Income Inequality

The automatic response of most free market types is to defend income inequality as not necessarily a bad thing and I think a certain amount is both unavoidable and benign. But what needs to be pointed out is that a centralised money supply has contributed to much of the wealth inequality we have today.

The economist Bill Bonner writes

What we do know is that you can’t expect to get something for nothing…not in the world of finance and investment. So you can’t expect to earn a lot from your investments…unless you are lucky, or smart, or the feds rig the system in your favor. Which, of course, is what they’ve done for the last 40 years!

No kidding. In the early ’70s, the feds created a new kind of money. Dollars…with nothing behind them other than the feds themselves. If they wanted, they could destroy the dollar. Or keep it solid. It was entirely up to them.

In the event, they destroyed it slowly. In the early ’70s, we recall buying gasoline for 25 cents a gallon. Now, it was over $3 when we left the US a week ago. It’s lost more than 90% of its value!

But this destruction had consequences that were different for the “rich” than they were for the working classes. Financial assets rose with the inflation of the money supply. The price of labor did not. Stocks went up 13 times. Consumer prices (excluding gasoline) went up about half as much.

So the fed increases the money supply and much of this new money goes into the banks and stocks - in the form of low interest loans and stimulus - before it finds its way into the hands of the average Joe in the form of higher wages. But the average Joe still has to pay for the higher energy and food costs that the increased money supply inevitably produces. So monetary easing and government control of the money supply leads to a redistribution of wealth from the poor - in the form of higher costs - to the wealthy - in the form of higher stock prices.

Another Big Government cause of inequality is the whole lobbying process itself. Funnily enough I have heard advocates of more government rail against the rich because it allows them to curry more favours with the federal government. This is no doubt true but the solution isn't to increase government but to lessen government so that the wealthy can't lobby the government for more favours.