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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.
Note: The views expressed in Daily Articles on Mises.org are not necessarily those of the Mises Institute.
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Frank Hollenbeck teaches finance and economics at the International University of Geneva. He has previously held positions as a Senior Economist at the State Department, Chief Economist at Caterpillar Overseas, and as an Associate Director of a Swiss private bank. See Frank Hollenbeck’s article archives.
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This article was written by Graham Summers and originally published atPhoenixCapitalResearch.com
History is often written to benefit certain groups over others.
Indeed, you will often find the blame for some of the worst events in history placed on the wrong individuals or factors. Most Americans today continue to argue over liberal vs. conservative beliefs, unaware that the vast majority of economy ills plaguing the country originate in neither party but in the Federal Reserve, which has debased the US Dollar by over 95% in the 20thcentury alone.
With that in mind, I want to consider what actually caused the hyperinflationary period in Weimar Germany. Please consider the quote from Niall Ferguson’s book, “The Ascent of Money” regarding what really happened there:
Yet it would be wrong to see the hyperinflation of 1923 as a simple consequence ofthe Versailles Treaty. That was how the Germans liked to see it, of course…All of this was to overlook the domestic political roots of the monetary crisis. The Weimar tax system was feeble, not least because the new regime lacked legitimacy among higher income groups who declined to pay the taxes imposed on them.
At the same time, public money was spent recklessly, particularly on generous wage settlements for public sector unions. The combination of insufficient taxation and excessive spending created enormous deficits in 1919 and 1920 (in excess of 10 per cent of net national product), before the victors had even presented their reparations bill… Moreover, those in charge of Weimar economic policy in the early 1920s felt they had little incentive to stabilize German fiscal and monetary policy, even when an opportunity presented itself in the middle of 1920.
A common calculation among Germany’s financial elites was that runaway currency depreciation would force the Allied powers into revision the reparations settlement, since the effect would be to cheapen German exports.
What the Germans overlooked was that the inflation induced boom of 1920-22, at a time when the US and UK economies were in the depths of a post-war recession, caused an even bigger surge in imports, thus negating the economic pressure they had hoped to exert. At the heart of the German hyperinflation was a miscalculation.
You’ll note the frightening similarities to the US’s monetary policy today. We see:
1 Reckless spending of public money, particularly in the form of entitlement spending
2 Excessive spending resulting in massive deficits.
3 Little incentive for political leaders to rein in said spending.
4 Intentional currency depreciation in order to make debt payments more feasible.
This sounds like a blueprint for what US leaders (indeed most Western leaders) have engaged in post-2007. The multi-trillion Dollar question is if we’ve already crossed the line in terms of setting the stage for massive inflation down the road.
We believe that it is quite possible… for the following reasons.
The US now sports a Debt to GDP ratio of over 100%.
Every 1% rise in interest rates will result in over $100 billion more in interest payments on US debt.
Indications of inflation (stealth price hikes, wage protests, etc.) are showing up throughout the economy.
Indications that other countries are moving to abandon the US Dollar are present.
In a nutshell we are in a very dangerous position. This doesn’t mean hyperinflation HAS to occur. Indeed, history often times rhymes rather than repeats. However, the fact of the matter is that the same policies which create Weimar Germany are occurring in the US today. How they play out remains to be seen, but it is unlikely it will end well.
For Dominga Kanaza, it wasn’t just the soaring inflation or the weeklong blackouts or even the looting that frayed her nerves.
It was all of them combined.
At one point last month, the 37-year-old shop owner refused to open the metal shutters protecting her corner grocery in downtown Buenos Aires more than a few inches — just enough to sell soda to passersby on a sweltering summer day.
“It was scary,” said Kanaza as she yelled out prices to customers while sipping on mate, Argentina’s caffeine-rich herbal drink. The looting that began in neighboring Cordoba province when police officers left streets unguarded to strike for higher pay had spread to the outskirts of Buenos Aires, sparking panic in Kanaza’s neighborhood. The chaos, she said, was like nothing she had seen since the rioting that followed the South American nation’s record $95 billion default in 2001.
Thirteen years after that collapse, President Cristina Fernandez de Kirchner is running out of time to avert another crisis. The policy mix that Fernandez and her late husband and predecessor, Nestor Kirchner, used to usher in 7 percent average annual growth over the past decade — higher government spending financed by printing money — is unraveling.
Inflation soared to 28 percent last year, according to opposition lawmaker Patricia Bullrich, who divulges monthly estimates for economists cowed into silence by Fernandez’s crackdown on price reports that clash with official figures. By the government’s count, inflation was less than 11 percent.
The peso sank 3.5 percent to a record low of 7.14 per dollar yesterday, according to Banco de la Nacion Argentina, and has plunged more than 25 percent in the past 12 months. That’s its worst selloff since the devaluation that followed the default. Currencies from only three countries in the world have fallen more: war-torn Syria, Iran and Venezuela.
Power outages like the one that sunk Kanaza’s shop into darkness are becoming more frequent, deepening the economic slump, after the nation’s grid atrophied under a decade of government-set electricity price controls. The International Monetary Fund, which censured Argentina last year for misreporting inflation, predicts economic growth will slow to 2.8 percent this year, about half the 5.1 percent average across developing nations.
Fernandez’s biggest financial problem is the loss of foreign reserves. They’ve tumbled 44 percent in the past three years to $29.5 billion as prices on the country’s soy and wheat exports slumped and Argentines circumvented currency controls created to keep dollars onshore. The government sought to stiffen those restrictions again yesterday, limiting people to two online purchases a year from overseas providers.
For a country that remains locked out of international debt markets as it haggles with billionaire hedge fund manager Paul Singer over lawsuits stemming from the default, the reserves are its main source of dollars to pay holders of $30 billion of bonds who accepted restructuring terms. When other foreign-currency obligations are included, the amount owed swells to $50 billion.
Investors are bracing for the possibility of another default. The country’s average dollar bond yield of 12 percent is the highest among major developing nations after Venezuela. Trading in swap contracts that insure bonds shows investors see a 79 percent probability of a halt in payments over the next five years, a reflection in part of concern that Singer’s demand of full repayment on the securities he kept from the 2001 default will disrupt debt servicing.
“We’re seeing some sort of day of reckoning,” said Diego Ferro, co-chief investment officer in New York at Greylock Capital Management, which has been investing in the country’s debt since the 1990s. “The adjustment will have to happen if Argentina doesn’t want to hit a wall before 2015.”
Fernandez, 60, has overhauled her cabinet and reworked some policies in a bid to stem the capital flight. In her first day back on the job in November following surgery to remove a blood clot near her brain, she replaced the economy minister, cabinet chief, agriculture minister and central bank president. A day later, Guillermo Moreno, the trade secretary who played the strongman enforcing price controls, was gone.
The new cabinet pledged to work with the IMF to improve data, began talks to settle $6.5 billion of overdue debt with Paris Club creditor nations and unveiled plans to compensate Spain’s Repsol SA for the seizure of its local oil unit in 2012. Bonds advanced, driving yields on the country’s benchmark securities to a one-year low of 11.07 percent on Nov. 29.
Ferro doubts the measures are enough. Bolder steps, such as reaching a deal with Singer to regain access to overseas markets and lifting currency controls, are needed to regain investor confidence, he said. The bond rally began to falter in early December. By mid-month, all the gains had been erased.
An Economy Ministry spokeswoman didn’t return telephone calls seeking comment on the government’s financing plans.
Fernandez is giving no indication of what her next move is. After re-appearing following the five-week absence for surgery, she vanished again, spending much of December holed up in her 5,600-square-foot (520 square meters) brick villa in Patagonia. She went another five weeks without making a public appearance before unveiling a new student aid program before supporters in the presidential palace last night.
And that’s perhaps what angers Argentines like Miguel Llanes the most. While the looting spread across the country from Cordoba and the blackouts dragged on day after day in the capital city, Fernandez was nowhere to be seen. Llanes, unable to open his curtain shop in downtown Buenos Aires for over a week, vented by joining protesters who were burning tires and garbage in the streets.
“Where was the president?” he shouts.
And then he raises a question that holders of $50 billion of Argentine bonds are dying to know.
“How long will this last? They’ve spent all the money.”
To contact the editor responsible for this story: Laura Zelenko at firstname.lastname@example.org
Last week, in Part I of “That Was The Weak That Worked,” we reviewed the equity markets in an attempt to see how equity investors managed to scamper through 2013 with the friskiness of puppies when all about them lay doubt and potential disaster.
We found the answer in quantitative easing — of course.
This week we will take a look at how the bond market managed to navigate the same 12-month period and see what can be learned about 2013 in order to forecast for 2014.
Let’s begin by considering the subject of logical fallacies — an endeavor rendered more obsolete with each passing day.
(Deus Diapente): The study of logical fallacies is useful in learning how to think instead of what to think. In learning how to deconstruct an argument, you learn how to efficiently construct your own thoughts, ideas, and arguments. You learn how to find fallacies in your own line of reasoning before they’re even presented, which is a valuable methodology for learning how to think. Which is a lot more honest, liberating, and possibly more objective than simply regurgitating what society, teachers, parents, preachers, friends, or politicians tell us…
“Learning how to think instead of what to think”?
The very idea is enough to send many into an Austen-like swoon, and yet within this relatively simple construct lies a principle that, if it were applied to today’s markets, would have every rational investor rushing headlong into the hills.
Allow me to demonstrate using everyone’s favourite logical structure: the syllogism.
A syllogism is classified as a point-by-point outline of a deductive or inductive argument. Syllogisms normally contain two premises followed by a conclusion:
Premise 1:Miley Cyrus is the most talented musician of her generation.
?Premise 2:The most talented musician of every generation achieves legendary status.?
Conclusion:Miley Cyrus is a legend.
The conclusion, from a purely logical standpoint, holds water. The problem comes when either of the first two premises is not accepted by the person to which they are proposed.
At that point, the argument starts to fall apart.
The common term for this kind of flawed argument is a “non sequitur,” which literally means “it does not follow.”
So let’s apply the syllogistic approach to the concept of quantitative easing and see how we go:
Premise 1:Central banks have been printing money like lunatics.?
Premise 2:Their printing of money hasn’t had any ill effects.?
Conclusion:Printing money doesn’t have any ill effects.
Right then. There’s our syllogism. Do you want to go first, or shall I?
Quantitative Easing IV (or “QE IV” — so-called because it was injected directly into the veins of the monetary system) was unveiled on December 11, 2012, when Ben Bernanke announced, as Operation Twist expired, that in addition to the ongoing QE3 program (which committed the Federal Reserve to buying $40 bn in MBS every month) he would sanction the additional buying of $45 bn in long-term Treasury securities. Every month. Forever. Until further notice.
The rest, as they say (whoever “they” are), is history.
The effect on the Fed’s balance sheet is plain to see:
That’s a very steady, predictable line; and markets, as we have discussed, LOVE steady and predictable. The consistency of this curve underpinned the strength in equity markets this year, as I demonstrated last week. But in Bondville? Well, that’s another story…
2014 is going to be a bumpy ride for bond markets, folks. Count on it.
Government debt is at levels that only governments themselves would pay, at exactly the time when they are trying to lean more heavily on the private sector to take up the slack — good luck with that.
Interest rates, bond markets, and the housing market are inextricably intertwined. They always have been and always will be. Period.
You cannot monkey around with one piece of that eternal triangle and expect the others not to be affected at some point, and just because nothing bad has happened definitely does NOT mean it won’t.
2013 may well have been The Weak That Worked, but the odds on that continuing for another 12 months are very short indeed.
And so, as we wrap up this week, let’s revisit the idea of logical fallacies and throw a couple more that the guardians of the global economy are relying on into the ring for good measure:
The Taper Syllogism
Premise 1: The Fed tapered its monthly asset purchases.
Premise 2: The taper had no major negative effect on markets.
Conclusion: Tapering has no negative effect on markets.
The Housing Bubble Syllogism
Premise 1: The government has all the data on the housing market.
Premise 2: The government sees no bubble in the data.
Conclusion: There is no housing bubble.
The Interest Rate Syllogism
Premise 1: The Fed sets interest rates.
Premise 2: The Fed has promised low rates of zero to 0.25 percent “… at least as long as the unemployment rate remains above 6.5 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.”
Conclusion: Interest rates will stay at zero to 0.25% and zero to 0.25 percent will be appropriate “… at least as long as the unemployment rate remains above 6.5 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.”
The Inflation Syllogism
Premise 1: The world’s central banks have printed ~$4.7 trillion.
Premise 2: There is no noticeable problem with (official) inflation numbers.
Conclusion: Printing money doesn’t cause inflation.
Full Grant Williams letter below…
While the mainstream media continue to push the meme that the economy is in (slow) recovery, some important facts point out that things are not as rosy as you are being told. In fact, most Americans feel the recessionnever ended.
An analysis of retail sales post-Christmas indicates that in-store retail sales decreased more than 3 percent over the same week last year. Retail brick-and-mortar shopper traffic decreased by 21.2 percent over thesame period in 2012. The lack of in-store sales didn’t translate to an increase in Web sales.
In September, homes sales dropped more than at any time in the last 40 months. New mortgage applications dropped 66 percent from an October 2012 peak, reaching a lownot seen in 13 years.
We are now seeing business and personal debt reaching levels not seen since 2007, right before the last crash. Household incomes have not improved at all and, in fact, have dropped. The unemployment numbers are completely cooked. The unemployment rate will drop again due to the ending of benefits to 1.3 million workers who will no longer be counted.
There are 107 million Americans on government assistance. About 50 million Americans get food stamps. The U.S. population has increased by 16 million people since 2006, but there are 1.5 million fewer Americans employed today. Workforce participation rates are the lowest in decades.
According to the consumer price index, the economy is growing at about 2.5 percent. But official inflation is also 2.5 percent. Real inflation is closer to 8 percent.
Yes, the stock market is hitting record highs. But that’s because the Federal Reserve is dumping $85 billion a month into the economy through QE to infinity to prop up the banksters and the market.
The Fed has inflated your dollar away to nothing. One dollar is now equal to 5 cents.
All so-called “growth” in the economy can be directly attributed to inflation. Inflation is not increasing prices, which is a symptom of inflation, but an increase in the money supply.
Inflation is a hidden tax on the wealth of the people.
Helicopter Ben Bernanke has succeeded in creating the illusion of a recovery. The illusion is about to end.
If being wealthy was the same as pretending to be wealthy then people who care about reality would have a little less to complain about. But pretending is a poor way for a society to negotiate its way through history. It makes for accumulating distortions which eventually undermine the society’s ability to function, especially when the pretending is about money, which is society’s operating system.
The distortion that even simple people care about is that the gap between the rich and the poor is as plain, vast, and grotesque as at any time in our history — except perhaps during slavery times in Dixieland, when many of the poor did not even own their existence. We’ve had plenty of reminders of that in pop culture the last couple of years, including Quentin Tarantino’s fiercely stupid movie Django Unchained and the more recent melodrama 12 Years a Slave. But you have to wonder what young adults weighed down by unpayable college debt think when they go to see them, because without a rebellion that millennial generation will not own their own lives either. They must know it, but they must not know what to do about it.
The pretense and distortions start at the top of American life with a President who broadcasts the message that some kind of “recovery” has occurred in the economic affairs of the country. Either he just wants the public feel better, or he is misled by the people and agencies in his own government, or perhaps he just lies to keep the lid on. To truly recover from the dislocations of 2008, we would have to make a consensual decision to start behaving differently in the process of adapting to the new circumstances that the arc of history is presenting to us. We’d have to decide to leave behind the economy of financialization, suburban sprawl, car dependency, Wal-Mart consumerism, and prepare for a different way of inhabiting North America.
The dislocations of 2008 when the banking system nearly imploded were Nature’s way of telling us that dishonesty has consequences. The immediate dishonesty of that day was the racket in securitizing worthless mortgages — promises to pay large sums of money over long periods of time. The promises were false and the collateral was janky. It got so bad and ran so far and deep that it essentially destroyed the mechanism of credit creation as it had been known until then, and it has not been repaired.
Since then, we have pretended to repair the operations of credit by falsely substituting bank bailouts and Federal Reserve “quantitative easing” (QE) or digital money-printing for plain dealing in borrowed money between honest brokers at the local level. The unfortunate consequence is that in the process we have distorted — and possibly destroyed — the value of our money and the various things denominated in it, especially securities, bonds, stocks and other money-like paper.
The crash of the mortgage racket occurred not just because of swindling and fraud among bankers; in fact, that was only a nasty symptom of something larger: peak oil. I know that many people have come to disbelieve in the idea of peak oil, but that is only another mode of playing pretend. Peak oil, which essentially arrived in 2006, undermined the basic conditions of credit creation in an advanced techno-industrial society dependent on increasing supplies of fossil fuels. Most people, including practically all credentialed economists, fail to understand this. There is a fundamental relationship between ever-increasing energy supplies > economic growth > and credit-based money (or “money,” if you will). When the energy inputs flatten out or decrease, growth stops, wealth is no longer generated, old loans can’t be repaid, and new loans can’t be generated honestly, i.e. with the expectation of repayment. That has been our predicament since 2008 and nothing has changed. We are pretending to compensate by issuing new unpayable debt to pay the interest on our old accumulated debt. This pretense can only go on so long before our economic relations reflect the basic dishonesty of it. Reality is a harsh mistress.
In the meantime, we amuse ourselves with fairy tales about “the shale oil revolution” and “the manufacturing renaissance.” 2014 could be the year that the forces of Nature compel our attention and give us a reason to stop all this pretending. I’ll address this question in next week’s annual yearly forecast.