“The magician and the politician have much in common: they both have to draw our attention away from what they are really doing” – Ben Okri
A good friend recently passed along a pew research report showing that the wealth gap between whites and minorities (namely blacks and Hispanics) had increased with the onset of “the Great Recession.” The findings are interesting, and can be seen in greater detail at the above link. Basically, the bursting of the real estate bubble took a much harsher toll on median wealth of blacks and Hispanics, versus whites.
As can be expected, the report is fodder for those who claim that the system is rigged (it is, by the way, but not the way they think) and that racism is alive, well, prevalent, dominant, and unmitigated in the United States. We’ll get to silly class-warfare arguments later. First, we have to discuss what is really driving this whole mess.
Richard Cantillon was a French economist in the early 1700s, and the namesake of the “Cantillon Effects” – a description of the market distortions caused by inflationary monetary policies. Effectively what Cantillon argued, and what is demonstrated quite clearly throughout history, is that the creation of new “money” (e.g., printing), which is the appropriate definition of inflation, and the resultant price changes, which we will call price inflation, do not happen simultaneously or evenly throughout the economy, and prove to have a unequal impact on various groups in the “food chain.”
Consider a simple example (I’ll borrow from one of Ron Paul’s favorite descriptions of the process – though I’m quite sure he borrowed it from Mises or even Cantillon himself). The government, on a whim, doubles the money supply by printing more (inflation). Because of the excess money, people are bidding more for the products they purchase, which drives up prices through the simple operations of supply and demand (price inflation). While the inflation happened immediately, the price inflation happens only over time as the new money trickles into the economy. Whoever had that money first (the bankers and politically connected cronies) got to spend the new money at the old prices. The rest of the schleps had to make due with their current money (and current wages) as prices rose. Eventually that price increase trickles into their wages and we find a new equilibrium. However, in the intervening disequilibrium time, those with first access to money made a windfall at the expense of those with last access.
Now, what if the system is designed to inflate the money supply on a continual basis? What if the generators of money (or, as we like to call it, “Federal Reserve Notes”) had a policy of intentionally inflating the money supply by something like 2% a year? There would be a continual transfer of wealth from the poor to the rich, from the politically obscure to the politically connected. Sound familiar?
Those with first access to new money continually reap financial benefits that are to the detriment of those at the end of the line. The system is rigged. As we noted a few weeks ago, this is a system of unjust weights and measures (see Just Weights and Measures … and Money), and is a rabid injustice. It is used by the powerful to oppress the weak. The Bible has clear warnings against such nonsense – warnings that don’t seem to impact our political system just yet.
Ask yourself this, in the great credit bubble blown by Alan Greenspan and then Ben Bernanke during the housing “boom” who made out and who got wiped out? The bankers did fine, first with profits and then a massive taxpayer bailout (don’t get me started). Those who already owned houses did great. Those who were coming into the game at the very end, the ones with the least capital to offer and the worst credit ratings, got destroyed. Those with first access to money made out while those at the end of the line got wiped out.
Or how about this – the top 1% wealthiest Americans owns almost 43% of the “financial assets” (stocks, bonds, etc.). The top 5% own 72% and the top 10% own 83%. (see post by Charles Hugh Smith for more.) When the federal reserve pushes interest rates to artificially low levels, inflating the money supply, making your savings less valuable, and forcing you to feed your family in the face of stagnant wages and price inflation – who benefits? Well, the stock market goes up if for no other reason than speculation. Hmm, seems like most of that windfall goes to the wealthy, does it not?
Racial inequality in wealth distribution is merely a correlation to the real, underlying phenomenon. The political class and banking class are cleaning up at the expense of the poor and working class. That there is a racial divide between these groups is the reason that there is a racial divide in wealth. It isn’t a grand racist conspiracy (well, maybe it is, but if it is then the victims are unwittingly contributing to the plot).
Don’t fall for the class-warfare rhetoric around this. The way around this problem is not, not, not government intervention and regulation. They’re the ones that caused this problem, and they are the wholly-owned subsidiaries of the political and banking class. They’re not about to scuttle the system.
Don’t fall for the marginal tax rate arguments here. The top federal tax rate is 35%, the bottom is technically 10% though there are plenty who pay zero percent or even a small negative percentage (credits). To think that the wealth gap in America is caused by these rates is absurd. Somehow the top wage-earners have gotten away with paying an paltry 35% and that’s why they rake in so much cash. Are we to believe that the only way to fix the wealth divide is to tax the top wage-earners at 50%? If that’s true then poverty and despair amongst the masses with concentration of wealth and power in the few is the natural state of man. Of course, the wage earners and the wealthy are not the same people – Warren Buffet doesn’t pay anything like that 35% rate since his income isn’t a wage.
There is a problem in the tax system, that is for sure – but it is the hidden tax of inflation, which is devastating the poor and working class to the benefit of the elites (not the high wage-earners mind you, but the powerful, wealthy class).
The most coherent political movement attempting to address the root cause of these issues is the Tea Party. (I would say the Libertarians also, but honestly they have joined the Tea Party – haven’t they?) It is not social programs and government interventionism that will fix this. The class warfare rhetoric is simply a distraction, as noted by Ben Okri in our opening quote. The system only gets fixed when we stop the poor-to-rich transfer induced by monetary inflation.