Socialism is a Kneejerk Reaction to Rising Income Inequality but Does Nothing to Address the Root Cause

Recently I stumbled across an LA Times story entitled: America's Explosion of Income Inequality, in One Amazing Animated Chart. The chart shows what many of us know, there is rising income inequality, but beyond a huge picture of Bernie Sanders to start off the story, does little to identify a solution. I actually appreciate very little meaningful commentary; the data point is quite enough as long as you're willing to do your own research. And while the Sanders pic was a thinly veiled hat tip to the author's solution, Socialism, he did nothing to address the root cause. Luckily I had done my own research, and feel confident that I know the cause and thus I should be much more equipped than the author to determine the best solution. Instead of making a snarky comment I took the opportunity to reach out to the author with the email and questions below.



Michael,

I wanted to address your story on rising income inequality in the United States. It is implied, if not stated, that the solution to rising income inequality is to implement reforms to the entitlement system to redistribute this wealth, as is touted by presidential candidate Bernie Sanders. To address your three points, of course income inequality exists, it is as bad or worse than many realize, and at these extremes it is not good for our society, but redistributing this wealth through taxes and social programs (socialism), while understandably tempting, is merely a Band-Aid seeking to correct the problem before understanding it. We must first ask the question why are the rich getting richer more quickly than the common man? Below I will outline that the problem lies with our monetary system, not with capitalism itself.

Under our debt based monetary system total debt must grow at a certain rate based on the interest accrued the year before. The money supply and economy (national income) normally also grow but at a slower rate. This sets up a condition where eventually the total national credit market debt cannot be serviced by the national income. This growing divergence is outlined by the below chart.


During the years between 1981-2008, whenever the total debt would reach the limits of the economy the criteria would be changed. More specifically the interest rates would be manipulated lower by the Federal Reserve to spur economic participants to take on more debt. More than anything else this debt was used to buy assets, causing asset price inflation, and in turn, asset bubbles. Who owns these assets that saw tremendous increases in value? The rich.

In 2008 this game of decreasing interest rates to keep debt growing, as required by our monetary system, ran into a snag. An asset (housing) bubble burst, and the Fed dropping rates to zero was not enough to reflate the bubble. Debt stopped growing and actually shrank. This is a big no no for a debt based monetary system, shrinking debt will cause a debt based monetary system to destroy itself. I'm sure you heard that the financial crisis nearly destroyed the world financial system. This destruction was nearly caused by the very small drop of total credit market debt that had been rising on a nearly perfect exponential curve for decades as shown in the above chart.

To get things headed in the right direction the central banks of the world had to introduce a new tool, quantitative easing or QE. With this program the Federal Reserve created 3.5 trillion new dollars and traded them for mortgage backed securities (MBS) and government bonds forcing their price up. Who owns a disproportionate amount of MBS and government bonds? The rich.

Once the rich got ahold of this new money what did they buy? Other things the rich like to own; stocks, high end real estate, and art, all of which also skyrocketed in price adding to income inequality. If the Fed had used the newly created trillions to buy commemorative plates, boxes of old clothes, and couch lint, the high levels and increasing income inequality of the past several years would have been non existent, and likely would have reversed, not that that would have been the correct solution.

QE has ended in the Untied States which now only has ultra-low interest rates supporting asset bubbles in stocks, bonds, and real estate, although, QE is still at record levels in the EU and Japan.

My contention that those who own assets have benefited from the efforts of the central banks is also supported by a quote you referenced. "Older Americans were the biggest gainers by far in terms of their progression up the income tiers during the current century, and also when compared with the start of the 1970s....The group aged 18-29 has seen the biggest slide." Even if in the same employment income bracket as a younger worker, older workers, who are naturally wealthier from a career in the workforce, are going to see much more income from assets in the form of interest and dividends.

To address QE adding to the income inequality there has been talk about "QE for the people" also termed helicopter money. But while it may help ease some of the direct QE injection into wealth inequality, it does not address the flawed and failing monetary system. Core inflation (very damaging to the poor and middle class) would also be effected by helicopter money more than traditional QE.

When I have inquired to those who are Sanders supporters, what has caused the income inequality, they often simply say capitalism. And while capitalism naturally causes inequality as a feature of the system that allows it to function, it currently is not acting alone. Our current monetary system was created by a certain segment of the affluent, namely the banks, for their own gain, we cannot be surprised when they benefit. Actually perpetuating this system is now a question of survival for the banks, not just profit.

Why do you think income inequality has increased so much in recent years? What are the mechanisms that have caused it? How would you address those specific causes?

While I believe Bernie is an honest man, his tire patch of a solution without addressing the root cause is childish and ignorant. We must address the root cause of the problem not its symptoms.

Thank you for shining more light on this important problem. Feel free to reply or address my points in a future story. Please let me know if you pursue the latter.

Thanks

The Reset

2 comments:

  1. An excellent explanation. I don't imagine than Bernie responded. I have yet to hear a politician address this problem (not even Ron Paul, though he did open many eyes to some of the issues re: central banking), because understanding this would mean admitting that the governments are in bed with the bankers in this con game.

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