The Greatest Increase in Wealth Inequality in American History Occurred During the Obama Administration

Source: David Stockman Email

I just received an email from David Stockman's newsletter, and it included the upper graph taken from Edward N. Wolff's "Has Middle Class Wealth Recovered."  There are a number of ways to look at the question of rich versus poor; the above graph uses one, the relative shares of the top one percent and the bottom  ninety percent. (Disclaimer: I'm one of the nine percent in neither category.)  

The gap narrows in the 1970s, but observe  the lower graph, which is of real wage growth.  Real wages stopped growing in 1973.  The reason the wealth inequality declines during the 1970s in the upper graph is that the stock market was falling in the 1970s. Hence, the decline in wealth inequality during the 1970s is a measure of joint pain and only of theoretical importance.  The solution put forward by Richard M. Nixon in 1971 was pumping money into the economy via the Federal Reserve Bank. 

The pure paper money system established in 1971  helped the wealthy but not the majority.  Notice also that the third-most-rapid increase in wealth inequality, according to the upper graph, occurred during the Reagan administration. It began to solidify during the Bush I years, 1988-1992; it remained constant during the Clinton years; then, following the tech bubble bust of 2001 it escalated during the Bush II years, which were the years of the second-greatest gains in wealth inequality.  However, Bush and Reagan were pikers compared to Obama, who oversaw the most massive wealth transfers, which followed the 2008 crisis via the expansion of the Federal Reserve's balance sheet, the creation of massive amounts of reserve IOUs called Federal Reserve bank credit, quantitative easing, and so on. 

The lower graph tells a slightly different story.  Since the early 1970s, when the Fed was given a free hand to redistribute wealth via the creation of paper money, real wages have stagnated.  The GDP has continued to grow, although the meaning of GDP is questionable because it includes government spending and make-work projects that do not create value.  There is little difference between Democrats and Republicans.

King Bear versus Bullzilla

I subscribe to two newsletters with opposite predictions about the markets:  David Stockman's Stockman Letter and Steve Sjuggerud's True Wealth, published by Stansberry Research. Stockman is predicting declines in a wide range of markets, including tech and energy, while Sjuggerud is predicting bull markets across the board, but especially in tech and China. There will be a "melt up" (Sjuggerud's term) until a correction, which will occur perhaps 18 months from now.

The great investor Howard Marks, in his book The Most Important Thing, says that being right at the wrong time is the same as being wrong, and from a purely financial perspective he is right.   While I'm quoting aphorisms, one that is worth considering is "the trend is your friend." 

Sjuggerud doesn't appear to dispute Stockman's underlying theory:  The Fed and the current monetary regime are a long-term drain on productivity and economic well being, and the bubble economy it has created is little different from other failed bubble economies of the past, such as John Law's Mississippi Bubble in France in the early 18th century.  The ending of a long-term bubble of this kind will not be positive. It may mean long-term stagnation and declining job opportunities, as occurred in Japan, and it may mean a massive crash.

If the trend is our friend, I'm thinking that Sjuggerud's hypothesis is right in the short-run while Stockman's is right in the long-run.  Tech and similar investments will do well until they don't.  The trick is to gain at least something from the short-term bubbles and to get out while the going is good.

The last tech bubble saw the Nasdaq rise to unprecedented heights. According to Wikipedia: "It reached a price-earnings ratio of 200, dwarfing the peak price-earnings ratio of 80 for the Japanese Nikkei 225 during the Japanese asset price bubble of 1991." It's impossible to know just when a bubble will burst, but it seems to me that the current Nasdaq price-earnings ratio  of 18.6 allows leeway for a bubble to proceed.  It is true that the prices of today's glamour stocks are at nosebleed levels, but the general market has a ways to go.  

Clive Crook's Groupthink

I stayed in my apartment in Astoria, Queens last night because of a dental appointment this afternoon.  Because I keep basic cable there, I watched the mainstream Bloomberg news channel.  Luckily, David Stockman was on.

Stockman has written an interesting book, The Great Deformation,  in which he predicts a collapse of the dollar and advocates a gold standard.  Stockman's prescription is contrary to the preferences of Wall Street, Bloomberg LP, big businessmen, and bankers. However, it is not outlandish.  Without Stockman's insider knowledge of the Reagan administration, I advocate the same ideas; I am delighted to see him on mainstream television.

The program involved former Reagan official  Stockman debating Bloomberg's Clive Crook, a good-looking journalist with an English accent.  Crook says that he likes some of Stockman's analysis, but he longs for "the old David Stockman" who was mainstream and did not advocate outlandish ideas like  dissolution of the federal government  and a gold standard.  Crook was dismissive and insulting; his argument was ad hominem and unsubstantial.  Instead of saying why he thinks that a gold standard won't work, Crook claimed that by advocating a gold standard Stockman placed himself outside the mainstream.

Most good ideas are rejected at first. Nikoa Tesla was told that AC electricity was a perpetual motion scheme; talking pictures were thought to be a fad, as was television.  Who cares if the US establishment, which has created the current dismal social-and-economic situation, finds Stockman's ideas to be outlandish? Their failed ideas have destroyed America's progress.

Anyone who has studied group dynamics knows that Crook's tactics are characteristic of groupthink.  All groups depend on conformity.  Although the pro-Fed establishment is not a small group in the same sense as the jury in Twelve Angry Men, it is a group with norms.  The historical record of the current financial system has been poor all along. The Fed caused the Great Depression; it caused the 1970s Stagflation, and Stockman is right: It has gotten worse since Alan Greenspan's appointment during the Reagan years.

Because the in-group faces a great loss if it loses the Fed or sees restrictions placed on its ability to print money for itself, it needs to defend the status quo. Rather than defend the indefensible, Crook applies power-and-influence tactics aimed at silencing Stockman.  

In a sense, Crook is right: Stockman's ideas are irrelevant to the current group in power. This includes both Democrats and Republicans.  When the Fed was established in 1913, the founders did not anticipate abolition of the gold standard. An argument for abolition of the gold standard would have seemed irrelevant to Woodrow Wilson, who had been a gold Democrat (he did not vote for William Jennings Bryan in 1896).   Twenty years later FDR abolished the gold standard.  The reverse can occur today. 

David Stockman Rails at GOP Incompetence

Last month I gave a talk at the Kingston-Rhinebeck Tea Party.  I pointed out that the GOP's commitment to the Fed has permitted the flourishing of a wide range of special interest groups. In turn, the Fed engenders income inequality, American economic decline, especially in manufacturing, and Wall Street's expansion.  Howard S. Katz has been making these points since the 1970s and earlier, and they key off the Austrians  Ludwig von Mises and Murray N. Rothbard.  Ron Paul and his son Rand make similar points as well, and they should be viewed as the leaders of the political movement that aims to undo the massive damage that the the parties of the elephant and the donkey have caused (the Democrats are worse than the GOP).

Marketwatch's Paul B. Farrell reports that the cornerstone of the legacy media, the New York Times,  has published David Stockman's article making these points with the clarity and specificity of an insider with important historical knowledge.  Stockman was President Reagan's budget director who lost a battle against Reagan' supply siders.  Stockman argues that the GOP destroyed the American economy in four steps:

1. Richard Nixon's dropping of the gold standard at the behest of Milton Friedman and his defaulting on the American obligation to redeem dollars for gold internationally

2. President Reagan's neo-Keynesian doctrine of supply-side economics

3. The expansion of Wall Street and the recent expansion of the money supply

4. The financing of American credit through foreign debt, resulting in increasing income inequality and the exit of factory jobs.

I have made all these points since 2004.  Stockman is specific as to much of the historical detail.  The Marketwatch article is well worth reading.  Stockman notes:

"the top 1% of Americans -- paid mainly from the Wall Street casino -- received two-thirds of the gain in national income, while the bottom 90% -- mainly dependent on Main Street's shrinking economy -- got only 12%. This growing wealth gap is not the market's fault. It's the decaying fruit of bad economic policy."

That the GOP continues to support the stupid policies of the Rockefeller-Bush Republicans contributes as much to American decline as do Obama's policies.  While the Democratic Party is lost, the GOP should serve as the rational alternative. Instead, it has followed the ideology of the Democrats into big government extremism and economic decline.  When questioned about the Patriot Act, many Republicans simply spin and lay the blame on President Clinton.  The large circulation legacy media contribute to the absence of mass level debate.  Stockman's recent article conveniently appears in the Times a year after the massive bailouts and money printing escapades (chiefly under the Democrats, incidentally) that may have put the nation's collapse into third gear.

Those Democrats who wish to make partisan hay out of Stockman's Op Ed might consider that the only people making these arguments for the past 40 years have been Republicans.  Which does not mitigate the ill effects of Milton Friedman and his colleagues in academia along with the Rockefeller-Bush Republicans.