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.
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.
Austrian bump!
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.
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.
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!
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.
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.
bookmark for later.
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.
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").
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.
Thanks for posting
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.
That’s the whole point of central banks. Looting the nation for the elites who design the system.
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.
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?
Bfl
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?
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