Wealth Gap in America Caused by Federal Reserve, Not Capitalism

When most people hear about the redistribution of wealth they think of welfare payments and health care for the elderly, but the real redistribution of wealth is from the 99% to the 1%, not the other way around. The rapid expansion of the money supply by the Federal Reserve does not flow into the economy evenly, but is added in at distinct points. 

The most distinct of these points is through the too-big-to-fail banks. Access to the new money first means these banks can buy assets and drive up prices in the stock market, benefiting themselves and the 1% that make up their best clients. By the time this new money has time to flow out into the broader economy; the 99% see no benefit and in fact suffer from higher prices.

The real cause of the increasing disparity in income levels in the U.S. is not capitalism, but central planning from the Federal Reserve. Continuing expansion of the money supply and artificially low interest rates are maintained by a process in which the Fed buys assets from the major banks and the richest Americans at inflated prices, or lends money to them at low rates that they can then use to buy assets at inflated prices. 

This process naturally enriches all of those who are participating in it, as well as harming the rest of us by creating an economy full of mal-investment and waste. Capital is used up in finance and other “service” sectors instead of being invested in manufacturing and other productive sectors of the economy. Continuing price inflation in the asset markets also drives up prices for basic commodities, which in turn raises the price of all the things average people buy, especially food and gas. Economist Mark Spitznagel recently had an editorial in the Wall Street Journal making many of these points. This is further evidence that the realities pointed out by Austrian economists are breaking into the “mainstream” once dominated by Keynesian apologists for Leviathan.

While libertarians and traditional “liberals” may disagree about the redistribution of wealth from the rich to the poor, we should all recognize that there is certainly no need for wealth redistribution from the poor to the rich. Politicians of all stripes need to pay more attention to what is going on at the Federal Reserve and in the banking sector generally. Most stay away from these issues because they are perceived as boring, but the economy is never going to get better until we can put a stop to the endless series of booms and busts. Everyone who is concerned with the fate of the average American needs to understand the difference between fiat money and commodity money. 

Fiat money is money that is merely a token, something that has no value in and of itself; people accept it in payment for goods and services because the government forces them to. Commodity moneys, like gold, are assets that have real value; no one has to tell you that a gold coin is fair payment for a day’s labor. The root of our current economic problems is the system of fiat money. As long as we have a fiat system, the central banks will be able to print money and give it to their friends. As long as we have a fiat system, there will be redistribution of wealth from the poor to the rich. This is a much bigger problem for our nation than the “welfare” payments that politicians spend so much time talking about. The issues brought up by Austrian economists like Murry Rothbard are not going away, and if America is to have a future as bright as its recent past, they must be addressed.