I’ll try to keep this one pithy today, mostly because it’s late.
So, it is true, I think, that we have a problem of wealth inequality in this country. As I’ve argued in the past, I believe that this has developed mostly as a result of unequal access to credit (i.e. leverage). In effect, the only way to get ahead in a planned inflationary fiat/credit debt monetary system is to borrow more than everybody else and do it at the lowest possible (most favored) rate of interest.
In this fashion, most of the real wealth in our economy is created at a rate and scale that is largely dependent on the quantity and quality of the leverage available to the investor. It’s the Fed discount window rate on one end vs. payday loans and “Crazy Al’s Used Cars” on the other…and the whole spectrum in between.
Does culture, racism, and education still matter? Sure, of course it does. And, so to0 does attitude and talent….entrepreneurialism still pays off for those who have good ideas and are willing to work hard and, of course take on risk.
As we’ve discovered, all borrowers face some significant risks with their investments. Inflationary economies will usually pay them back in spades, but then, that’s the whole idea behind the scheme. It encourages borrowing and spending and, consequently, punishes saving. While the inflation party is going strong, borrowers with access to the best sources of credit will always do the best. This is the answer to the age-old question about how “the rich get richer”. Need I mention that savers (or, more generally, non-debtors) inevitably fall behind.
Now, here’s the rub: trying to “bail out” anybody when the inflation party inevitably crashes – especially the largest borrowers (and/or lenders) in the system only propagates the wealth distribution problem. In fact, I would argue that the manner in which it is being approached today constitutes the largest transfer of wealth that has ever occurred in the history of mankind.
Imagine this: Our public sector deficit spending represents 12+% of GDP – without which we’d officially be witnessing a rather significant (commensurate) rate of shrinkage in the real economy. This shrinkage would result mostly in response to debt destruction and the “deleveraging” that occurs when excess debt becomes problematic. All of this is, in our economic system, results in a real decline in both GDP and, of course, the money supply itself. Default on (or pay off) a loan and, poof, that money just disappears.
Now, while the US economy is, more or less, simply “treading water” – hardly keeping pace with the “official” rate of inflation, you have increased public sector spending (based on newly created debt money) that is offsetting all of those losses of debt money.
Side Note: For those who might be interested, this is why balancing the budget (either through spending cuts or raising taxes) would, without question, result in a significant decline in GDP, along with a commensurate increase in unemployment. My guess…12% of GDP = another 18 million unemployed.
We might quibble (ok, yeah, I’m quibbling) over the real benefit of “socializing” this sort of “re-inflation” strategy. But, let’s be clear about this: While all of those defaults are happening on one side of the monetary ledger, this increase in spending does, in fact, represent a massive (and unprecedented) transfer of wealth on the other side.
And, I don’t know about you, but this process strikes me as merely the latest stage of the same scheme that has been and continues to make me poorer. I don’t like debt and never have. Yet, I have had to accept some of it just to stay even, as described above. What savings I might have put away were frittered away (along with the purchasing power of my retirement and social security benefits) though the steady erosion of even low-grade (i.e. so-called “reasonable rates of”) inflation.
Now, to add insult (or, really, more injury) to this injury, I must participate in all of these extraordinary efforts to “bail out” a whole host of the largest lenders and borrowers in the system. Oh, sure, I can feel better about the fact that a bunch of other “innocent bystanders” are also being assisted, mostly through the mitigating effect that all of this spending has on the still punishing unemployment rate. But, still, how does a 10%+ annual rate of “socialized wealth transfer” not end up costing me far more in the long run?
Many, including the likes Paul Krugman and Larry Summers, argue that the only reason I still have a job is that such spending has prevented a fatal death spiral. And, they might be right about that. And, as most of you know, they have passionately argued that what we really need is even more of such spending, though they never quite address the fact that this merely gives the government even more control over picking winners and losers in this massive transfer of wealth scheme.
No question, we all suffer in a deflationary event. But, at the rate of 10+% per year, aren’t we seeing the potential for a complete (or, at least, rather significant) transfer of the nation’s wealth in a mere few years? So folks like me….maybe you…lost somewhere in the shrinking middle class…get to pay an increasing burden to those very same institutions and their investors that received the credit boon to begin with?
And this ridiculous con somehow is made more politically palatable by imposing throw bigger, more “progressive” bones – in the form of extended unemployment insurance, food stamps, and promises of ever more progressive tax policies – to those who have been impoverished by it and dropped out of the bottom of the middle class?
Really? That’s it? Trillions going from (whatever) current administration’s enemies to the (whatever) current administration’s friends. And all paid for by the likes of me? How do I not get poorer? I’m supposed to be happy that I still have a job and haven’t (yet) dropped out the bottom in this arrangement?
OK, I forgot my promise to be pithy, now didn’t I? Let me say this: Let those with too much debt (including me if that turns out to be the case) lose their job, their home, their car, their business, their stock or bond portfolio, their pension fund. Too many of those assets were accumulated by the disparate advantages afforded in the playing of an inflation game that should never have existed in the first place.
Those that successfully gamed the system weren’t simply smart and prudent. Too often, they actually did have an “unfair” advantage that, for many, many years rewarded the riskiest sort of behavior. Again, this is the way inflationary economies are designed. Perhaps we ought to be addressing that issue first and foremost.
And, for the record, I have very little sympathy for the OWS crowd’s communistic leanings. That’s just insanity and/or ignorance. But, I do agree with them on this point: the form of capitalism that has been fostered in this fiat/debt monetary system will always be corrupt and, as we’ve seen, doomed to fail in a spectacular and catastrophic way that hurts all of us.
But, please, let’s not fool ourselves into thinking that, somehow, ever more “progressive” taxation or welfare will actually solve anything. So long as we continue to create money in this fashion, periodically adjusting the distribution of wealth while in full-on crisis mode, we’ll simply continue to propagate one oligarchy after another. I’d like to get off of that ride.
I don’t care a whit that we’re now backed into a tight corner, sitting between a rock and a hard place. The solutions being offered us only increase the degree of indentured servitude that all of that debt imposes on each and every one of us that hasn’t given up and actually still wants to work for a living.
So give us a sound currency (once again, please) and let imprudent debtors and lenders suffer the justice that their gambling deserves. Just thinking out loud.