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.

The Superbubble and the Wisdom in Owning Gold

Gold Prices Since '08--An 18-Month Stagnation Mirrors the 1983-2001 Era

Money Supply M1:  Obama Meant Change

Monetary Base--Can Be Expanded Tenfold  from Here

I have been subscribing to Przemyslaw Radomski's Sunshine Profits newsletter for four or five months. One of his Kitco articles is here.  He is a capable technical analyst who is predicting a gold-price turnaround. His short-term predictions may be correct, although there’s reason  not to be surprised if there are a few years of a hiatus in gold’s movement upward (the current hiatus has lasted 1.5 years, as the top chart indicates). Even if Radomski is right and gold rallies this year, there could be a several year stale period before another epic-scale rally occurs. That's not to say to sell gold because the Federal Reserve Bank and the federal government have led America to an unstable, casino economy.  Because the US monetary system is unstable, gold is a hedge.

If fundamental political and monetary patterns don’t change, then gold can see a much larger long-term upswing than the six-fold-or-so increase that has occurred over the past 10 years.   From 1981 to 2001 there were fundamental bullish reasons to buy gold, but the Reagan, Bush I, and early Clinton years' monetary expansion caused lower commodity prices. Gold’s price fell to a low of about $250. This occurred because Federal Reserve money printing increased competition among miners as well as manufacturers.  Mining competition increased supply just as the supply of consumer goods increased, resulting in intermediate-term price depression. Also, the Chinese absorbed American inflation by demanding dollars to buy treasury bonds.   

The Chinese policy continues, and now we see a new monetary expansion under Obama that dwarfs the Reagan-Clinton-Bush expansion (see the second and third charts above).  If the Chinese policy changes, or the initial depressing effect on commodity prices from the Obama monetary expansion ends quickly, a larger bull market can occur in gold in the intermediate term than occurred from 2001 to 2011.  

The 1980s and 1990s economy was something like the 1920s, with monetary expansion funneled into stock-and-real-estate bubbles rather than price inflation.  Because the prior, 30-year monetary expansion mutes the effects of the three QEs, and the Fed added the QEs to the 30-year expansion with no reallocation or liquidation of the (distorted) real economy, in the coming years we can expect larger bubbles or larger inflation than we’ve seen in the past.  Either may augur well for gold once a shakeout in the mining sector occurs.

Let’s say natural gas fracking and shale oil cause energy price declines. The result can be a more expansive economy.  Let’s say the Fed is reluctant to withdraw the bank credit and monetary base that it has created. (The money supply –M1—has gone from $800 billion in ’08 to over 2.4 trillion now, while the monetary base has gone from a little over $800 billion in ’08 to over $2.8 trillion now, as per the two above charts.)  In that case, the monetary base can be expanded so that the money supply is up to 10 times the monetary base. That will occur in an inflationary period. In other words, the $2.8 trillion in monetary base can become $28 trillion in money supply, leading to a more than tenfold increase in the supply of money.  

That’s not all because, first, the US federal debt is currently $16 trillion, $5 trillion of which is held by foreign holders. Let's say the US economy continues to stagnate. At some point there may be a panic in US debt.  If so, there will be sales of dollars in exchange for other currencies and assets, resulting in a large inflow of dollars into the US.  Also, according to this Fedral Reserve Bank report:  “Estimates by the Federal Reserve suggest that as much as 60 percent of the $760 billion in U.S. currency outstanding at the end of 2005, or roughly $450 billion, was held outside the United States.” In the event of a run on the dollar, large dollar holdings can be repatriated through demand for exchange at banks and purchases of US assets. The result will be a dollar collapse. 

Hence, holding gold along with  other non-dollar assets such as stock has a diversification rationale.  The Fed's hyper-expansion is having the same effect on the stock market that the 1983-2000 expansion had, but the economy is much worse off in terms of misallocation of resources.  In the past, monetary bubbles and their concomitant asset bubbles and inflation were followed by contractions, but that has not occurred;  Obama and Bernanke have invented the superbubble.

Investors are no better off than they were in 2003 and 2007, and the stock market is at similar levels.  Interest rates are near zero.  Although the Fed has caused valuations of future earnings to increase to nearly infinite levels, causing the stock market to escalate, stock market prices are constrained by the availability of money to invest.  Will banks continue to pump up the stock market in a kind of Ponzi scheme whereby the Fed prints money, uses it to buy treasury bonds, and the banks then use the printed money to pump up the stock  market?  Alternatively, can foreign investors carry the US stock market to ever higher levels?   It is not at all clear that the current stock market valuation is more than one more peak in a secular bear market that began in 2000.

Another problem with the stock market is that during periods of uncertainty, there can be sharp falls in valuations.  If, for example, there is a currency collapse, the stock market might fall because of the risk.  Hence, we see the wisdom in owning gold.

If You Are Profiting from Wall Street's Current Merger Boom, Then the US Government Works for You

The Democrats claim to be the party of the poor, but if you have been following my blog you know that is pap.  Since November 2008 the economy has done poorly for the average American.  According to the Bureau of Labor Statistics, unemployment is 9.6 percent. Americans on Social Security saw no increase but local taxes increased, leaving them short.  Inflation, at 1.1 percent, has been modest, but people are beginning to suspect inaccuracies in the BLS numbers.  I hear complaints about food prices' going up.  In any case, there is no reason to think that anything will reduce the unemployment rate in the near future.

Thus, the stimulus and the bailout have failed to produce significant results.  This is not surprising. Keynesian policies failed during the Great Depression as well.  Pundits assert that as a result of the recent failure of the Bush-Obama policies (failure on paper, not in their intent, which is to help Wall Street, not to reduce unemployment), Larry Summers and Rahm Emanuel have handed in their resignations.

One of the Bush-Obama strategies has been to massively expand the monetary base and the money supply.   The argument for this policy is monetarist, and the monetarists don't differ much from Keynesians. Both believe that printing money can beneficially stabilize the economy.  Neither accedes that the new money is a wealth transfer device to Wall Street.

Forbes reports that the wealthiest Americans have gotten wealthier this year.  The wealthiest among them are Warren Buffett and Bill Gates, both of whom are Democrats.  According to the Los Angeles Times mergers and acquisitions are at an all time high.  A guest on Bloomberg radio today was saying that Wall Street has never had a better year.  Although this is never stated in the Wall Street-controlled media, Wall Street's economic flourishing depends entirely on the Federal Reserve Bank. It is not attributable to free markets and it is not capitalist.

The Wall Street investment banks and law firms are profiting handsomely due to the Fed's monetary creation and the Bush-Obama administration. The merger activity is directly due to the administration's new money.  It has had no hand in reducing unemployment, in improving the economy or making the public better off.  Rather, it serves to harm the economy by reducing competition and paying commissions to bankers and Wall Street lawyers for destroying rather than creating wealth.

If you have seen a commission check or have a salary that depends on the recent expansion of merger activity, the US government is working for you.  If not, you are its patsy.

The Banking System Has Caused Economic Slowdown

The consensus argument (which is often wrong) is that the banking system has caused the current economic malaise. In general, recessions and depressions are monetary. The Great Depression was a monetary phenomenon. This time, the Fed has ballooned money supply yet the slowdown continues. Of course, it is likely that there is a lag, and in a month, two or three there will be a turnaround. The stock market, however, continues to fall. This may have to do with continued media publicity. If the lag or media publicity arguments do not turn out to hold, the culprit is the banking system itself, which is what I keep hearing.

Not that money supply is independent of the banking system. Much of the money supply is created by the banks. But if the money supply is the reason for depressions and recessions, there is an argument to maintain the current banking system--the Fed can counter panics and so fractional reserve banking's chief problem (the threat of runs) can be countered. But not if the banking system itself is faulty. Then the argument for the current fractional reserve system is attenuated. Then, fractional reserve banking is in part responsible for misallocation and slowdowns, and money supply (itself a product of fractional reserve banking) is only partly to blame. In that case, a clear thinking public (sans the New York Times, pro-bank "liberals" and the like) ought to ask why the the banking is perpetuated given its dismal performance.

Fractional reserve banking is a form of fraud and need not be legal. Bankers lend out more money than they have on reserve. For every one dollar deposit, banks lend out up to six additional dollars. These dollars are covered by incoming new deposits. The system is not far from a Ponzi scheme. New investment covers old loans. It works if borrowers come and go with regularity. The problem until the days of the New Deal was that they frequently did not. There would be "runs", banks would falter and depressions would result.

Without fractional reserve banking there would be more savings and less economic activity. The economic activity that occurred would be more rational than it is with fractional reserve banking. Over time, better projects would be built and there would be more innovation because investors would be more focused on rational investments. This would stabilize economic outcomes over time, as more good ideas were implemented as were fewer bad ones. There would be less reckless depredation of the environment as unnecessary housing and manufacturing would be cut back. Higher unemployment levels over the intermediate and perhaps long term could be subsidized through relief, just as it is now. Interest rates would be higher and more people would save. There would be less or no inflation (and perhaps deflation) so people planning for retirement would not need to rely on the stock market. Savings would generate adequate returns for retirement. Better investment would be made, so that statistical economic growth might be slower but substantive economic growth would be much faster. The difference to which I'm alluding, satistical versus substantive economic growth, is that statistical growth includes garbage investment like sub-prime housing and public schools that do not produce value. Substantive economic growth would include private schools that do produce value and housing that people really want.

Banks need not be permitted to lend more money than they have. The argument for doing so is economic growth. But the argument against it is the rape of America's retirees; and the stifling of innovation caused by the misallocation of credit and irrational turns in the economy due to banking panics--on the part of bankers themselves.

Future Taxation and Paper Money Expansion in the Revolutionary War

Benjamin Franklin advocated paper money and monetary expansion in his essay "A Modest Inquiry into the Nature and Necessity of a Paper Currency." John H. Wood in the Chicago Fed's Economic Perspectives tells that Franklin advocated inflation but that:

"Afterwards, however, in that most candid of autobiographies, Franklin suggested that his motives might not have been altogether altruistic.

"'My Friends [in the Assembly], who conceiv'd I had been of some service, thought fit to reward me by employing me in printing the money; a very profitable jobb and a great help to me.'

"This monopoly, which Franklin retained until 1764, must certainly have been 'a great help'to the struggling young printer. He was also heavily in debt, another reason to favor a monetary expansion. Forty years later, however, Franklin, grown prosperous and now a creditor, observed that, "I now think there are limits beyond which the quantity [of currency] may be hurtful."

In an article that appeared in The Journal of Economic History (Vol. 48, No. 1 (Mar., 1988), pp. 47-68) Charles W. Calomiris notes that not only Franklin but also a number of the Federalists, to include Madison, Hamilton, John Adams, Gouverneur Morris and Robert Morris also supported paper money expansion in the mid 18th century. In fact, although paper money was invented in China, its modern application was invented in America. The British discouraged acquisition of gold specie in America, and many contemporary observers believed that there was a shortage of money.

Calomiris notes that in 1729, at the age of twenty-three, Franklin wrote "A Modest Inquiry into the Nature and Necessity of a Paper Currency,":

"a polemic supporting the creation of land banks in Pennsylvania. Franklin argued that the expansion of properly backed paper currency could have a lasting real effect on the aggregate stock of money and the extent of trade. Franklin focused on the favorable developmental consequences for a capital-poor, land-rich economy of being able to substitute paper for exportable specie. Franklin expounded on the virtues of multiple deposit expansion in Europe and the great saving enjoyed through fractional reserve banking and consequent reductions in specie hold-ings. The mortgage-backed currency issued by land banks, he reasoned, would be even more efficient because it would not direct any real resources to production

"Franklin argues that abundant money leads to lower interest rates, greater production, immigration, and special- ization by enhancing the rapid settlement of debts and by insuring that traders will always be able to purchase the bundle of goods they desire. Furthermore, in a currency-scarce economy, merchants who deal in foreign goods often are forced to pay wages and debts in kind from inventories, and thereby promote the consumption of foreign goods to the detriment of local commerce. In this context, land-backed paper money has a developmental "bootstrapping" role in moving the economy beyond a critical initial threshold which allows exchange and specialization to thrive...

"Franklin addressed opponents of land banks who claimed that an increase in money always led to inflation. He maintained that credible land-backed money would not be inflationary, in part because its creation corresponded to the earmarking of a set of real assets which backed it. The importance of backing in determining the value of money was extended by analogy to the government's use of its assets (future taxes) as a means of redeeming and giving value to its debts, including currency."

However, "Adam Smith argued that the demand for money-like debt depended not only on the backing of money, but on the sufficiency of the supply of competing liquid claims in the economy as a whole. He allowed money demand, as well as land or tax backing, to influence the value of money-like claims through the liquidity premium money enjoys." Smith did not look favorably upon paper money expansion.

Calomiris notes (pp. 47-8):

“Whether the colonies suffered a scarcity of money has been a topic of debate among economic historians. Throughout eighteenth-century America there were a wide variety of circulating media- foreign coins and bills, a trivial number of domestic coins, and private, colonial, state and continental notes. Specie import cost was inflated before the Revolutionary War by mercantilistic prohibitions and duties intended to encourage the flow of specie from the colonies to Britain... Colonial bills were restricted in supply by prohibitions and limitations originating in Britain, as well as by local government prohibitions of private paper issues and local limits on emissions of legal-tender currency. Parliament enacted its prohibitions at the behest of British and colonial creditors who saw in paper money a means to reduce the value of hard-currency debt. Some colonials complained that government regulations and government unwillingness to supply sufficient paper bills caused unnec- essary monetary scarcity” (pp. 47-8).

Like Pennsylvania, New York experimented with paper money inflation. Calomiris quotes New York's Governor Hunter (p. 48):

"I do affirm that since the circulation of these bills, the trade of this place has increased at least above a half of what it was."

"The currency stock valued in real terms at roughly 8 million Spanish milled dollars was viewed as a severe shortage in 1775, and the trebling of real balances from 1775 to 1776 due to state and continental note issues confirms the earlier potential for growth in real money balances" (p. 48)

"Pelatiah Webster's estimate of total specie and bills in America at the beginning of 1775 is $10 million (specie equivalent)." From May 1775 to November 1776 the states, acting individually, issued $18 million in currency to help finance the Revolutionary War but:

"The greatest source of increase in liquidity during the early war years, however, was the bills first authorized by the Continental Congress in May 1775. By the end of 1776, Congress had issued $25 million in continentals for which it received $21 million in specie value."

"The value of the promise to redeem continentals depended crucially on the ability and willingness of Congress to tax. Under the Articles of Confederation, however, only states had taxation authority, while both Congress and states could issue money and other debt. The redemption of continentals required the completion of the following chain of events: the war had to be won, Congress had to want to redeem its currency, the states had to be willing to transfer resources to Congress or to vest it with the power to tax, and the public had to be sufficiently wealthy and willing to be taxed" (p. 60)

"To contemporaries it was clear that the difference between the state and continental bills was the expected value of each for extinguishing taxes" (p. 61)

Ultimately "It's not worth a continental" became a popular expression as the federal Continental was redeemed at 2 cents on the dollar. Calomiris argues that where taxation was used to repay notes that served as paper money, extending the money supply was not inflationary. But where there was no backing of the paper money with increased taxation it was.

He goes on to quote Benjamin Franklin (p. 63):

“The general effect of the depreciation among the inhabitants of the States has been this, that it has operated as a gradual tax upon them, and every man has paid his share of the tax according to the time he retained any of the money in his hands, and to the depreciation within that time. Thus it has proved a tax on money, a kind of property very difficult to be taxed in any other mode; and it has fallen more equally than many other taxes, as those people paid most, who, being richest, had most money passing through their hands.”

In effect, Franklin is arguing for holding hard assets (land, gold, inventory, Lexuses) rather than cash.

Calomiris offers an interesting concluding observation:

"The financial legacy of the American Revolution was distrust of government money which, when combined with the struggle over private bank chartering privileges, contributed to the prolonged inadequacy of financial institutions in the United States. Critics of government monetary control cited the revolutionary experience as proof that governments could not be trusted to repay their monetary obligations. Such bitter opposition to government bill issues led to the prohibition of state bill issues by the Constitution. Federal powers regarding paper money creation were left deliberately vague by the framers as a compromise between those who advocated absolute prohibition and those who saw the advantage of occasional issues. While a small amount of government currency was issued during the War of 1812, only the financial exigencies produced by the Civil War led the government once again to create a substantial supply of paper money. The somewhat credible commitment to resume specie backing of greenbacks limited their depreciation, and the achievement of resumption in 1879 set the stage for a permanent government role in supplying paper money. Thus the displacement of the post-Revolution for a discussion of the constitutional debate over federal monetary powers."

Andrew Jackson Turns in His Grave

Howard S. Katz has posted two blogs on the growth of monetary reserves and Federal Reserve bank credit. Most economists now agree that the unemployment of the Great Depression was caused by a contraction of monetary reserves followed by popular insistence on maintenance of pre-existing wages. The "recovery" that stimulative monetary policy began to create in 1936 was stopped by further contraction of the money supply, resulting in new stock market lows and unemployment in the late 1930s. These problems were caused initially by monetary expansion in the 1920s by Benjamin Strong's Fed. The stock market bubble that led to the 1929 stock market crash was a monetary phenomenon. Likewise, the housing bubble of the past six years and the tech bubble of seven and eight years ago were all due to Federal Reserve manipulation. It seems that politicians can't keep their fingers out of the cookie jar. What irritates me is that the pissant media, from Fox to MSNBC, blames these problems on the "free market". If government control and manipulation of interest rates to stimulate bubbles is "free", then they are right. But unfortunately, our pissant media friends are ignorant of the meaning of the word "freedom" in America and American history.

Katz produces these charts:

I. Federal Reserve Bank Credit growth 130% since August(which apparently leads monetary base growth):



II. Monetary base growth: 20% since August:



Andrew Jackson turns in his grave at the sight of self-indulgent America, once the home of dynamic industrial growth, now the home of Wall Street beggars looting the public treasury while an ignorant public looks on.

Fed Increases Monetary Base by 16% in One Week

Howard S. Katz recently put this week's increase in the monetary base on his blog. The increase of over 16% in one week is historical. The United States increasingly looks like the Weimar Republic. Just one month ago I had a conversation with an economist who previously worked for the Fed. She insisted, correctly, that the money supply had not increased in several years (because foreign governments were monetizing our debt for us, creating an unstable monetary "game"). In just five weeks Ben Bernanke has proven her utterly wrong. The monetary base has gone from $888 billion on 9/11/08 to $1.74 trillion on October 16. In other words, Reserve Bank Credits increased better than 16% this week. This should double the money supply in the coming two years. This will cause inflation and a bull market in stocks, at least temporarily. However, there also may be dollar sales as foreign holders panic at this historic devaluation. A rocky road ahead. The chart and numbers follow.

Inflation Is More Important Than Taxes

The New York Sun rightly criticizes the New York Times for its monomaniacal obsession with raising taxes. However, the Sun is too sanguine about the Republican candidates' interest in lowering taxes.

While I do not gainsay that Republicans tend to support reduced taxes while Democrats tend to favor increasing them, and I agree that this is a mark in the Republicans' favor, I would add that neither party has been responsible about balancing the budget, reining in spending, or maintaining a steady money supply. In particular, the Republicans have been on a spending spree that has included a considerable taint of corruption. As well, the Republican administrations since 1980, as well as the Clinton administration, have aggressively expanded the money supply at a rate far faster than productivity and population growth warrant. The result has been a 3.7% inflation rate since 1979, and it has only been that low if you (as does the Department of Labor) exclude house prices. Including house prices, the Republicans have given us an inflation rate of over 4% annually over the past 29 years. This dismal performance should be an especially sore topic for New Yorkers, many of whom have been forced to leave the City because of escalating housing prices boosted by ever-escalating Wall Street salaries.

In turn, Wall Street's salaries do not result from Wall Street's market performance, nor from Wall Street's production of value, but rather from unrealistically low interest rates (which are the chief reason for the past 50 years' stock market growth); low interest loans to big business; and incompetently executed mortgage programs that have resulted from the low interest rates. The low interest rates are a government and public subsidy to the financial community. They are a form of welfare. If Wall Street created value, it would not whine every time the Fed raises interest rates. Firms that create value, unlike Wall Street, do not mind high interest rates because their value-creation and efficiency cover rising interest rate costs. Government agencies, commercial banks and Wall Street firms require government subsidies like low interest rates because they do not create value.

The inflated salaries and exit payouts to Wall Street executives and hedge fund managers come from the Fed's artificial expansion of the money supply. The past 29 years' orgy of liquidity has amounted to a large welfare transfer to the ultra-rich, resulting in stagnant real wages and the exit of mainstream jobs from the U.S.

As well, and more ominously, the Fed's monetary expansion has largely been absorbed by foreign governments, who now hold many times the total number of dollars in circulation in the US. Although the argument is made that there is no reason to think that foreign dollar holders will act against their economic interests, multiple large dollar holders (the Saudis, Europe, Japan, China, etc.) each with nearly or more than a trillion dollars who stand to lose significantly in case of a run is a desperately unstable situation. A run or crash in this market could mean hyper-inflation in the US. It is a fools' strategy, and the Republicans have led us to it, with the Democrats' complicity. I have never consented and had not been aware until recently that the money I use every day has been the basis for a large scale shell game that has provided unprecedentedly large payoffs to financial operators while the average American sees stagnant real wages.

Although the Republicans might favor a few percent lower taxes than the Democrats, we live in a dream world where both parties have ignored responsible household management. We risk the coming years to be dire ones because of our unwillingness to demand competence and fairness from our government, and our willingness to believe that counterfeiting dollars can make us wealthy beyond transferring wealth from the general public to debtors.