oftwominds-Charles Hugh Smith: Want to Reduce Income/Wealth Inequality? Abolish the Engine of Inequality, the Federal Reserve
The Federal Reserve is the primary obstacle to reducing income/wealth inequality. Those who support the Fed are supporting a neofeudal arrangement that widens the income/wealth gap by its very existence.
The issue of income/wealth inequality is finally moving into the mainstream: which is to say, politicos of every ideological stripe now feel obliged to bleat platitudes and express cardboard “concern” for the plight of the non-millionaires with whom they personally have little contact.
I have addressed the complex causes of rising income/wealth inequality for years.Indeed, my book Why Things Are Falling Apart and What We Can Do About It is largely about this very issue.
Here is a selection of the dozens of entries I have written about rising income/wealth inequality.
Income Inequality in the U.S. (August 22, 2008)
Made in U.S.A.: Wealth Inequality (July 15, 2011)
Let’s Pretend Financialization Hasn’t Killed the Economy (March 8, 2012)
Income Disparity and Education (September 26, 2013)
Is America’s Social Contract Broken? (July 17, 2013)
Rising Inequality and Poverty: Can They Be Fixed? (August 15, 2013)
How Cheap Credit Fuels Income/Wealth Inequality (May 30, 2013)
Why Is Debt the Source of Income Inequality and Serfdom? It’s the Interest, Baby(November 27, 2013)
While many key drivers of declining income are structural and not “fixable” with conventional policies (globalization of labor and the “end of work” replacement of human labor by robots, automation and software, to name the two most important ones), the financial policies that create wealth/income inequality are made right here in the U.S.A. by the Federal Reserve.
We should start addressing wealth/income inequality by eliminating the primary source of wealth/income inequality in the U.S.: the Federal Reserve.
The Fed generates wealth/income inequality in three basic ways:
1. Zero-interest rates (ZIRP) and limitless liquidity creates cheap credit that enables the super-wealthy to buy rentier income streams that increase their wealth.
The closer one is to this gargantuan flood of “free money for cronies,” the wealthier one can become by borrowing from the Fed for near-zero and buying assets that yield returns well above zero. If your speculative bet goes bad, the Fed will bail you out.
2. Zero-interest rates (ZIRP) and limitless liquidity feeds financialization, broadly speaking, the commoditization of debt and debt instruments. The process of commoditizing (securitizing) every loan or debt greatly increases the income and wealth of the financial sector and the state (government), which reaps higher taxes from skyrocketing financial profits, bubbles and rising asset values (love those higher property taxes, baby!).
There is no persuasive evidence that cheap credit enables legitimate wealth creation, while there is abundant evidence that cheap credit fuels speculation, credit bubbles and a variety of financier schemes and scams that create temporary phantom wealth for crony capitalists and impoverishes everyone who wasn’t in on the scam.
The housing bubble was not just a credit bubble; it was a credit bubble enabled by the securitization/financialization of the primary household asset, the home.Those closest to the Fed-enabled flow of credit reaped the gains of this financialization (or were subsequently bailed out by the Fed after the bubble burst), while the households that believed the Fed’s shuck-and-jive (“There is no bubble”) suffered losses when the bubble popped.
This chart of income inequality depicts the correlation between the Fed’s easy-money credit expansion and the extraordinary increase in income inequality.Please note the causal relation between income and wealth; though it is certainly possible to squander one’s entire income, those households with large incomes tend to acquire financial wealth. Those with access to cheap credit are able to buy income-producing assets that add to their wealth.
Financialization is most readily manifested in the FIRE sectors: finance, insurance, real estate.
You can see the results of financialization in financial profits, which soared in the era of securitization, shadow banking, asset bubbles and loosened or ignored regulation:
Here’s how cheap, abundant credit–supposedly the key engine of growth, according to the Federal Reserve–massively increases wealth inequality: the wealthy have much greater access to credit than the non-wealthy, and they use this vastly greater credit to buy productive assets that generate income streams that increase their income and wealth.
As their income and wealth increase, their debt loads decline.
The family home is supposed to be a store of wealth, but the financialization of housing and changing demographics have mooted that traditional assumption; the home may rise in yet another bubble or crash in another bubble bust. It is no longer a safe store of value, it is a debt-based gamble that is very easy to lose.
Credit has rendered even the upper-income middle class family debt-serfs, while credit has greatly increased the opportunities for the wealthy to buy rentier income streams. Credit used to purchase unproductive consumption creates debt-serfdom; credit used to buy rentier assets adds to wealth and income. Unfortunately the average household does not have access to the credit required to buy productive assets; only the wealthy possess that perquisite.
The Fed’s Solution to Income Stagnation: Make Everyone a Speculator (January 24, 2014)
As a direct result of Fed policy, the rich get richer and everyone else gets poorer.
3. But that isn’t the end of the destructive consequences of Fed policy: the Federal Reserve has also created a neofeudal society in which debt enslaves the masses and enriches the financial Elites.
Put another way, not all wealth is created equally. Compare Steve Jobs, who became a billionaire by developing and selling “insanely great” mass-market technologies that people willingly buy because it enhances their lives, with a crony-capitalist who reaps billions in profits from risky carry trades funded by the Fed’s free-money-for-cronies policy or by selling phantom assets (mortgages, for example) to the Fed at a price far above market value.
Clearly, there is a distinction between those two fortunes: one created value, employment for thousands of people, and tremendous technological leverage for millions of ordinary people. The other enriched a handful of financiers. This financial wealth could not be conjured into existence and skimmed by Elites without the Federal Reserve.
This Fed-enabled financial wealth destroys democracy and free markets when it buys the machinery of governance. To the best of my knowledge, Jobs spent little of his time or wealth lobbying Big Government for favors, special laws eliminating competitors with regulatory hurdles, etc.
Compare that to the millions spent by the “too big to fail” banking industry to buy Congressional approval of their cartel’s grip on the nation’s throat: Buying Off Washington To Kill Financial “Reform”.
Much of the debate about wealth inequality focuses on whether the super-wealthy are “paying their fair share” of the nation’s taxes. If we refer to the point above, we see that as long as the super-wealthy can buy the machinery of governance, then they will never allow themselves to be taxed like regular tax donkeys.
Unfortunately, only the top 1/10th of 1% can “afford” this kind of Fed-funded “democracy.” As of 2007, the bottom 80% of American households held a mere 7% of these financial assets, while the top 1% held 42.7%, the top 5% holds 72% and the top 10% held fully 83%.
The income of the top 5% soared during Fed-enabled credit bubbles:
Since all these distortions originate from the Fed, the only solution is to abolish the Fed. Those who have absorbed the ceaseless propaganda believe that an economy needs a central bank to create money and manage interest rates.
This is simply wrong. The U.S. Treasury (a branch of government actually described by the Constitution, unlike the Fed) could print money just as it borrows money. Should a liquidity crisis squeeze rates higher, the Treasury has the means to create liquidity and make it available to the legitimate financial system.
All the Fed’s regulatory powers were power-grabbed from legitimate government agencies defined by the Constitution.
The Federal Reserve is the primary engine of income/wealth inequality in the U.S.Eliminate “free money for cronies,” bailouts of the “too big to fail” banks that own the Fed, manipulation of markets, the purchase of impaired private assets at high prices, and all the other tools of financialization the Fed wields to enforce its grip on the nation’s throat–in other words, abolish the Fed–and the neofeudal structure that feeds inequality will vanish along with the feudal lords that enforced it.
We don’t need to “fix” things as much as remove the obstacles that are blocking the way forward. The Federal Reserve is the primary obstacle to reducing income/wealth inequality. Those who support the Fed are supporting a neofeudal arrangement that widens the income/wealth gap by its very existence.
As an integration of a previous post, where I was discussing the trends in oil and gas consumption in Italy, here is a comparison with the historical trends of the gross domestic product (GdP). As you can see, the GdP has started a clear trend of decline, after having peaked in 2007.
No GdP would exist without a continuous inflow of natural resources into the economy and the most important of these resources is energy. In Italy, gas and oil are by far the largest sources of primary energy (ca 77% of the total). So, qualitatively, we would expect that a decline in energy production would accompanied by a decline in GdP.
Now, the question is what causes what? That is, is the decline in GdP causing a decline in the demand and, consequently, a reduction in energy consumption? Or is the decline in energy availability that causes a decline in GdP? The data seem to favor the second hypothesis, since it is clear that “peak GdP” (2007) trails “peak hydrocarbons” (2005).
However, the concept of “cause and effect” may be misplaced in this case. Starting from the results of a paper published in “Energies” (U. Bardi and A. Lavacchi “A Simple Interpretation of the Hubbert Model” 2009), we can argue that the GdP can be seen as a proxy for the dissipation of the “capital stock” of a system where capital and resources are related in a feedback relationship. That is, capital is created in proportion to the rate of resource exploitation and resources are exploited at a rate proportional to the available capital. In the case of a non renewable resource, such as oil and gas, gradual irreversible depletion generates “Hubbert-like” (bell shaped) production curves and a peak in the rate of resource exploitation coming before the peak of capital dissipation.
In short, the economy of Italy seem to be declining as a consequence of the increasing cost (or – equivalently – declining energy returns, EROEI) of primary energy sources, mainly natural gas and crude oil. If such is the case, decline is irreversible. The only possibility to avoid this outcome is to decouple the economy from non renewable resources, generating energy using renewable ones.
Note for those who hate the concept of Gross Domestic Product, GdP. It has been said many times that GdP growth is not a worthwhile objective, since growth has little or nothing to do with quality of life and personal happiness. Fine, I agree, but we should not be confusing the concept of “growth”, which we normally measure in terms of GdP and GdP itself, which does not necessarily imply growth. GdP is simply a useful measurement of the performance of an economy. Unfortunately, however, it is a fact that when GdP goes down, people tend to be very unhappy.
Note #2 (added after publication). You may be interested in a direct comparison of GdP and gas+oil consumption – which may be obtained by shifting the curve for GdP 2 years back in such a way to match the Oil+Gas peak. Here it is
A vendor picks chickens at a wholesale poultry market in Shanghai, on Jan. 21, 2014. Chinese authorities confirmed on Jan. 27 that there have been cases of H7N9 spreading between humans. (AP photo)
The Chinese authorities on Jan. 27 acknowledged for the first time that they have discovered cases of human-to-human infection with the H7N9 bird flu, while remaining vague on the details in an attempt to prevent public panic.
In a short statement on Jan. 27, the authorities said that human-to-human transmission was recorded in eastern China’s Zhejiang Province. They do not specify the number of cases, nor the city in which they took place.
The H7N9 Joint Prevention and Control Office said the infection or infections took place under “particular conditions” and are “non-sustained transmissions,” meaning that it is not expected to spread from those incidents.
The case or cases in Zhejiang would be the first time that human-to-human transmission has been officially acknowledged by the authorities since H7N9, a new avian influenza, was first recorded in China in March 2013.
Experts at the China Center of Disease Control, however, said it was just a “special case,” and human-to-human transmission of H7N9 is not yet very widespread.
“The public has no need to panic too much,” said Xinhua, the mouthpiece of the Chinese Communist Party.
Zhejiang has a bad record with H7N9 infections: it has recorded 49 diagnosed cases and 12 deaths this month, the latest official report says.
A newly released “Treatment Scheme of Human Infection with H7N9 Bird Flu” by China’s Health and Family Planning Commission also now lists “limit and non-sustained human-to-human infection” as one of the ways in which the H7N9 virus may be transmitted.
More common transmission mechanisms include “infection through the respiratory tract, through close contact with secretions or excretions of infected birds, and through contact with the infected environment.”
Despite the authorities attempts at damage control in emphasizing the limited nature of human-to-human transmission, the news still came as highly unwelcome to the public. Many individuals posting on the Internet said they would avoid eating poultry, in order to protect themselves from contracting the virus. (Though it does not spread from the consumption of chicken meat.)
A large number of Chinese netizens have reported anecdotally that more people appear to be getting sick in comparison to years past.
“I have to let people know the truth. Very many people here in Harbin are sick, several times more compared to the same period in previous years,”remarked an anonymous netizen who said he or she was from northern China’s Heilongjiang Province. “There are both adults and children who have fevers above 40 Celsius (104 Fahrenheit). Many of them have developed pneumonia.”
Internet users post such comments anonymously because information about the spread of disease is highly controlled by the communist authorities, and Chinese citizens who disclose such information without authorization can be severely punished.
“They are not confirmed to have H7N9, but the truth is that there’s such a large scale of flu, cold, and pneumonia going on, and it has very strong infectiousness. Who can give us an explanation?” the post continued. “Even nurses and doctors are sick and having fevers. What should we people do?”
There is currently no established, effective medical treatment or vaccine against H7N9. Chinese health and disease control experts suggest people should wash their hands more often, exercise more, wear masks when coming in contact with poultry, and avoiding live birds.
144 people were diagnosed with H7N9 in China last year, but just this month there have been 103 H7N9 bird flu patients, according to Chinese official reports, which may be incomplete. At least 20 have died from infection this year. New reports are issued daily with more cases.
NASA and Britain’s GCHQ Mapping “Political Alignments” of Millions of Smartphone Users Worldwide. | Global Research
New information made public by Edward Snowden reveals that the governments of the United States and United Kingdom are trawling data from cellphone “apps” to accumulate dossiers on the “political alignments” of millions of smartphone users worldwide.
According to a 2012 internal UK Government Communications Headquarters (GCHQ) document, the National Security Agency (NSA) and GCHQ have been accumulating and storing hundreds of millions of user “cookies” —the digital footprints left on a cellphone or computer each time a user visits a web site—in order to accumulate detailed personal information about users’ private lives.
This confirms that the main purpose of the programs is not to protect the population from “terrorism,” but to facilitate the state repression of working class opposition to widening social inequality and social counterrevolution. The programs do not primarily target “terrorists,” but workers, intellectuals, and students.
The collection of data regarding the “political alignment” of cellphone users also suggests that the governments of the US and UK are keeping lists of those whose “political alignments” are of concern to the government. Previous revelations have shown how the NSA and GCHQ “flag” certain “suspects” for additional surveillance: the most recent revelation indicates that suspects are “flagged” at least in part based on their “political alignment.”
The legal rationale behind this process points to a growing movement to criminalize political thought in the US and UK.
If, as the revelations indicate, determining a user’s “political alignment” is a primary goal of this program, then it is also likely a factor in determining whether the government has a “reasonable, articulable suspicion” that the user is a “terrorist suspect.” If this is the case, the web sites a user visits may raise the government’s level of suspicion that the user is engaged in criminal activity, and may thereby provide the government with the pseudo-legal pretext required to unlock the content of all his or her phone calls, emails, text messages, etc.
Such a rationale would amount to a flagrant violation of both the First and Fourth Amendments to the United States Constitution. Not only does the Fourth Amendment protect against “unreasonable searches and seizures,” but the First Amendment also proscribes the government from monitoring individuals based on their political beliefs. The elimination of such a fundamental democratic right would be a dangerous step towards the imposition of a police state dictatorship.
The new report also details the depth of the mobile-app spying operation.
A 2009 “brute-force” analysis test performed by the NSA and GCHQ of what the New York Timesdescribes as a “tiny sliver of their cellphone databases” revealed that in one month, the NSA collected cellphone data of 8,615,650 cellphone users. Data from the GCHQ test revealed that in three months, the British had spied on 24,760,289 users. Expanded to a full year, this data shows that in 2009, the NSA collected data from over 103,000,000 users, while GCHQ collected data from over 99,000,000 users: and this coming from only a “tiny sliver” of a month’s data!
“They are gathered in bulk, and are currently our single largest type of events,” one leaked document reads.
The program—referred to in one NSA document as “Golden Nugget!”—also allows the governments to receive a log of users’ Google Maps application use. Such information allows the intelligence apparatus to track the exact whereabouts of surveillance victims worldwide. One chart from an internal NSA slideshow asks: “Where was my target when they did this?” and “Where is my target going?”
An NSA report from 2007 bragged that so much geo-data could be gathered that the intelligence agencies would “be able to clone Google’s database” of all searches for directions made via Google Maps.
“It effectively means that anyone using Google Maps on a smartphone is working in support of a GCHQ system,” a 2008 GCHQ report noted.
Additional presentation material leaked by Snowden shows that in 2010 the NSA explained that its “perfect scenario” was to “target uploading photo to a social media site taken with a mobile device.” The same slide asks, “What can we get?” The answer, according to the same presentation, includes the photographs of the user, buddy lists, emails, phone contacts, and “a host of other social networking data as well as location.”
The agencies also use information provided by mobile apps to paint a clear picture of the victim’s current location, sexual orientation, marital status, income, ethnicity, education level, and number of children.
GCHQ has an internal code-name system for grading their ability to snoop on a particular cellphone user. The codes are based on the television show “The Smurfs.” If the agencies can tap the phone’s microphone to listen to conversations, the codename “Nosey Smurf” is employed. If the agencies can track the precise location of the user as he or she moves, the codename “Tracker Smurf” is used. The ability to track a phone that is powered off is named “Dreamy Smurf,” and the ability to hide the spy software is coded “Paranoid Smurf.”
That the intelligence agencies have cheekily nicknamed codes in an Orwellian surveillance program after animated characters from a children’s show is a telling indication of the contempt with which the ruling class views the democratic rights of the population of the world.
Additionally, the agencies have been tracking and storing data from a series of cellphone game applications, including the popular “Angry Birds” game, which has been downloaded over 1.7 billion times.
The tracking of data from online games like “Angry Birds” further reveals that these programs are not intended to protect the population from “terrorism.” It would be indefensible for the NSA and GCHQ to explain that they suspected to glean information about looming Al Qaeda plots from a mindless cellphone game.
Yet this is precisely how the NSA has attempted to justify these programs.
“The communications of people who are not valid foreign intelligence targets are not of interest to the National Security Agency,” an agency spokeswoman said. “Any implication that NSA’s foreign intelligence collection is focused on the smartphone or social media communications of everyday Americans is not true. Moreover, NSA does not profile everyday Americans as it carries out its foreign intelligence mission.”
In an added indication of its anti-democratic character, the US government is therefore employing the technique of the “Big Lie” by denying what has just been proven true.
In reality, the revelations have further exposed President Barack Obama’s January 17 speech as a celebration of lies.
The president told the nation that the spying programs do “not involve the NSA examining the phone records of ordinary Americans.” He also said that the US “is not abusing authorities to listen to your private phone calls or read your emails,” and that “the United States is not spying on ordinary people who don’t threaten our national security.”
He added in reference to the “folks” at the NSA that “nothing I have learned [about the programs] indicated that our intelligence community has sought to violate the law or is cavalier about the civil liberties of their fellow citizens.”
But the evidence is mounting that the governments of the US and UK are compiling information regarding the “political alignments” of hundreds of millions across the globe. All those responsible for carrying out such a facially anti-democratic campaign—including President Obama, David Cameron, their aides, and the leaders of the security apparatus—must face criminal charges and immediate removal from office.
Journalists are never supposed to become the story. Apart from the print reporter’s byline or the broadcaster’s sign-off, we are supposed to remain in the background as witnesses to or agents for the news: never as its subject.
That’s why I find all the attention following our incarceration all very unsettling. This isn’t to suggest I am ungrateful. All of us who were arrested in the interior ministry’s sweep of Al Jazeera’s staff on December 29 are hugely encouraged by and grateful for the overwhelming show of support from across the globe. From the letter signed by 46 of the region’s most respected and influential foreign correspondents calling for our immediate release; to the petition from Australian colleagues; the letter writing and online campaigns and family press conferences – all of it has been both humbling and empowering.
We know we are not alone.
But what is galling is that we are into our fourth week behind bars for what I consider to be some pretty mundane reporting.
I’ve produced work in the past that has involved lots of detailed investigation, considerable risk, and not a small amount of sweat, that I wished the authorities would have been even a little bit offended by. Yet too often it has slipped out with infuriatingly little response.
This assignment to Cairo had been relatively routine – an opportunity to get to know Egyptian politics a little better. But, with only three weeks on the ground, hardly time to do anything other than tread water. So when a squad of plainclothes agents forced their way into my room, I was at first genuinely confused and later even a little annoyed that it wasn’t for some more significant slight.
This is not a trivial point. The fact that we were arrested for what seems to be a set of relatively uncontroversial stories tells us a lot about what counts as “normal” and what is dangerous in post-revolutionary Egypt.
‘A routine body of reporting’
Of course, the allegations we are facing suggest anything but normal journalistic endeavours. The state has accused three of us – myself, and producers Mohamed Fahmy and Baher Mohamed – of collaborating with the Muslim Brotherhood to use unlicensed equipment to broadcast information we knew to be false to defame and destabilise Egypt. Fahmy and Baher are further accused of being MB members. It’s a rap sheet that would be comically absurd if it wasn’t so deadly serious.
I’m keen to see what “evidence” the investigators have concocted to prove the allegations. But to date we have not been formally charged with any crime. We are merely in detention to give them time to assemble their case so the prosecutor can decide if it is strong enough to take to court. Under Egypt’s judicial system, we won’t get to see the file until charges are formally laid.
So, all we have is what we did – a routine body of reporting on the political drama unfolding around us, and what it might mean for Egypt. The fact that this has put us behind bars is especially alarming given the historical moment Egypt now finds itself in.
The current interim government emerged after widespread street protests and pressure from the military pushed Egypt’s first democratically elected president, Mohamed Morsi, from power. In the eyes of Morsi’s Islamist group, the Muslim Brotherhood, it was a military coup; to the government’s supporters, it was a popular overthrow – with a little help from the military – of an administration that had broken its promises on moderation; created widespread discontent; cracked down on dissent, and was dragging Egypt towards a closed-minded theocracy.
To defend the revolution, Egyptians have just passed a fiercely liberal constitution that, among other things, explicitly defends… freedom of speech. Article 11 even expressly protects journalists from imprisonment for crimes committed through publishing or broadcast.
‘No desire to see Egypt struggle’
But what constitutes a breach of the law in this case seems to be relative, where anything too far beyond the bounds of normally accepted limits becomes a threat. It isn’t that we pushed those limits. After more than 20 years as a foreign correspondent, I know what is safe ground. And we didn’t stray anywhere near that edge.
But the state here seems to see itself in an existential struggle that pits the forces of good, open, free society against the Islamist “terrorists” still struggling to seize control. In that environment, “normal” has shifted so far from the more widely accepted “middle” that our work suddenly appeared to be threatening.
We were not alone in our reporting, but our arrest has served as a chilling warning to others of where the middle is here.
In this “new normal”, secular activists – including some of my prison neighbours – have been imprisoned at least three times, first for opposing the now fallen autocrat Hosni Mubarak; then for protesting at the excesses of the short-lived Muslim Brotherhood administration and now for what they say is draconian overreach by the current government. Campaigners putting up “no” posters for the recent constitutional referendum are also in prison, as is anyone caught taking part in Muslim Brotherhood organised protests (the Brotherhood is now deemed to be a “terrorist organisation”). In this “new normal”, an independant agency reckons some 21,000 were arrested in the five months since Morsi’s ousting on June 30, while 2,665 people had been killed and almost 16,000 injured in the same period. And, of course, among the detained are journalists, including ourselves, accused of supporting terrorism and undermining the state.
Let me be clear: I have no desire to weaken Egypt nor in any way see it struggle. Nor do I have any interest in supporting any group, the Muslim Brotherhood or otherwise. But then our arrest doesn’t seem to be about our work at all. It seems to be about staking out what the government here considers to be normal and acceptable. Anyone who applauds the state is seen as safe and deserving of liberty. Anything else is a threat that needs to be crushed.