Tag Archives: Wealth inequality

Watch the Top 5%–They’re the Key to the Whole Economy, by Charles Hugh Smith

When the top 5% hold most of the assets, they have an outsize effect on the economy. From Charles Hugh Smith at oftwominds.com:

Go ahead and become dependent on asset bubbles and the free spending of the top 5%, and optimize your economy to serve this “growth,” but be prepared for the consequences when the costs of this optimization and dependency come due.

Here’s the problem with concentrating most of the income and wealth in the top 5%: the whole economy now depends on their spending and “the wealth effect” of bubbles driving that spending. As the charts below show, the top tier of households own the vast majority of the wealth and take home roughly half of all income, including virtually all (97%) the income derived from capital.

By inflating an enormous everything bubble, the Federal Reserve and other central banks have inflated the “wealth” of this top tier. This was of course the plan: by artificially inflating asset bubbles, the central bankers believed that those seeing their net worth expand would loosen their purse strings and borrow and spend freely: the wealth effect.

The problem with relying on the the wealth effect is that if wealth has concentrated in the top, then only the top will benefit. The bottom 50% own virtually no capital (see chart below) and the modest wealth owned by the bottom 90% generates a mere 3% of all income derived from assets (stocks, bonds, real estate, etc.).

Monopoly Versus Democracy: How to End a Gilded Age (foreignaffairs.com):
Ten percent of Americans now control 97 percent of all capital income in the country. Nearly half of the new income generated since the global financial crisis of 2008 has gone to the wealthiest one percent of U.S. citizens. The richest three Americans collectively have more wealth than the poorest 160 million Americans.

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This Is How It Ends: All That Is Solid Melts Into Air, by Charles Hugh Smith

A lot of things that looked sturdy and permanent crumble when things go south. From Charles Hugh Smith at oftwominds.com:

While the Federal Reserve and the Billionaire Class push the stock market to new highs to promote a false facade of prosperity, everyday life will fall apart.

How will the status quo collapse? An open conflict–a civil war, an insurrection, a coup–appeals to our affection for drama, but the more likely reality is a decidedly undramatic dissolution in which all the elements of our way of life we reckoned were solid and permanent simply melt into air, to borrow Marx’s trenchant phrase.

In other words, Rome won’t be sacked by Barbarians, or ignite in an insurrectionary conflagration–everything will simply stop working as those burdened with the impossible task of keeping a failed system glued together simply walk away.

If we examine the collapse of the Soviet Union and the Western Roman Empire, we can trace the eventual collapse to the sudden psychological shift from an assumption of permanence that found expression in denial (Rome can’t fall, it’s eternal…) or in the universal belief that life was unchanging and so everything was forever.

This psychological state was replaced by a shocked awareness that what was unimaginable, “impossible”–systemic collapse–was not only entirely possible, it was happening in real time. This change in consciousness arose in individuals in differing ways and velocities, but eventually everyone accepted that some adaptation was now necessary.

Correspondent R.J. and I have been discussing the consequences of the sharp decline in the value of labor which is painfully obvious in the chart below and the many other charts depicting the declining purchasing power of wages and the skimming of the majority of the economic gains by the top 0.1%.

In effect, it no longer pays to work beyond the bare minimum needed to survive as all the value generated by labor above this minimum is either skimmed by the Bezos, Buffetts, Gates, Zuckerbergs et al. or it’s paid in higher taxes to the government.

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As The World Burns, by Chris Martenson

If you haven’t thought about what would happen if mass social upheaval came to your area, it’s a good time to start. From Christ Martenson at peakprosperity.com:

Personal safety & security are quickly becoming more important in this era of growing social rage

Decades of unfairness are now boiling over in the United States in the form of protests, riots, burning buildings and violence.

Minneapolis is on fire – literally – and the unrest has spread to numerous other major cities.

Last year (2019) The Yellow Vest protesters in France dealt with enormous amount of police violence and intimidation as they put life and limb on the line to try and wrest better economic and living conditions for themselves.

The people of Hong Kong are back out in force again now that the Coronavirus threat has abated, seeking greater autonomy and control over their own lives. Last year (2019) Chileans also protested, seeking better wages and living conditions.

While the specific demands of each of these movements are unique, they all share common causes.

Our analysis at Peak Prosperity is this: the days of constant exponential growth on a finite planet are drawing to a close. All of the systems that govern the sharing of resources among humans – political, economic and especially financial – are designed to concentrate, not share, wealth.

Taken together, we have an economic pie that is no longer growing but is subject to a set of laws and financial predation that guarantee the wealthy get more than their fair share of what remains.

This leads to increasingly visible, palpable unfairness.

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Dalio: “The World Has Gone Mad And The System Is Broken”, by Ray Dalio

Ray Dalio runs one of the world’s largest hedge fund complexes. He offers a good diagnosis of the world’s very sick financial system. From Dalio at Linkedin.com via zerohedge.com:

I say these things because:

  • Money is free for those who are creditworthy because the investors who are giving it to them are willing to get back less than they give. More specifically investors lending to those who are creditworthy will accept very low or negative interest rates and won’t require having their principal paid back for the foreseeable future. They are doing this because they have an enormous amount of money to invest that has been, and continues to be, pushed on them by central banks that are buying financial assets in their futile attempts to push economic activity and inflation up. The reason that this money that is being pushed on investors isn’t pushing growth and inflation much higher is that the investors who are getting it want to invest it rather than spend it. This dynamic is creating a “pushing on a string” dynamic that has happened many times before in history (though not in our lifetimes) and was thoroughly explained in my book Principles for Navigating Big Debt Crises.

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The End Of Money, by Chris Martenson

There are far more claims on wealth and production than there are wealth and production to service them. From Chris Martenson at peakprosperity.com:

Prepare for the coming wealth transfer

Today we live in a two-faced economy: it is boom times for some and bust times for others.

Your personal situation depends largely on how close you fall on the socioeconomic spectrum to the protected elite class, towards which the central banks are directing their money-printing firehoses.

Why should we care about this bifurcation? History.

2,000 years ago, in Plutarch’s time, it was already ‘old wisdom’ that unhealthy wealth imbalances ended badly for society:

Plutarch quote

Even those near the top of the wealth pyramid don’t aspire to live surrounded by an impoverished underclass, forced to live hiding behind their fortifications and guards, hoping the unrest of the masses doesn’t get any worse.

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The “Working Rich” Are Not Like You and Me–or the Oligarchs, by Charles Hugh Smith

Charles Hugh Smith’s hypothesis about income inequality is probably all wet, but he makes some good points about the working rich, wealth, and taxes in the US. From Smith at oftwominds.com:

Rising income inequality may be a reflection of the changing nature of work.

F. Scott Fitzgerald’s story The Rich Boy included this famous line: “Let me tell you about the very rich. They are different from you and me.” According to a recent paper published by the National Bureau of Economic Research (NBER), Capitalists in the Twenty-First Century (abstract only), the “working rich” are different from you and me, and from the Oligarchs above them who pay little in U.S. income taxes due to offshore tax havens and philanthro-capitalist tax avoidance scams.

Before we start complaining about the rich not paying their fair share, let’s note that the top 3% of taxpayers–mostly “working rich”– pay more than 50% of all income taxes. The latest available IRS data is from the 2016 tax year, as reported by Bloomberg: Top 3% of U.S. Taxpayers Paid Majority of Income Tax in 2016.

The top 1% paid 37% of all income tax collected,the top 5% paid almost 60% and the top 10% paid about 70%. What’s striking is the progressive nature of taxes compared to the income of each bracket: the top 1% earned about 20% of total income but paid 37% of the income tax, the top 5% earned 35% and paid almost 60% of the income tax and the top 10% earned 46% of the income and paid 70% of the tax.

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