Friday, September 2, 2016

The Wealth Gap in America......What's Really Causing and What Should Be Done About It?

Is it just me, or is this talk about the wealth gap getting tiresome?  It really sounds like good ole fashioned government propaganda to me, nothing more.  The media fain outrage and call for a more civilized society in the 21st century.  Some politicians like, Elizabeth Warren start yacking about the minimum wage and the media just lines up, as if she's the government pied piper.  Here's the thing..... These people on television and in the government aren't concerned about the bottom 90% of income earners.  But let's suppose, just for a moment, that they actually do care about the income disparity of these two groups.  This is where I like to ask one of my favorite questions, "Therefore what?"  What is to be done about it and by whom?  Most people default to taxing away the wealthy group's income and then advocate for government to redistribute the proceeds from this tax to the disadvantaged group.  Even a cursory review of the government's record in managing public programs, would lead most rational people to the conclusion that this process would definitely punish the rich people, but in no way, would redistribution solve the problem of the "wealth gap".  The populism that leads to government policy to solve social problems ALWAYS fails to reach its intended and stated purpose.  Furthermore, it serves only to enlarge government and extend its tyranny over the citizenry.  So.....what's the cause and what do we do about it?

At this point, we have to bring the study of economics into the discussion.  Now, before your eyes begin to glaze over, let me try to make the case that every responsible citizen that votes really needs to better understand this subject.  Because economics is a social science and not a physical science, its not as black and white as say, physics or math.  It attempts to predict human action in the face of many choices and limited resources, and it tends to be co-opted and manipulated by government in order to justify its largess and to accrue votes for maintaining its own power.  The "group think" that exist in academia, government and our media is pervasive in our political and media culture, and is used to herd Americans into a particular way of thinking about almost everything.  In this blog, I will put forth some ideas about the causes of our income disparity, but I want to caution you that these ideas are not shared among "leaders" in the mainstream.  There are many entrenched interest in business, government (at all levels) and other institutions within the country that act a collective opposing force to the understanding that I layout here, and will fight fiercely to preserve that status quo, which will ultimately lead to our demise.  We must use our understanding and clarity on the subject to try fight these opposing forces whenever and wherever we have the opportunity to do so.

So let's start with a very simple question.  What do wealthy people do with their income?  Answer:  they spend a lot of it, that's very true, but a large chunk of their income is saved and placed in various assets.  These assets might include; businesses, stocks, bonds and real estate, just to name a few.  If you're in the bottom 90%, how is your income used?  That's right!  You tend to spend most of your income on housing, food, transportation, energy and entertainment and usually there's little or nothing leftover for savings.  Now, this is where I need to make a VERY STRONG statement......THE GOVERNMENT CANNOT DO ANYTHING ABOUT THIS TO IMPROVE YOUR LIFE!  The fact that people believe that the government has something to give us in return for their vote, demonstrates that we don't understand this simple little rule.  The government (city, state, or federal) cannot give to citizenry without first taking from them.  So, at some point along the income scale, you are actually getting back your own money.  The problem is that people think that the rich are paying for all of this stuff and that's just not the case.  Maybe down the road we will do a tax study, but for today, let's just say that 53% of tax payers are paying almost 100% of the tax.  That's a lot more people than just the 'RICH".

Alright, now that we have that out of the way, let's go back to the discussion around savings and assets.  Suppose I'm already rich and I have a lot of excess income.  Do I hoard it, role around it, burn it in my fireplace, no, of course not?  Most rich people tend to buy more assets, such as, another business or an expansion of the existing business, which is great because it creates jobs and other opportunities for workers.  Here is the key to whole thing and the dirty little secret they just write a check for the new business?  NO, THEY BORROW THE MONEY FROM THE BANK!  They have something called collateral that can be pledged to the bank so that the bank will loan them the money they need to build up their asset base.  The reason this is key to income disparity is because this option is NOT AVAILABLE to someone who is not already rich.  Don't believe me?  Stop into Wells Fargo or JP Morgan Chase and tell them that you want to start a business and would like to borrow $250,000.  "Sure Mr. Entrepreneur, just list your assets here that you would like to pledge as collateral.  What, you don't have any assets?  I'm sorry, we will not able to loan you money for your new business."  You see this technique of using the banking system to leverage your assets has an exponential impact on one's income.  The problem is that it favors those who are already rich at the expense of those trying to save money and get rich.  What incentive is there to work extra hard, live thrifty in order to save and put your money in the bank only to earn a paltry 0.025% rate of interest on those precious savings?  Even if you don't care about whether or not there is an incentive to save, you simply cannot get enough return on the savings to grow it substantially in the banking system.  So, today in United States, we have a banking system that privileges borrows at the expense of savers and it shouldn't privilege anybody at the expense of anybody else.

As you might have guessed, the low interest rate in our banking system is not the only factor creating the income disparity between the rich and the middle class.  There has been a great deal of talk about the minimum wage or as government hacks like to call it, "Living Wage".  The TV commentators like to argue about whether or not an increase the minimum wage would hurt businesses or not, or hurt employment or not, and so on.....  I'm firmly in the camp that such an increase would hurt business and employment, but I want to call you attention to a much more destructive force than the minimum wage.  That's right, the Federal Reserve.  In 1964, the minimum wage was $1.25 an hour.  You may not believe this, but you could actually live on this wage if you worked fulltime.  Another obscure interesting fact about 1964, is that it was the last year that the United States mint issued 90% silver quarters. 

Doing some very simple math and using today's value of silver, we could calculate the purchasing power of an individual living on the minimum wage today, if we could still be paid in 1964 quarter dollars.  As you can see in the figure above, a single 1964 quarter would purchase $3.39 in today's prices.  So, the five 1964 quarters with which a worker would be paid today, without any increase in the minimum wage, would purchase $16.95 worth of goods and services.  If that person worked a 40 hour week, they would have a before tax income of $678 per week and if they worked 50 weeks per year, would earn $33,900 per year.

So what happened?  How come a quarter minted by the U.S. Government today will not purchase $3.39 of goods and services.  To fully answer these questions, we have to travel back in time and look at some history.  On April 5, 1933, President Franklin D. Roosevelt signed Executive Order 6102 criminalizing the possession of gold bullion and gold certificates by citizens within the continental United States.  We had officially moved from a gold standard to a gold exchange standard.  In effect, what this meant, was that the United States made the U.S. Dollar the standard for all debts public and private within the continental United States.  Fast forward to July 1944 to the international monetary conference in Bretton Woods, New Hampshire.  At this conference, the goal was to establish a postwar monetary order that all nations would pledge to use to settle current accounts for the purpose of trade.  There were other goals at this conference, but this one is key to this article.  Since most of the industrialized world was destroyed in the war and because the U.S. possessed all the gold and was producing most all of the goods and services for the globe, the participants at the conference agreed to clear trade accounts with U.S. Dollars backed by gold.  This system appeared to work well and continued to operate uninterrupted until the Great Society programs passed under Lyndon Johnson and the Vietnam War escalation led to vast amounts of government spending beyond what was backed by gold.  Several countries, but namely France, was trying to redeem vast quantities of U.S. Dollars held in reserve in exchange for gold at the New York Federal Reserve.  In effect, France was saying to the United States, "We would rather have gold than these paper Dollars.  We will send you these Dollars and you can send us (France) the gold."

In August of 1971, Richard Nixon fired the final shot into the heart of the U.S. Dollar and completely disconnected it from any mooring that kept the government anchored in reality.  He "TEMPORARILY" was closing the Gold Window to protect the Dollar from the "Speculators".  The speculators, in this case, were the French government, who was trying to hold the United States government accountable to maintain the value of the Dollar per the Bretton Woods Conference.  Since then, the government has inflated the value of the Dollar away (prices go up) and robbed each and every American of the standard of living earned and that would have increased over time making all of us more wealthy than we are today.  A quick glance at the "official" Producer Price Index (PPI) chart below clearly shows the point at which inflation really began to take off in America.  This graph, will no doubt, steepen over time as the effects of Quantitative Easing and other monetary trickery begin to leach out of the banking system and into the economy.  Since The Great Recession, The Federal Reserve has monetized some $4.5 trillion of the official debt.  This is just FED SPEAK for, we printed a bunch of new Dollars and decided to purchase bonds FROM our own U.S. Treasury.  This akin to you writing a check to yourself in the amount of $1 billion and then claiming to be a billionaire.  If the public cannot check the FED's power or eliminate it all together, this country will cease to exist in its current form.

In general, everybody's standard of living goes up over time with the introduction of new technology and investment by producers to make workers more productive. However, government's interference in this process by redirecting resources to the financial sector in order to create a "wealth effect", can have a negative impact on our ability to actually experience those productivity gains.  This is why we should try to turn government and its "benevolence" away from attempting to manage the economy at every turn.  Capitalism or the Free Enterprise System does not require the government's involvement at all to function properly and benefit its participants according to their level of production.  Government managing the economy is not capitalism, in fact, it's actually statist in nature, more akin to fascism, where government and big business get together to manipulate the markets by passing legislation and creating barriers to competition.  The free enterprise system is a feature of liberty and of a free people.  This type of liberty leads to economic prosperity through the absence of force, manipulation, and arbitrary rules designed to control or herd people around like mindless lemmings with dollars in their pockets to be captured by the fascist overlords.  Free enterprise involves voluntary cooperation, contracts, property rights, and of course, sound money.  Money that can be created out of nothing and by handful of connected, powerful people for the purpose of capturing the "productive capacity" of the economy and its individual participants, is a perversion of capitalism and undermines the economic liberty of a free people and will not endure long-term.  Unlike the laws that govern the natural world, economic laws can be bent to great extremes and for very long periods of time. This is because these economic laws involve people, and the manipulation of human nature which can work until direct "appearance" of incentives cease to exist.  However, these perversions of economics cannot be made to last, the incentives eventually run their course, and people come kicking and screaming back to reality, where the pain is eventually distributed to all citizens.  So, without the government's help, we can all expect some type of normalization back to reality.  Yes, even the richest among us!

Sunday, August 28, 2016

What is The FED Really Up to? Not Running the Economy, that' for Sure!

I'm so tired of the Federal Reserve getting so much credit for "Running the Economy"!  The FED doesn't run the economy, all the people who participate in the economy actually run the economy.  The collective billions of transactions to buy or sell raw materials, capital equipment, IT infrastructure, real estate and consumer goods drives the performance of our economy.  No one person or group of people could possibly coordinate the millions of actors and billions of transactions that take place in the economy that signal participants on what to produce, how much to produce and for what industry segments are the most critical for that production.  It's absurd on the face of it!  I sometimes wonder where this came from and who started this absurd idea and for what purpose?

It is true that The FED manages "open market operations" to sell U.S Bonds of different durations issued by the U.S. Treasury, but this is largely a debt issuance function and is purely financial.  It's the activity in this market created between buyers and sellers which then sets market interest rates that are used all over the World.  The FED does not normally participate in this market, it merely makes the market, so that buyers and sellers can come together and transact.  During Quantitative Easing, however, the FED became a participate in the market and actually PURCHASED these bonds, which ultimately made bond prices go up in value, which caused rates to fall.  This activity is highly unusual in the United States and is usually reserved to markets manipulated by despots and tyrants around the World.  This monetization of the money supply, expands the number of dollars and ultimately steals value from the currency and the holders of the currency.

The unfair and systematic destruction of the money supply through currency creation, whether direct or indirect, is one of the most common arguments for a HARD MONEY system.  The Founders of this country also understood this, which is why they agreed to give Congress this power by writing in Article I, Section 8, Clause 5 of The Constitution, "Congress shall have the power to Coin money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures."  Due to a persistent and unrelenting desire by those in politics and in banking who did not want to be constrained by a system based on coinage, we have moved slowly and deliberately in favor of an unbound system that will ultimately lead to complete destruction.

Some say that this money system is legitimate and sound, and use as evidence the fact that it's worked so well for so long without any major disruptions or inflationary events.  The fact is, history is littered with the corpses of those governments who have gained control over the money with legal tender laws, followed by a systematic theft of the wealth of its citizens through monetary inflation.  It's happening as we speak in Venezuela with an annual inflation rate estimated to be around 700%.  Producers are unable to purchase raw materials in order produce goods for consumers to buy because the money is so manipulated that other countries will not trade with Venezuela.  Those producers are then forced to shutdown limiting goods to the market.  The Venezuelan government responds by rationing goods and the citizens are left with nothing to do but stand in line everyday trying to get food to feed their families.  It is truly criminal and tragic, but even now it continues.

So why hasn't the U.S. collapsed?  It's a good question, and it may have many legitimate answers, but among these are not that the system is sound and fair.  One of the clues to the longevity of the U.S. money system likely dates back to an important global conference that took place in Bretton Woods, CT in July of 1944.  As WWII was nearing its end, government leaders and intellectuals met at this conference to discuss the global financial system in the wake of the great war.  There was much damage to economies all over the world during the war and no advanced country, other than the U.S., was going to be producing any goods for a long time.  Additionally, the U.S. owned or controlled almost the entire world's inventory of gold.  In the face of these overwhelming conditions, the representatives of this conference decided to give the United States and the Dollar the extraordinary privilege of global reserve currency status.  This meant the trade balances between countries would be settled in U.S. Dollars.  This is an extraordinary power, and in hindsight, I'm sure many historians inside and outside the United States see this transfer of sovereignty to the United States as a major global mistake!

Even now, I recognize that the connection that I am trying to make around my case is not entirely obvious.  So, I want to talk about how this privilege has been abused by our government at the expense of Americans and non-Americans.  But to do that, we now need to turn to trade, which is interesting because it is such a hot button during this presidential political season.  Before the World of fiat money in global trade, countries would trade goods with one another and settle global imbalances by transferring gold to make up the difference.  Gold in reserves held by government was owned by all citizens.  If some of that gold had to be shipped to another sovereign country to settle a trade imbalance, then country and its citizens would experience a loss in wealth.  Of course, gold reserves could be replaced by mining more gold and placing those reserves back in the Treasury, but this requires real resources to produce the gold; labor, equipment and time.  What is important to see here is that it's production that produces wealth in global trade, not money.  Increasing money without increasing production, simply increases the price of the goods produced.

Contrast this process with what happens today in a Dollar based reserve currency system back by nothing.  If the U.S. doesn't produce enough goods to trade with other countries in way that the balances are zero, our Federal Reserve just sends a bunch of electronic Dollars to settle the accounts.  Since there are not enough goods sold in the World that one can purchase with Dollars, the excess Dollars come back to the U.S. in the form of demand for U.S. Treasury Bonds.  This is why China owns so much of our National debt and why our interest rates have been so low for so long.  We are expropriating wealth from the rest of the World by sending Dollars to them that required no production to earn and giving them worthless IOUs in trade.  In short, the United States government has been exporting our inflation to sovereign countries around the World.  The net effect is that Americans have been enjoying a standard of living that is not real nor earned, and when this privilege is taken away from the U.S., our standard of living will fall substantially!  This is the nature of a standard of living based on debt built by fiat money!