Increased Wealth Inequality: A Diversion For Something Else?

By John Schroder - June 14, 2015 
There has been quite a bit of press coverage recently regarding the wealth demographics globally, or we perhaps should say the focus has really been more on the growing inequality. The US and UK especially have been highlighted for changes in wealth distribution statistics over recent years, and recent reports issued in early 2015 claim that the wealthiest 1 percent will own 50 percent of the world's wealth by 2016. Another recent news headline claims that 85 of the richest people in the world will have more wealth than 3.5 Billion of the world's poorest. But of course to be fair and quite clear, the term wealth differs very much from income or earnings and it is indeed an important distinction.

Wealth of course includes assets such as equities (stocks), fixed income investments (bonds), real estate, works of art and a plethora of other assets as well. And in addition, for the purposes of these reports, in reality the calculation is for assets minus liabilities or debts. In other words, if someone owns the equivalent of US$10 Million worth of whatever kind of collective assets (often enough on paper only), but has that same amount of debt, they are not wealthy but rather net out to zero on their own balance sheet. So, true wealth in this context refers not to people who might be mere Billionaires on paper, but quite solvent individuals with unencumbered assets (meaning no debt or liens against such assets). And this definition of course can narrow down the pool quite a bit. In fact, there have been a few occasions whereby Donald Trump commented that the unemployed guy on the street corner begging for change (with perhaps a few dollars worth of coins in his cup) had a higher net worth than he did, and technically he was correct at different points in his career. Of course that did not change the fact that Donald Trump was certainly not wanting for his next meal nor that the homeless guy was no longer homeless either.

With regards to this increased wealth inequality we are now seeing, we would simply ask why are the well off even more well off than they were a few years back? Who or what is to blame for this occurrence? Is it honestly true that a cabal of wealthy people are sitting around plotting to make themselves wealthier and everyone else poorer? Who really are the rich? How many of them exist in the world? If OXFAM International is correct, there are only 85 extremely mega-wealthy people in this world that need to be, shall we say, assessed. But, there were supposedly 388 such people back in 2010, which baits the question: where did they go? Has the economic crisis hit and hurt them too? The London based firm Wealth-Insight reports there are about 10,000 ultra wealthy people in the UK, which is defined as someone with 20 Million Pounds or more worth of assets. In contrast, the US supposedly has about 40,000 such mega wealthy people, Germany about 12,000 and Switzerland about 5,500. Of course it is also reported that the wealthiest one percent in the US enjoyed 95 percent of economic growth since 2009, while the bottom 90 percent became poorer. But if that is true, the question again becomes how and why was this somehow accomplished? Did the top 10 or 20 percent of income earners band together to plot a secret wealth confiscation conspiracy or was all this income disparity really caused by something else?

Focusing in on the central bank policies to address the so-called 2008 Great Recession (or whatever other moniker you want to provide), the US Federal Reserve Bank wanted to re-inflate the US housing market bubble. Why? Because that would alleviate the problem of banks holding mortgage loan balances against real estate valued at less than the mortgage loan (in some cases) or in the least bring the housing values back up to repair the loan to value ratios on their books. Likewise financial instrument purchases (bonds, mortgage backed securities and other kinds of financial instruments) and seemingly semi-permanent zero interest rate policies were all meant to provide balance sheet relief to the various banking and financial firms staring down the barrel of insolvency. But the side or secondary effects of all these things have been the creation of a US Dollar carry trade, higher stock market valuations, re-inflated housing prices, a bond market bubble, plus loss of interest income for buyers of fixed income securities (pension funds, retirees themselves). Mr. Josh Bivens of the Economic Policy Institute opines that: While the Fed drove up stock prices, most of which are owned by the wealthy, it also increased the value of housing, which is mostly owned by the middle class. So, in short, these central bank rescues of the financial sector indirectly benefited owners of real estate and equities, which tend to be assets more likely to be owned by the somewhat more affluent (let's face it, poor people are struggling to pay the electric bill and are not concerned about buying up shares of Coca-Cola or Microsoft).

But we also wish to call attention to this term of affluence, which can be very subjective all depending upon the comparisons being made. Is the owner of a home in a middle-class suburb affluent? He or she might be in comparison to the homeless individual but certainly not so when we compare him or her to a software company billionaire.
Severe extremes or divergences involving wealth or income levels can be a very dangerous thing both economically and socially for any society. And usually when we see a country or economy containing a very large and growing middle-class, we see general prosperity and an optimistic group of citizenry that believes opportunity exists to better themselves financially. In contrast and even more dangerous is the case of a country that is losing it's previously economically comfortable middle class, at least with regards to potential social issues. Obviously everyone wants to do better financially, but when they lose what they have or had, that is when the trouble begins.

On that note, there has been a growing number of social – political movements over the past few years to protest against what is perceived to be a form of proactive income inequality seeking activities by the top tier of wealthy people in the world (occupy wall street and similar movements come to mind). And such vocal activism lends support to politicians and journalists as well that want to lead the charge in campaigns to eat the rich, so to speak. Of course for those that feel disenfranchised, this is an easy sell or a very convenient scapegoat diversion. Politicians and Central Bankers get off the hook for their own foolishness or even incompetence and a specific social group is declared the guilty party regarding economic stratification. However and unfortunately, the result is a call for higher forms of income taxation on the so-called wealthy or higher wage earnings in general, perhaps higher taxes on those that might own real estate or other assets and a call for renewed vigor regarding cross border tax reporting as well. But there seems to be a disconnect between the public anger and whom really is to blame for all this inequality. And in our opinion, the very same guilty parties are to blame regarding why social welfare safety net systems across the board in many western governments are either underfunded or completely unsustainable as they currently exist. Ditto for various legislated incentives that have motivated manufacturing and other jobs to go elsewhere. The key term here is legislate, as in our esteemed and supposed learned politicians or wise leaders (central bank higher echelon come to mind also) theoretically charged with a fiduciary responsibility to safeguard and manage the public (read government) finances.


But getting back to those portrayed as villains in the media (social and in print), Ms. Suzanne Moore wrote a January 19, 2015 article for the Guardian Newspaper whereby she claims that inequality isn't inevitable, it's engineered. Ms. Moore goes on to opine that: The rich, via lobbyists and Byzantine tax arrangements, actively work to stop redistribution. Redistribution? Where oh where does it state in any western nation's constitution that the government exists to act as the promulgator of an extortion racket? Why would anyone in their right mind believe it sound and sensible for any government to forcibly take away the legally earned income or wealth of it's citizens? Programs to help those that may need it and cannot fend for themselves are noble and one might say necessary in a fair and just society. Taxes of course must be paid to cover the basic operating costs of services such as providing clean water, safe roads and so on, but redistribution? Who gets to decide how much is taken and who gets it?

With regards to people or groups that want to influence politics, yes there are lobbyists of all kinds trying to persuade politicians to pass legislation favorable to their interests. The petroleum industry, the food industry, animal welfare groups, and those concerned about education all have their own lobby groups. In the United States there is even a very large and well funded lobby for retired people with the acronym AARP (American Association Of Retired People). Is the problem that there are these kinds of lobbyists in the first place, or is the problem that you personally may not like the topic, theme or industry a particular lobbyist is attempting to support?  In terms of tax breaks or Ms. Moore's Byzantine tax arrangements, is it just the so-called wealthy or mega-wealthy utilizing a tax system permitting them to reduce their own tax burden, or is it equally applied across a wide swath of society? I am reminded of the US system permitting home mortgage interest to be deducted against income tax obligations. Every American that has a home with a mortgage can engage in this income tax reducing arrangement. In fact, the US tax authority defines a home as a house, condominium, cooperative, mobile home, boat, recreational vehicle or similar property that has sleeping, cooking and toilet facilities. So theoretically the self employed plumber in Louisiana that buys one of these do it yourself fixer up house boats moored on a swamp can take the deduction. And even the mortgage interest on a second home can be deducted as well. According to a March 16, 2014 article from the Wall Street Journal, homeowners in the U.S. received a total of roughly $70 billion in federal tax breaks (using the mortgage interest deduction against income tax calculations) for 2013. The article goes on to report that: critics say the deduction mainly benefits those with higher incomes and it does nothing to help lower-income Americans who rent. Perhaps, although one must first declare and define what is exactly a so-called higher income. Is it someone with US$50,000 per year in earnings? Someone with US$200,000? On the surface (if you did not know any better) one might believe that everyone with a home enjoying a tax deduction for mortgage interest payments is mega wealthy. However the statistics regarding the average single family home value (and the income levels of whom inhabits such a home) immediately proves otherwise.

Getting back to the complaint cited in the Wall Street Journal, why then do the politicians not simply create a new law allowing renters to deduct rental payments against their own income or tax liabilities? Why not eliminate the mortgage interest deduction tax benefit? But if you are a home owner with a mortgage, would you want to give up this tax break? Likewise, if you were someone with the ability to set up some kind of tax beneficial trust for your children or grandchildren, would you give that up? Are you an evil social malcontent if you answered NO to either one of these questions? And just so you know, Canada, India, Norway, The Netherlands and Sweden all have some kind of mortgage interest deduction tax benefit in place (for Canada though is it mainly business related). At the end of the day, I think no one wants to give up any tax breaks or provisions allowing for lawfully structured tax reduction regardless of where you might fall on the wealth or income scale. And truth be told, it is the middle-class that also benefit from many of these so-called tax breaks or deductions and much more so in terms of the population percentage.


If we can cite the political class and not a particular class of income earners as being directly responsible for the current state of affairs, we can also directly cite the various central banks in many western governments that have pursued banking bailout programs, money printing and of course zero interest rate policies. In other words, economic policies and programs enacted to bail out the financial and housing sectors. But the problem with money printing, zero percent interest policy and other related programs with catchy acronyms is that you never know where the money will go or what other kinds of distortions will be created in the economy as a result. It is sort of like releasing a potato sack full of alley cats into the woods and thinking you will have no problem rounding them all up again later on, or even knowing where they will go. Truly the cure may be worse than the disease in terms of these policies, after all is said and done.
 

But do not take our word alone for it. The former two term chairman of the US Federal Reserve Bank and former Princeton University Economics professor Mr. Ben Shalom Bernanke writes in a June 1, 2015 Brookings Institute article that: Monetary policy is a blunt tool which certainly affects the distribution of income and wealth, although whether the net effect is to increase or reduce inequality is not clear. Say what Ben? Not clear? Indeed when constructing various policies it is a decision or trade off in terms of achieving some specific goals for the greater good. Which is to say that regardless of any sort of economic policy or circumstance, there will always be winners and losers or those that gain a benefit and those that do not. As an example, higher interest rates benefit savers and retirees living off of interest from bonds and bank instruments whereas as borrowers are certainly disadvantaged by higher interest on loans. Likewise, low or even zero interest rates benefit one class or segment of the economy and will disadvantage others. There is no perfect scenario or situation that benefits everyone at the same time. And helicopter Ben goes on to opine that the stimulus campaign was justified irrespective of the impact on inequality. However, the point is, it was these very Federal Reserve Bank actions and policies that directly contributed to the increased wealth inequality railed against by OXFAM and Ms. Suzanne Moore writing for the Guardian Newspaper. So, if you are looking to point fingers or place blame for why there is now increased inequality, you know very clearly where to look.
 

What is the greater good as it pertains to central banking policies or activities? The banking industry? The pharmaceutical industry? Auto manufacturers? If the greater good was truly the goal, secondary effects and other inherent possibilities should have been thought about. And in that regard, US$700 Billion Dollars worth of TARP funds in the US might have been used to shore up entities such as the US Federal Deposit Insurance Corporation so that retail depositors could be made whole after allowing the troubled financial firms to go by the wayside. Allowing such a thing is the creative destruction paradigm posited by the economist Joseph Alois Schumpeter. Plainly stated, in a free market capitalist system, the well managed and responsible firms survive and prosper and the ill managed or foolish go under. However and instead, the US Federal Government and the US Central Bank (The US Federal Reserve Bank) and other similar entities in other countries decided to bail-out the financial industry without thinking about the unintended consequences or main street. But aside from increased regulatory scrutiny and new increased reserve ratio requirements – has anything gotten better for the broader overall economy or everyday citizen?


One very disturbing recent
event tells us it has gotten worse. We are speaking of course about the November 2014 G-20 meeting initiative to support so-called banking bail-ins. To briefly explain, we can simply say that this new paradigm basically attempts to codify seizure of client account deposits globally, or at least banks operating inside the G-20 member nations. In terms of a bank crisis event (that term sounds nicer than bankruptcy) the liabilities on derivatives owed to another financial institution are given priority and retail customer bank accounts are considered to be unsecured lenders whose savings account assets can confiscated to cover the bank's losses. Now, why would they do such a thing knowing all that they do about the various problems that came to light from the 2008 financial crisis? Quite simply, these respective western governments are broke. The government banking deposit insurance institutions are a joke in terms of solvency (what they really have on hand or lack thereof to cover their so-called insurance payout liabilities) and of course with government debt now at 100 percent of GDP (if not higher in some case) you should not expect any new money coming out of the government. Ergo, the latest new thinking is, we are all Cypriots now. And so, in short, despite all the bail-out money issued or created by central banks, despite increased government debt on the national balance sheet to cover the costs of various so-called economic stimulus programs, at the end of the day, some 7 years later, they will simply raid the savings accounts of bank account holders the next time.


The Coming Western World's Wealth Confiscation Initiative?

So, we have already strongly suggested that it was the Central Bank and the politicians that have created the current increased wealth inequalities we are now seeing. But, that is an inconvenient truth. You are not going to find any politician or central banker apologizing to the general public for what they have done (no one in their right mind wants to be voluntarily tarred and feathered). And so, the diversion is focused upon wealth inequality, the so-called wealthy in general and less us not forget those terrible expatriates as well. But what is the real problem at hand that they need to somehow find cash for?


Many of the western governments are in the same predicament. They have all made extensive social welfare promises of one kind or another, funded through Ponzi Scheme accounting that has run it's course. In short, the jig is up, as they say. Social welfare programs across the board in many of these western nations are either already technically insolvent, or they will be soon. And with an extraordinarily large segment of the population now reaching retirement age (Baby-Boomer's), this puts even more pressure on a pay as you go system that has already been paid and went. Plus of course manufacturing has gone south and east, leaving a hole in various forms of lost government revenue (Germany has been one notable exception with policies to try and keep the jobs at home). And the younger generation recently graduating from a university certainly do not have it. They are burdened with home mortgage sized student loans to pay off, that is if they can get a job. Recent statistics from the US and the UK indicate a sizable portion are still living at home with mom and dad, after having graduated with a Masters or Doctorate degree. And to add insult to injury, the ponzi scheme welfare contribution paradigm puts even more pressure on this younger generation to pay an even higher percentage of their earning than their parents or grand-parents (when these social welfare programs were created, there were maybe anywhere from 10 to 20 people paying in for each person taking out a benefit check and now in 2015 that ration is down to roughly 3 to 1 – and closing fast). In the US, with an estimated 70 Million people taking some form of government social welfare benefit, that is a whole lot of mouths to feed.


Just as the various western world banking institutions will not be called to task and will instead confiscate their next collateral boost directly from their own savings account holders, we believe that the various government politicians will attempt to take additional monies from the public in the form of new and higher taxation. Never mind that someone might have earned their income quite legally and from their own efforts, and forgetful that such persons have already paid income taxes and social welfare deductions against those earnings already – back to the taxpayer well will be the new motion picture (coming soon on DVD). Of course, just like the banks, we suppose they feel they have no choice. The banks are not going to get a government or taxpayer funded bailout next time around and central banks have already choked their own balance sheets buying up all the various and sundry bonds. Likewise, do not expect governments to sell off government buildings or cut their own swells of government employees to generate additional funds. It will be average citizen that might very well be forced to accept less government services, a reduced public pension payout and higher taxes thrown in for good measure.


In summary, increasing wealth and income inequality is not desirous if you want to achieve a society with a broad upwardly mobile middle-class. However, and on the other hand, such financially better off persons are not to blame because they unintentionally benefited from financial industry bail-outs by the respective governments or central banks, nor are they to blame because governments are broke and can no longer fund the variety of social welfare programs that exist. And in this context we are not speaking of aid to the poor exclusively, but are including government run public pension programs and various forms of health insurance as well. But, we tend to believe the extended social and print media focus on this inequality issue is intended to cement the idea in the public mind that eating the rich, so to speak, is justified and necessary. Both journalists and politicians that deflect the argument towards a specific income or wealth class are not motivating that segment of the population to stay behind and become part of the solution. On the contrary, those that can afford it are buying bolt holds in New Zealand, the Caribbean, Latin America and anywhere else that suits them. Likewise, the middle class that can afford it are leaving to acquire residency and citizenship is less taxing and more affordable jurisdictions because they have no interest is staying behind and going broke either. The backlash to this by the varied western governments, we think, will be increased restrictions on outbound money transfers to other countries, an attempted increased scrutiny on tax collection and otherwise any other draconian regulations or processes to stop the solvent from leaving with their wealth. It is already in place now when someone attempts to withdraw a 4 digit amount in cash from their bank account or complete a foreign bound bank wire in the US and parts of Europe (France comes to mind).