Tag Archives: Economy

The Widening Wealth Gap

A recently released Pew Research Center study confirms what every thinking American has understood for quite some time: the wealth gap between rich and poor has widened considerably since the onset of the financial crisis in 2008. The study’s statistics probably underestimate the plight of struggling families and individuals compared to upper-income groups as the median wealth of upper- income families totaled $639,000 in 2013, 6.6 times the median wealth of middle- income families of $96,000. This compares with 4.5 times the gap In 2007 between the two groups.

Along with the widening wealth gap, the overall outlook for the middle and lower classes is decidedly bleak as stated in the report: “The latest data reinforce the larger story of America’s middle-class household wealth stagnation over the past three decades.” The study adds: “Middle- and lower-income families’ wealth levels in 2013 are comparable to where they were in the early 1990s.”

While the Pew study quantifies, to some extent, the declining financial status of the vast majority of Americans, it does not point to the actual cause of the widening gulf between upper and lower income groups. The reason for the wealth gap and for the financial crisis in general has been the Federal Reserve’s expansionary monetary policy (inflation) which began in earnest with “quantitative easing” under former Fed Chairman, Ben Bernanke.

As estimated by John Williams of ShadowStats, the U.S. money supply has almost doubled since the start of the crisis and shows little sign of abatement under the stewardship of current Fed Chair, Janet Yellen.

Inflation is always redistributive. Like any petty counterfeiter, the new money allows its creator (the Fed) to receive “free goods” without having to produce or exchange. Moreover, by the time the new money filters out into the economy, its purchasing power has been reduced as prices have gone up.

Inflationary monetary policy is devastating to those who receive their income in wages or are on a fixed income. Since wages are paid in money, each monetary unit that is received by wage earners is diluted by the expansion of its supply. Although nominal wage rates may rise, their real purchasing power will decline. Real wages can only increase through savings and capital accumulation none of which is occurring in the era of quantitative easing.

Real wages, of course, have remained stagnate for decades. While the Pew study does not mention it, wages have not progressed since 1971 which, not surprisingly, coincides with President Nixon’s decision to abandon the last vestiges of the gold standard. Without the fiscal discipline of gold, politicians and central bankers have been unconstrained in their spending and money printing with the wealth gap expanding further and further.

Thus, when the Fed increases the money supply, the governing class and those financial elites and groups closely associated with it (Wall Street, banks, financial houses) benefit at the expense of everyone else. Those who are not directly connected with the Fed receive diluted or no new money at all. This is how America’s current financial and political oligarchy retains its status and power.

The Fed-induced wealth gap, will also lead to social antagonisms. As the disparity between rich and poor widens, blame will be indiscriminately thrown on all upper income groups instead of those who are creating the problem. There will be calls for putative taxation and regulatory policies to punish the well off. This, of course, will burden the “productive rich” those who honestly earn their wealth outside the banking/government sector.

It is quite simple to reverse the wealth gap: stop printing money. Or, better yet, return the monetary system to a gold and silver standard. The ultimate fix, which will not only lessen the wealth gap, but remedy a whole host of economic problems, is to completely de-politicize the money and banking industry.

For any of these recommendations to become a reality, however, there would first have to be a change in the prevailing ideology which glorifies central banking and fiat money. Until such a time when inflation is no longer tolerated and the monetary order consists of sound money (gold and silver), the wealth gap will continue to widen.

Antonius Aquinas@AntoniusAquinas

The World Bank and Rising Food Prices

1 Reply

A recent World Bank report warned of rising global food prices as if a study (no doubt an expensive one) is needed to explain what everyone who buys food or, for that matter, any commodity, is keenly aware of. “Food price shock,” the report cautioned, “can both spark and exacerbate conflict and political instability, and it is vital to promote polices that work to mitigate these effects.”

Naturally, the report fails to explain the real reason for increases in food prices. Like the lies, distortions, and half truths which used to emanate from the Soviet news agency, Pravda, the World Bank report misleads its readers citing “increasing weather concerns,” “import demand” pressure from China, and “geopolitical tension in the Ukraine” for the escalating food costs.

All of this, of course, is nonsense spoken to bamboozle the public and the naïve financial press who will swallow just about anything that a governmental authority shovels out.

The fundamental reason for skyrocketing food prices is the massive amount of money which has been issued since the start of the financial crisis by the likes of the World Bank, IMF, the Fed, Bank of England, and the ECB.

Not surprisingly, the report contradicts itself. Despite the reasons that it gives for the sharp rise in food prices, it admits that the supply of food worldwide is at an all time high: “. . . prices increased despite bumper crops in 2013 and continued projections of record grain harvests and stronger stocks expected for 2014.” It added that even the political turmoil in the Ukraine “have not disrupted exports so far.”

So, if supply is at record levels and demand has increased only significantly in China, what accounts for the massive price hikes across the globe? Simple: money creation.

The report, and others like it, speak of the devastating effect that high food prices have on the poor and impoverished. Instead of pointing the finger at themselves or the other international inflation generating agencies, the World Bank has in the past called for income redistribution which never help the poor, but just line the pockets of politicians and enlarge the balance sheets of the banksters.

Without the unprecedented money creation of the past half dozen years, food prices would have fallen. Instead, the trillions printed have done inestimable harm to the world’s economies while the banking and financial sectors have seen record “profits.”

If the World Bank was truly concerned about the impact of higher food prices, it would immediately fold up shop, call for the liquidation of all central banks and advocate a return to honest money based on a commodity be it gold or silver. Moreover, any bank or financial institution that did not maintain a reserve requirement of 100% would be shut down, charged with fraud and embezzlement while its perpetrators would be rounded up either scourged, tarred and feathered, or, at the very least, face a life time of hard manual labor.

Such measures are more than justified after what has taken place over the past decade and all of the mischief and ruination banks have committed throughout history. These or any other meaningful punishments will also act as a deterrent to anyone contemplating such nefarious activity in the future.

The solution to rising food prices is straight forward, however, its implementation is the problem. To achieve a sound monetary order, public opinion must be shown and then persuaded that the cause of most of the current financial difficulties stem from central and fractional-reserve banking practices. Until a majority is convinced of this evil, things will most likely not turn around.

Unfortunately, until food prices go a lot higher, or there is another crisis or general collapse, no significant alteration of the present fiat monetary system will take place. Nor can it be assumed that as things get worse, a “new system” or a “reform” of the present one will be necessarily better. Under the current statist ideological conditions, it will more than likely be a lot worse.

In sum, erroneous World Bank reports on escalating food prices will continue to be released.

Antonius Aquinas@AntoniusAquinas

The Consumer Spending Myth

7 Replies

There is no bigger misconception held among the financial press and within academia than that of consumer spending. A typical example of this comes from a recent Reuters release entitled: “Strong Consumer Spending, Factory Data Buoy U.S. Growth Outlook.” The first sentence of the article reads, “U.S. consumer spending recorded its largest gain in more than 4½ years in March . . . reinforcing views the economy was regaining steam.”

The supposed importance of consumer spending as a gauge of economic well being is a modern notion ushered in during the Keynesian Revolution which took place in the 1930s. J.M. Keynes, a British economist, mistakenly believed that the Great Depression was the result of a “lack of aggregate demand.” Thus, demand had to be stimulated (mostly through government spending) to revive a moribund economy.

Keynes’ theory has, unfortunately, held sway ever since despite being contrary to what had been believed up until that time and the many of criticism of it since.

An individual’s income can be distributed in one of three ways: it can be spent, saved, or held in cash. If individuals do not spend and decide to save more of their income, it will have no negative economic impact. In fact, the increased savings will expand the capital base which will provide the vital means necessary for lengthier periods of production, a situation that will eventually generate more and cheaper goods – granted there is no artificial increase in the money supply.

If income is kept in cash (checking accounts, bills, coins, stuffed in mattresses), money is taken out of “circulation,” so to speak, which will eventually lead to an increase in the purchasing power of the monetary unit – a scenario rarely seen in the modern era, but one which would be of tremendous benefit to just about everyone especially retirees and those on fixed incomes.

The manner in which individuals divert their income, therefore, has little if any effect on output. Historically, this ratio has remained relatively stable with only gradual change over time.

Furthermore, consumption always takes place as long as there is life. One “consumes” without even walking out of the house – turning on lights, running water, eating, etc., – are all consumption activities. If there was a sudden drop off in purchases, it would not lead to a recession. Some retail sectors would likely suffer, however, it would only be for a short period until entrepreneurs adjust to the new saving and consumption patterns.

Instead of consumer spending, there are more accurate areas to “measure” economic performance.

First, the trend of overall prices: are prices falling or rising? If prices continually rise, it is the result of money creation (inflation) by the central bank – in America’s case, the Federal Reserve.

Second, the tax burden – what percentage of income is taken by the state? There are many pernicious effects of high taxes, the most damaging is that they sap an economy of the capital necessary for production and employment.

The personal savings rate is often overlooked as a barometer of economic well being. A low or negative rate of savings indicates, among other factors, that income levels are not sufficient enough for individuals to save. The individual savings rate in most Western nations is abysmally low and under current monetary and economic policies will remain so.

All three areas of Western economic life show negative trends: prices have continued to rise due to the central banks massive money creation to bail out, in part, the banking and financial sector. Taxes remain confiscatory and have not been cut in any meaningful way. And, the personal savings rate has hovered around zero.

Until the idea of consumer spending has been debunked as a meaningful index of economic conditions, the public will be continued to be misled by the actual state of market affairs. When more accurate indices of economic conditions are looked to, then the notion of what constitutes real prosperity and or economic recovery will have different connotations. Applying such indicators to current reality shows a stark and gloomy contrast to the rosy portrait of things that consumer spending enthusiasts so often espouse.

Antonius Aquinas@AntoniusAquinas