EKIP– Expert Club for Economics and Politics A Different Opinion
Frank Holenbeck
The gap between the rich and the poor continues to widen. In 1975, the richest 1% of the population held 8% of the economic pie; now they own over 20%. This is a striking change from the 1950s and 1960s, when the richest owned just over 10%. A study by Emmanuel Saez showed that between 2009 and 2012, their real income jumped by 31.4%. The richest 10% now receive 50.5% of all income, the highest level since records began in 1917. The richest are getting richer, faster.
Most of the literature on income inequality is written by university sociology professors, who attribute the unequal distribution of wealth to technology, the declining role of unions, the decline in the real value of the minimum wage, and everyone's favorite scapegoat: the rising importance of China.
These factors may play a role, but two others are the real drivers of income inequality. One is necessary, while the other is the opposite.
In a capitalist economy, prices and profits play a crucial role in allocating resources to where they are needed most and in using them to produce goods and services that best meet consumer needs. When Apple took the risk of producing the iPad, many commentators expected it to be a complete failure. But this success brought profits, while at the same time sending a signal to other manufacturers that people wanted more of this product. The profits were the reward for the risk taken. Profit is the motive that gives us a multitude of new products and a constantly improving standard of living. Yet profit and income inequality go hand in hand. We cannot have one without the other, and if we try to eliminate one, we will eliminate, or greatly reduce, the other. Income inequalities are an inseparable result of the profit and loss that characterize capitalism; they cannot be separated.
Prime Minister Margaret Thatcher understood this indivisibility well. She once said that it was better to have large income inequalities and everyone near the top of the ladder than to have small differences and everyone near the bottom.
Yet the middle class is sinking into poverty—it’s not climbing the ladder. Between 1979 and 2007, the incomes of the middle 60 percent rose by less than 40 percent, while inflation was 186 percent. For the bottom 99 percent, real income rose by just 0.4 percent between 2009 and 2012, according to the SaaS study. But that doesn’t help to make up for the 11.6 percent loss that occurred between 2007 and 2009—the biggest two-year decline since the Great Depression. When adjusted for inflation, minimum wage earners actually earn less now than they did 50 years ago.
This brings us to the second unwanted and unjust source of income inequality: the creation of money out of thin air, or the legal counterfeiting of money by central banks. It should come as no surprise that the growing income gap coincides with the adoption of fiat currencies around the world. Every dollar that a central bank creates benefits the first holders of the money—the government and the banking sector—at the expense of those it reaches later—wage earners and the poor. Since the creation of the unsecured currency system in 1971, the dollar has lost 82% of its value, while the banking sector has grown from 4% to more than 10% of GDP today.
The central bank does not create anything real – neither resources nor goods and services. When it prints money, it causes the cost of transactions to increase. The original quantity theory of money associates it with everything that can be bought with it, including assets. When the central bank creates money, traders, hedge funds and banks are the first to benefit from the increasing volatility and the upward trend in asset prices. Also, futures and other derivatives on exchange rates and interest rates were unnecessary until 1971, because there was no need for hedging then. The central bank is responsible for this added risk – volatility and a jump in asset prices, not justified by the fundamentals.
The banking sector was able to significantly increase its profits or claims on products and services. However, more claims for a sector that essentially produces nothing of real value means less claims on real goods and services for everyone else. That is why counterfeiting is illegal. The central bank therefore plays a leading role as a “reciprocal Robin Hood”, increasing the economic pie going to the rich while slowly plunging the middle class into poverty.
Janet Yellen recently said, “I am grateful that … inflation will come back close to our long-term 2 percent goal,” demonstrating her commitment to the institutionalized policy of wealth theft and redistribution. The European Central Bank is no better. Its LTRO strategy consisted of lending long-term loans to banks on questionable collateral to buy government bonds, which were then quickly deposited back into the central bank to be lent cheaply to buy more government bonds. This had nothing to do with liquidity, it was all about boosting bank profits. That is why every euro the central bank creates is a tax on everyone who uses euros. It is a tax on cash balances. It takes from working people to give to the wealthy European bankers. This is blatant backdoor debt monetization, with the banking sector acting as a middleman and getting a nice, juicy cut. The same logic applies to the redistribution created by the payment of interest on reserves by American banks.
Worried about income inequality, President Obama and the Democrats have proposed even higher taxes on the wealthy and an increase in the minimum wage. They are wrongly focusing on the outcome, rather than the cause, of income inequality. If they succeed, they will be “throwing the baby out with the bathwater.” If they are serious about reducing inequality, they should focus on its main cause: the central bank.
In 1923, Germany returned to its pre-war currency and gold standard with almost no gold. It did so by vowing never to print again. We should do the same.
Translation: Silvia Yanakieva
Proofreader: Daniel Vassilev
Not that I disagree with the author, but I don't understand why he focused only on central banks. They are just part of the fractional reserve system that generally creates money. Money was created out of thin air even before there were central banks. That is, the process of redistributing wealth was going on back then, but just uncoordinated and slower.
And by the way, there is nothing wrong with inequality. It is bad when it is not due to differences in people's productive abilities, but to: connections, political games, administrative regulations, etc., i.e. when it is caused by forces outside the free market.
In the presence of a free market, inequality would be established and it would be permanent, not as it is now: increasing.
And the author is very right in noting that modern policies try to combat the consequences of wealth redistribution by trying to correct them (MRP, for example), rather than accepting the causes of growing income differentiation.
It focuses on central banks because they have a monopoly on the money supply. If we say that other banks (in a situation where there is no monopoly) do the same, then they will have a much more limited influence and will be punished (by their customers) for this kind of behavior.
Come on, this is where economic ignorance comes in! Inequality is created by the market! The cause of inequality is profit! Income from profit grows exponentially, because it increases proportionally to itself. Income from wages grows linearly, if it grows at all, because it grows by adding the same amount. These are fundamental principles that do not depend on the way money is "printed"! The work of central banks has no relation to the principles of income formation - multiplicative for profits and additive - for wages! As I wrote to you under the other article about "The Labor Theory of Value and Capitalist Exploitation", the market is an unfair game in which capitalists are privileged. This is exactly where inequality comes from!
By blaming central banks, you are only throwing firecrackers and lying to the population.
Oh, and banning by IP doesn't help either 🙂 It's pointless to bother :).
@Kihano
When new money is created, for example by a bank, the first to receive this new money are in a position to buy something with it for which there is no work involved. That is, they receive something for nothing. Example: I am a counterfeiter, I print 10,000,000 dollars and buy a factory. For this money I have not produced any goods and services to offer on the market. And that is why printing money is a bad thing. However, it is currently accepted that if the state does it (through the Central Bank and fractional reserve banking), then it is OK.
Funny but true. The counterfeiter is a criminal when he produces money, but the state is not.
The first to receive the money in the chain of distribution of this money always have an advantage. They receive more from the produced goods and services than those to whom the money arrives late or last. Typically, the money first goes to the financial sector and to large enterprises of "our people", close to the government (Goldman Sachs, for example). And that is why these enterprises and companies receive more from the economy than they have contributed to it. In fact, they grow, accumulate capital at the expense of other people, and these are typically small companies and people on salaries.
In an inflationary economy, the following happens to the average person: first the prices of products rise and only then does his salary rise. That is, his salary always lags behind prices.
In a deflationary economy (fixed money supply), the opposite would happen: first the prices of products fall, and only then (with a delay) do the wages of the average worker fall. And these wages fall less than the prices have fallen. We would have a constant and evenly distributed increase in the standard of living of the people.
Currently, the increase in people's living standards is not uniform. The profit of those who are first in the money chain is always more, they accumulate more capital and become richer. For the ordinary worker, the scraps remain, which, however, also grow. De facto, the following happens: In a growing economy with, for example, 5% growth per year, some privileged people grow by 8% per year, and others by 2% per year. From there follows the constantly growing income differentiation in society that people complain about so much and which is conveniently blamed on the back of "bad capitalism".
EE,
The only purpose of this "explanation" is to replace the real explanation, namely that the market is a dishonest game in which there are permanent winners - the private sector and permanent losers - the rest. This "explanation" is completely clear to me, you don't need to explain it. And precisely because it is clear to me, that is precisely why I can tell you that it is not true. Its effect, if it exists at all, is zero, except for the effect of the dishonesty of the market. Besides, what does Goldman Sachs gain by "getting money first"? Does it buy potatoes or pies? No, Goldman Sachs sits and waits for someone to ask them for a loan. In order for financial institutions to make a profit, they give loans, not buy goods. The money must be rolled over at least once in order for them to make a profit. And once it has been rolled over, it has reached everyone.
Then, only 10% (with a 10% reserve requirement) of the money is "created" by the central bank. The rest is created by commercial banks, which are scattered everywhere and are not "ours".
Then, if the state uses the borrowed money, i.e. the printed money, for social spending, then it will first go to the poor and the whole scheme is reversed. If this scheme were the main one, then in social countries, like the Scandinavian ones, the unemployed would be rich, and businessmen would be digging through the buckets. But that's not the case, is it? Because this effect of "the first to get money" is insignificant. The main effect is from the dishonesty of the market.
The capitalist system cannot exist with a constant total amount of money! This is mathematically impossible, because in a short time all the money will be in the hands of one person! Well, they will have beaten him before that.
@kihano
"that the market is an unfair game in which there are permanent winners – the private sector and permanent losers – the rest"
In a pure free market there is no dishonesty. And the reason is that no one forces you to do something against your will. All exchanges are voluntary. Please do not confuse this with the current state of affairs.
"Besides, what does Goldman Sachs gain by being the first to get money? Does it buy potatoes or pies?"
He wins because he can collect more money than others. The money is concentrated in him.
"Then, only 10% (at a 10% reserve requirement) of money is 'created' by the central bank. The rest is created by commercial banks, which are scattered everywhere and are not 'ours'."
"Then, if the state uses the borrowed money, i.e. the printed money, for social spending, it will go to the poor first and the whole scheme is reversed."
Namely. No one claims that only banks are profitable from the above process. This process is gradual, i.e. those who are in the first places or generally speaking "at the beginning of the chain" profit at the expense of those who are at the end of it. I.e. if a company or citizen takes a loan from a bank, it will be profitable, but this profit will be at the expense of other people, i.e. those who receive the money later. The poorest are the losers from the whole process. They certainly cannot take a loan from a bank and only watch as prices around them rise, and salaries/pensions/social benefits lag behind this price increase by years. Pensioners/people on social payments are also very screwed. In order to raise their money, the state must collect more money, i.e. the money from the banking system must have multiplied, entered the economy, raised prices, collected through taxes and only then can the state index. The delay is huge.
It's been a long time since the poor were the most screwed up. Right now we just pretend it's not the case and turn a blind eye to the fact that the system is broken because it's taking us out.
"The capitalist system cannot exist with a constant total amount of money!"
The above is your belief (and Marx's). So far I have not heard a logical argument from you as to why this is so.
"This is mathematically impossible, because in a short time all the money will be concentrated in the hands of one person!"
It can't. There's just no way. The reason is that money can't be eaten, drunk, dressed, etc. Money is just a barter commodity and as such has no value in itself. Imagine that you're on a lonely island with 1,000,000 dollars. You're a millionaire! However, in practice you're poorer than the poorest people in Bulgaria, because you can't buy anything with that money. And the reason is that there's nothing there, nothing is produced.
Businessmen understand the above very well and never keep their money just like that in a pile, to look at it (I exclude some medical conditions). Money is meaningless if it does not rotate. Only then does it make a profit. And in order to rotate it, you have to give it to someone else, i.e. buy something from him, for example.
Not to mention that without money the economy would collapse and exist at a prehistoric level. The presence of money allows for the development of the division of labor, and from there, the constant increase in productivity (i.e., the standard of living).