Monday, November 5, 2012

Real Reasons For Income Inequality

You could say that US income inequality is due "failed policies of the past..." and you'd be right.  But the blame extends back decades over at least 5 administrations--both Democratic and Republican.

The US Government and Federal Reserve policies are the root cause of income inequality---especially those in response to the recent recession. And because these policies persist, expect more inequality and more bubbles.  The policies that hurt the bottom 99% but help the top 1% include inflation, the housing and stock market bubbles, bank bailouts and quantitative easing---all directly help the wealthy and hurt the less well-off.

Capitalism is the Best Of All Other Alternatives
There's some truth that unbridled Capitalism tends to concentrate wealth, but noticed I said "unbridled" which is not an accurate adjective of modern US capitalism. There are plenty of regulations--even inappropriate regulation of businesses and banks. And businesses are taxed heavily. The great wealth of Rockefeller and Carnegie was redistributed by private charitable trusts to universities, arts and other worthy charities. Who do you think re-distributes wealth better, the federal government or these charitable trusts?

And if you don't like wealth inequality in capitalism, you should try Communism!  Recently the New York Times reported that China's leader Wen Jiabao's family has amassed a $2.7 billion fortune.  True to the corrupt nature of the Chinese communism, the New York times website was immediately blocked (presumably NYT newspapers are banned too).  The scandal involving Bo Xilai shows the massive corruption there and you can bet that that family is also wealthy beyond belief.  Or how about the thugs in Russia, Azerbaijan, Cuba and Belarus?   How about Royal families in constitutional monarchies or in the Middle East whose net worth soars into the 10s of Billions of dollars?  We're talking about serious wealth disparity!

Here's the real reason's for our income inequality:

Inflation Hurts the Poor and Helps The Wealthy
The bottom 50% of the population suffer the most from inflation as they hope wages or pensions keep up with price increases.   They don't have access to credit to buy real estate or other inflation hedges.  Due to the magic of leverage, wealthier middle or upper class individuals can actually profit from inflation.

Creating Inflation is now the official policy of the US Federal Reserve. They are targeting 2% inflation which will cause prices to double every 36 years.  Bernanke is now trying to create either inflation and/or ignite another bubble!

Inflation is the Disease not Deflation
The whole idea of maintaining ANY inflation is wrong.  Inflation is the disease not deflation.  Deflation is considered bad because, in modern times, it occurs as a reaction to the unwinding of a previous bout of inflation!  Before there was a Federal Reserve and their constant pump priming of money supply, "hard money policies" coupled with disciplined budgets and spending by Congress(except during wars), steady prices are the norm of economic history.  A fixed supply of hard money will cause prices to generally decline.  Wars and gold discoveries sometimes caused bouts of inflation but prices would drift down again later.

Deflation is Good!
Productivity causes prices of commodities and goods to decline.  This is reason people denigrate the Gold Standard because they think declining prices is a "bad" thing.  It's not true.  You like the fact that prices of computers drop, right?  Don't you love when prices of flat-screened TVs decline?  Don't you want lower rent prices?  Don't you want lower prices for food?  Everyone wants lower health care or lower education costs!  You would have declining prices if you eliminated the Federal Reserve and got the Federal Government out of the private economy! 

Bubbles Enrich the top 1% The Most
From Mike Shedlock at,
In 2000, there was an internet boom of epic proportion followed by an equally large bust. Who benefited from that? Clearly it was not the 99%.
From 2002 through 2006 there was a housing boom, the biggest the world had ever seen. Who benefited from that? Clearly it was not the 99%.
By the time those on the bottom end of the totem pole took part in the credit expansion boom, they were destroyed by it. 
Many one-percenters amassed fortunes during the housing boom. Some lost it all back. Others made fortunes betting against the bubble. Still others went broke betting against the boom too early.
Government policies over many administrations stoked the housing bubble:  affordable housing programs that lowered loan underwriting standards for Freddie and Fannie mortgage loans, tax incentives for taking on personal and mortgage debt (interest deduction), home equity loans, and finally zero capital gains taxes on housing capital gains.  Yes, if you lived in a house for a short period of time within 2 years of the house's sale, you were EXEMPT from capital gains taxes.   Is it any wonder that in the 2000s, the TV show "Flip This House" became popular?

Banker Bailouts
Bailouts of banks immediately goes into the hands of the 1% not the 99% plus it goes into the very hands who created the crisis to begin with!  Don't we know or learn anything??   Short term bridge loans might have been appropriate in 2008 to assist banks that were actually in trouble, but a clean sweep of the executive suite should have been required.  Most of the banks that received TARP money didn't actually need it as we're finding out from Sheila Bair

Quantitative Easing
The Feds quantitative easing and "high powered money creation" immediately goes directly into the hands of the 1% (banks) not the 99%.  

Zero Interest Rate Policies
Zero interest rates, interest rates well below the inflation rate,  hurt lower income "mom and pop" retirees who want to keep their money in safe CDs or money market funds.  CDs and MMs are paying nothing!  Mom's and Pop's are therefore getting poorer.  

Worse, Bernanke is keeping interest rates some 2 full percentage points below the rate of inflation. Commentators crucify Greenspan for creating the housing bubble by keeping interest rates too low in the early 2000s but Bernanke is just as bad or WORSE.  AND Bernanke wants even more inflation!

Government Spending Causes Inflation
Government spending and subsidies cause inflation in areas such a Medical and Educational costs.  College education costs have soared as student loan debt has soared.  Don't be surprised if student loans are the next bubble that bursts.  And yes, the Government has had it's hand in the student debt creation.  Increases in Medicare and Medicaid spending supports rising medical costs.  Out-of-control government spending causes inflation.  The Federal Reserve causes inflation.

The US Government and Federal Reserve policies are mostly the root cause of income inequality---especially in response to the recent recession.  All of the emergency policies of Bernanke should have already been reversed as they are perversely helping the richest Americans and setting up the next big wave of inflation that will hurt the least well-off.

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