What causes vast differences in wealth between rich and middle class people? And what should be done about it? My article today answers these questions so fasten your seat belts and prepare to have your world utterly changed by the time you finish reading.
Wealth distribution in the United States is vastly unfair if you look at the numbers. According to Who Rules America, Prof. William Domhoff of the University of California at Santa Cruz:
The Wealth Distribution
In the United States, wealth is highly concentrated in a relatively few hands. As of 2007, the top 1% of households (the upper class) owned 34.6% of all privately held wealth, and the next 19% (the managerial, professional, and small business stratum) had 50.5%, which means that just 20% of the people owned a remarkable 85%, leaving only 15% of the wealth for the bottom 80% (wage and salary workers). In terms of financial wealth (total net worth minus the value of one's home), the top 1% of households had an even greater share: 42.7%. Table 1 and Figure 1 present further details drawn from the careful work of economist Edward N. Wolff at New York University (2010).
|Table 1: Distribution of net worth and financial wealth in the United States, 1983-2007
||Total Net Worth
|Top 1 percent
||Next 19 percent
||Bottom 80 percent
|Top 1 percent
||Next 19 percent
||Bottom 80 percent
So let's assume the bottom line is that income distribution is vastly unequal in the US. Indeed, the top 1% control about a third of all the wealth, and 20% or so control 80% or so of the wealth.
Now that we have that out of the way, the questions are:
1. Why is this so?
2. What should be done about it?
Americans want to be more like Sweden, do they?
In the interests of being interesting, I am going to discuss what Americans think should be done about it first…then we'll circle back to the root cause of the inequality in the first place.
Paul Kedrosky called attention to a poll of Americans on the subject of what should be done about it, a study by one of my favorite scientists, Dan Ariely and Michael Norton.
First, respondents dramatically underestimated the current level of wealth inequality. Second, respondents constructed ideal wealth distributions that were far more equitable than even their erroneously low estimates of the actual distribution. Most important from a policy perspective, we observed a surprising level of consensus: All demographic groups – even those not usually associated with wealth redistribution such as Republicans and the wealthy – desired a more equal distribution of wealth than the status quo.[emphasis mine]
The conclusion is that Americans want to be more "like Sweden". Sweden's wealthy own more assets than its middle class or poor, but nothing like the inequality of the United States.
I have to add here that I think the huge inequality is very unfair and wrong and goes across not just what happens in the US but also between the US and other countries.
People are surprised that something like 200 years ago, before the Industrial Revolution really got going, there wasn't a huge wealth difference between India and Great Britain, or India and the United States.
The "Third World" as it was called, was not in any significant way vastly poorer than the "First World" countries. If you went into a typical middle class house in either India or England, you would find the same dirt floors, the same low grade food, the same hand to mouth existence.
Nowadays, there is a vast income and asset difference of course between countries such as China or India, and the United States, Japan, England, France, etc.
So there are huge income inequalities in the world, both within a single country such as the US, and between countries.
What can be done about it? Not much unless you understand the causes. We could have class warfare and through a "democratic" process we could have the large middle and poor classes vote to confiscate wealth from the rich. But that will never happen. The rich are in power and will never allow it.
And even if they did allow it, it would bring everyone down because it would be the ultimate violation of private property and the rules of contract. We already have enough disrespect for the tenuous rule of law. We don't need class warfare and the precedent of even more seizing of property, whether it's in the name of "taxes" or not.
So now let's see the causes of the inequality and then the solution will reveal itself.
The cause of income inequality
In the late 1700s, England started the world's first permanent Central Bank, the Bank of England. Its job was to buy debt from the government, and to keep the banks propped up so they could make higher profits.
In 1913, the US Government started the US central bank patterned on the Bank of England. It was called the Federal Reserve system, and was designed to be identical to the Bank of England except for window dressing. The Fed was supposedly a network of banks, and each bank was located in a different metropolitan area. These banks remain but all power has always been with the Federal Reserve Bank of New York, and remains that way.
For all intents and purposes, the Fed is a single central bank. Its job is now to buy government debt, and keep the nation's bank in monopoly profits.
Before the Fed was created, money meant gold and silver. Now, money is "fiat" meaning it has no backing and is not equivalent in any way to gold or silver. Government creates money out of thin air.
When you borrow money, the bank creates the money to give you. The Fed creates all the money that is demanded by the banks. When the Fed believes more money should be created, it can go into the open market and print money to buy bonds, stocks or even real estate. So far, the Fed has purchased bonds, but there are many who believe the Fed also routinely buys S&P futures and other stocks in an effort to keep the US stock market from crashing or even keep it going up.
When the banks lend, or the Fed buys bonds in the open market, money is created.
Who gets this money? Those who borrow get it. That means those in the FIRE economy. FIRE stands for Finance Insurance and Real Estate.
FIRE economy includes hedge funds, insurance companies, banks, real estate investors. These are the big borrowers of money.
Okay, so now let's see how this works. A hedge fund borrows money from a bank. They borrow, say, a billion dollars. They buy stocks and bonds and real estate. They pay a bonus of 1%, or $10 million, to their executives, managers and employees.
The executive in charge of a hedge fund gets a part of that hundred million dollar bonus not because he is more productive than, say, a train engineer or a welder. But because his firm borrowed the billion dollars and he gets a percentage of that.
There are two economies in the US. One economy is the FIRE economy, and our hedge fund executive is in that. The other economy is the one our welder and our train engineer are in, which is the Producers and Consumers Economy. I am indebted to Eric Janszen of iTulip for his explanation of the two economies.
The hedge fund exec is very rich. The welder is struggling. And all because one has access to unlimited fiat borrowed cash, while the other does not.
The FIRE economy uses borrowed money in billions, tens of billions and even trillions.
Banks are a fraud - they don't have your money when you want it
The P&C economy uses money in $10 per hour or $25 per hour or $3 per loaf of bread.
We use the same term "dollars" for each investment, expenditure or loan. But the FIRE economy dollars are made up out of thin air, while the P&C dollars are earned $1 at a time, with the government taxing at least $0.45, resulting in the difficult earning of one dollar in order to have a big fifty five cents left over.
Sometimes money leaks from the FIRE economy to the P&C economy. I sold my last piece of real estate in 2005, and instead of reinvesting the capital gains, I bought gold with it. This is rare, though. Most FIRE economy stays in the FIRE economy because people borrow, pyramid the "wealth" through using more and more borrowing, and only take a small percentage off the top. Of course, this small percentage is what makes the 1% own 34% of the wealth in the US.
So in brief, the wealthy are in the FIRE economy and borrow unlimited printed money. They take a small percentage off the top, and are able to use this printed money to buy more and more real estate and shares in companies, real wealth.
The source of the income inequality is printed money. Fiat money. Pure and simple.
Ron Paul says we should abolish the Federal Reserve. I agree because if we do that, we remove the source of all this printed money, and we end the grossly unfair system that allows those with access to printed money to buy up all the assets in the US
Real people get screwed by the banking system
and leave the rest of us poorer and poorer.
This is far more favorable than confiscating the wealth of the rich. Just abolis
h the money printing. Kill the FIRE economy. Make it so there is no more printed money.
And to do that, further to what I've already written about abolishing the Fed, let's abolish banks as we know them today.
How to abolish the banks - we don't need them
Banks take money in via deposits, and lend money out via printed money they create out of thin air. There is no link between deposits and loans, none at all.
Contrast that to real money, real savings. When I deposit money into my brokerage account at Fidelity, Fidelity keeps my money separately in a legal sense from everyone else's. Everyone could deposit money into Fidelity on Monday, and draw it out on Wednesday, and Fidelity in theory would be able to honor their requests to give them their money back.
Banks cannot return deposits if "everyone" withdraws their money. That's the meaning of a bank run — it threatens the bank because the bank, unlike Fidelity, does NOT keep each depositor's money separate. It comingles depositor money and lends it out along with 10 times more money that the bank gets from the Fed (printed money).
We no longer need banks to hold our money. It is a simple matter for the legal monopoly granted to the Fed and the banks to be eliminated. Who would you rather keep your real hard earned money with — a bank that doesn't keep it on hand, or a brokerage that keeps it for you 100% safe?
The role of banks has been to keep money safe and to lend it to worthy enterprises. Nowadays banks lend to those FIRE economy executives and managers who use it to steal yet more wealth from the producers and consumers. Only a small percentage of bank lending is to the job creation machines in the US — the small business. Most lending is to the FIRE economy.
So let's get rid of banks. And use a service that lets you directly find borrowers via the web.
So if you want to invest your money, you can buy stocks, you can buy bonds, or you can direc
tly lend your money to promising individuals or small business. You can pool your money and invest a small amount in a number of good business borrowers, alongside other investors.
Who needs banks anymore? They are a complete and total scam on all of us. We are all of us the victims of the fiat printed money Federal Reserve bank scam. It's time we got smart about it and realized that the banks and the Fed are the reason and source of income inequality. Let's ban the government monopoly on banks and start on the road to real free market capitalism.
bank vault http://www.flickr.com/photos/ishmaelo/
guy with credit card http://www.flickr.com/photos/rosengrant/
bank run http://www.flickr.com/photos/dominicspics/