The 1% Reap Big Profits as the Economy Recovers

Fed Building
Mike Konczal recently authored an article in which he points out that the top 1% have reaped the most benefits from the supposed “recovery” that began in 2009. In this article, I will address the issue of why income inequality occurs in the first place.

Treating income inequality with remedies like progressive taxation is like a doctor who treats symptoms without actually addressing the disease itself. If I give morphine to a cancer patient, they’ll feel good all the way to the point they keel over dead. Thus, it is of critical importance to understand why the rich seemingly keep on getting richer if we want to address income inequality by making positive economic changes.

Looking at charts of income inequality over time shows some very strong correlations between periods of credit expansion and periods of accelerating income inequality. Figure 2 of the Saez paper shows a spike in inequality right before the 1929 stock market crash followed by a continuous increase in inequality after the U.S. defaulted on the international gold standard in 1969 coupled with the decrease in interest rates by the Fed beginning in the early 1980s. Both periods relate directly to periods of credit expansion by the Fed, leading to an increase in the money supply.

When the government expands the money supply, those who get the new money first get the most benefit. Inflation is the primary mechanism of wealth redistribution in our economy today.  Think of the counterfeiter who gets the benefit of the new money he prints before it circulates into the economy and drives prices up. It is no coincidence that we see accelerating income inequality in the U.S. after the creation of the Fed and our defaulting on the gold standard. The type of gold standard we had after the creation of the Fed was not a “real” gold standard in the fact that the Fed could still manipulate the money supply to some degree because the gold was being fractionally reserved.]

A Business Insider article titled "How To Make The World's Easiest $1 Billion" points out how the rich can leverage debt to earn tremendous amounts of money. The system laid out in the article is still relevant today, even though the article was written in 2009. What it points out is that the monetary system itself is rigged by the central bank to benefit the rich at the expense of everyone else through expansion of the money supply.

The author sums up the game in a few short sentences:

"STEP 1: Form a bank.

STEP 2: Round up a bunch of unemployed friends to be 'bankers.'

STEP 3: Raise $1 billion of equity. (This is the only tricky step. And it's not that tricky. See below.*)

STEP 4: Borrow $9 billion from the Fed at an annual cost of 0.25%.

STEP 5: Buy $10 billion of 30-year Treasuries paying 4.45%

STEP 6: Sit back and watch the cash flow in."

The Fed doesn’t really have $9 billion to lend in this scenario – at least not legitimately. Because our monetary system allows the Fed to create and lend out any amount of money it likes, it is able to get away with this nonsense. We can see that those who have access to the Fed’s discount window stand to make some tidy risk free profits. There is a reason why Warren Buffet loves bonds and bailouts, and it has nothing to do with looking after the little guy.

Dissolving the central bank and demanding banks operate on a 100% reserve standard would go a long long way toward reducing income inequality in the U.S. by actually addressing the root cause of the issue itself – the Fed.

 Photo Credit: Wikimedia Commons

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Michael Suede

Michael Suede is an Austrian economist and author who holds a business degree from the University of Wisconsin. Michael's articles have appeared in numerous economics publications. Michael is also one of the few economists who is well versed in the economics of voluntary crypto-currencies such as Bitcoin. Michael is a veteran of the US Navy and an advocate of voluntarism. Michael authorizes the use of all his content under Public Domain copyright. Any organization or individual may freely republish, edit, modify and distribute Michael's works without restrictions.

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