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To: CowboyJay
It’s regressive taxation, and it’s destroying the country.

It surely is. It's stealing the savings of retirees, eating the capital of businesses invisibly, and driving the cost of living higher by the year while wages stagnate.

21 posted on 02/02/2014 4:15:20 PM PST by BfloGuy ( Even the opponents of Socialism are dominated by socialist ideas.)
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To: MrChips
It seems to me that whenever the think tanks and sociologists examine what deprives the lower classes, particularly the middle class, of wealth, they never include government.

Excellent point -- worth repeating. Government is never the cause of our problems to these people. We are the cause of our problems and must be subdued.

22 posted on 02/02/2014 4:17:25 PM PST by BfloGuy ( Even the opponents of Socialism are dominated by socialist ideas.)
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To: BfloGuy
Oh, and I suppose you're now going to claim that inflation is just a natural phenomenon

Why would I claim that?

and that it happens all at once equally for every good and every consumer.

If the price of gasoline rises $0.10 tomorrow, how does the bank that sold some bonds last week to the Fed pay a lower price than me?

For Pete's sake, that was understood to be false some four centuries ago.

Thanks for the link. Which part of it was supposed to back your claim?

The Fed buys a bond, yielding say 2.6% to 4.5%, from a bank, giving them in return, cash yielding 0.25%.

Gee! Why did the stupid banks agree to that?

Primary dealers serve as trading counterparties of the New York Fed in its implementation of monetary policy. This role includes the obligations to: (i) participate consistently in open market operations to carry out U.S. monetary policy pursuant to the direction of the Federal Open Market Committee (FOMC); and (ii) provide the New York Fed's trading desk with market information and analysis helpful in the formulation and implementation of monetary policy. Primary dealers are also required to participate in all auctions of U.S. government debt and to make reasonable markets for the New York Fed when it transacts on behalf of its foreign official account-holders.

http://www.newyorkfed.org/markets/pridealers_current.html

23 posted on 02/02/2014 5:57:56 PM PST by Toddsterpatriot (Science is hard. Harder if you're stupid.)
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To: DoughtyOne

As a young man I thought I could change the system by voting and working hard. It was a battle of ideals and effort. I grew older and possibly wiser. Then I thought the system was corrupt and it required more to solve. It would require violence against that system to defeat the ideals. Kind of shoot the lawyers and politicians ideology. I grew older and possibly wiser. I am now at the point where I see the system as a symptom of the populace. My current view is its time to shoot the low info voter. I now advocate decentralization and war against the political tyrants 1000 miles away (NE/West Coast) I hope I grow older and wiser.

I hope my children never ask why I saw this all and did nothing. I speak my opinion in the current safety of my home. I don’t have the conviction or wisdom of Jefferson, Adams or others from history. I am unsure what needs to be done but my current opinion is there needs to be war against those that want to force me my children and grandchildren into slavery for the common good. That’s not 1% or 2%. Its 30% of the people maybe more.

I believe this in my soul to be true.


24 posted on 02/02/2014 7:10:34 PM PST by wgmalabama
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To: alloysteel

That is one of the most concise and clear explanations I’ve ever read. Thank you.


25 posted on 02/02/2014 7:29:16 PM PST by Lurkina.n.Learnin (This is not just stupid, we're talking Democrat stupid here.)
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To: wgmalabama

Your job was to work hard and vote. Your job wasn’t to run around after your elected officials with a pooper scooper.

You did your job. They didn’t do theirs.

I will say this about blaming the low information voters.

Please give me a list of even ten steady Conservatives that have run for office at the national level in the last twenty years.

Reagan was the last Conservative presidential candidate. He ran last in 1986. That’s 30 years ago, by 2016.

There you have it. We can blame ignorant voters all we want, but if there aren’t any Conservative “NAMES” out there educating them, it’s our leader’s fault, not the low information voters.

I think Reagan could win today. He had a way of telling it like it is, and you knew your “Uncle Ronald Reagan” was shooting straight with you. How many candidates do we get that from these days?

One tells you, hey I’m dead set against Amnesty. What I do support is them registering so they can stay here and work. Then if they do what they’re supposed to...

They talk out of both sides of their mouth, and expect us to buy in. I say hell no. Not only are they lying to me, they are turning folks off to Conservatism, by playing “Tell me which cup the truth is under.” I’m so sick of that.

We run folks like McCain, and then we talk about the low information voter. Hell, the low information voter saw the fake McCain ten miles off.

Mr. Hey I’m going to dismantle Obamacare and replace it with Romenycare wasn’t fooling anyone. If a government heath system is wrong, then naming it after yourself doesn’t make it right? Who knew? Well, the low information voter did.

I may not like Obama, but geez Louise, I’ll be darned if I can tell my people to vote for McCain.

The GOPe is in for a rough ride over the next few years. I think they deserve just about anything that comes their way.


26 posted on 02/02/2014 8:01:42 PM PST by DoughtyOne (Amnesty is job NONE! It isn't even the leading issue with Hipanics.)
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To: DoughtyOne

My adult political life view was based Reagan. I graduated HS while he was president. He was the last patriotic politician in the executive branch or even running for the office.

I just wish we had another leader stepping up to lead the patriots. Its been too long and I am truly fearful of what needs to be done or maybe its fear nothing can be done to stop the madness.


27 posted on 02/02/2014 8:58:29 PM PST by wgmalabama
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To: Toddsterpatriot
Primary dealers serve as trading counterparties of the New York Fed in its implementation of monetary policy. This role includes the obligations to: (i) participate consistently in open market operations to carry out U.S. monetary policy pursuant to the direction of the Federal Open Market Committee (FOMC); and (ii) provide the New York Fed's trading desk with market information and analysis helpful in the formulation and implementation of monetary policy. Primary dealers are also required to participate in all auctions of U.S. government debt and to make reasonable markets for the New York Fed when it transacts on behalf of its foreign official account-holders.

Toddster, that is so much financial gobbledygook. I don't care a whit about regulations and requirements. I care about the economic theory that a government central bank that continually expands the money supply is damaging the economy.

I get it that you're a great admirer of the Federal Reserve. I just can't see why.

28 posted on 02/03/2014 4:10:06 PM PST by BfloGuy ( Even the opponents of Socialism are dominated by socialist ideas.)
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To: BfloGuy
Toddster, that is so much financial gobbledygook.

It answered your question.

So how does that benefit the banking sector?

I care about the economic theory that a government central bank that continually expands the money supply is damaging the economy.

What economic theory is that?

29 posted on 02/03/2014 5:44:34 PM PST by Toddsterpatriot (Science is hard. Harder if you're stupid.)
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To: Toddsterpatriot
What economic theory is that?

This one. You'd do well to, at least, read it. It isn't unknown.

And it's the only one that makes sense. You may heard of Hayek -- or maybe not.

30 posted on 02/04/2014 3:45:44 PM PST by BfloGuy ( Even the opponents of Socialism are dominated by socialist ideas.)
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To: BfloGuy
Thanks for the link.

Which part proves that continually expanding the money supply is damaging the economy?

31 posted on 02/04/2014 4:28:38 PM PST by Toddsterpatriot (Science is hard. Harder if you're stupid.)
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To: BfloGuy

Most people live on two incomes. Nothing against women working, but two incomes are necessary for most people because of taxes. I am an accountant for a very small company of three employe3s with modest salaries ($30K to $50K), and our withholding sent in to the government over 22 years is close to $1.3 million dollars! Government takes, and the middle class loses.


32 posted on 02/05/2014 11:25:25 AM PST by MrChips (Ad sapientiam pertinet aeternarum rerum cognitio intellectualis - St. Augustine)
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