So yesterday after I posted my Market Update where I analyzed the current state of countries’ economic strength and how it could affect the fixed income/governmental securities market; one of my readers inquired about income inequality from one of the links I posted (this one). I dug deeper this afternoon, and what I found has irritated the absolute /censored/ out of me. But don’t worry, I took some time to chill out so I won’t express my wrath here in our unbiased sanctuary. Cheezy….
But seriously, this is something that is important to me and I feel strongly about so take that with a grain of salt. That said, I have found some good stuff to share regarding income inequality. Plus I’ll give you my Christmas Countdown. Daggonnit let’s get into it.
Income inequality is a thing. The gap is growing. I’ll start with one of the issues that was addressed by my friend yesterday regarding the money supply. To understand the current income gap, we must first look at the money supply and how it affects the economy. So let’s review the 2008 credit crisis.
From a high-level view, the credit crisis stemmed from banks taking on too much debt from issuing subprime mortgage loans. In English for my beginner pundits: banks gave loans to people who couldn’t afford them. Banks got greedy throughout the early 2000’s, gift wrapping hundred-thousand dollar home loans to part time workers at McDonald’s. Eventually, banks had too much debt from these loans, but not enough cash to pay them off. For a better explanation, here is an awesome video from investopedia (actually the first real topic and video I watched when I began diving into Finance). Feeling sentimental.
Ok that was the cause, now for the response. It’s called quantitative easing provided by the US Central Bank. The Federal Reserve bailed out banks, and combated the resulting recession with this quantitative easing. When the economy stalls (or bombs like in 2008), the Fed does it’s thang by pumping money into the economy. THEY DO NOT PRINT MONEY OUT OF THIN AIR AND RAFFLE IT OFF TO PEOPLE (anyone who says something like this is wrong and you should shun them forever). The Federal Reserve buys governmental securities, which increases the US money supply. View this transaction as a credit/debit transaction for cash. So why the hail does the Fed do this?
It is centered around the concept of money velocity. When the economy is strong, transactions are occurring frequently and money is changing hands between buyers and sellers often. When the economy is in a recession, the velocity of money decreases. To fight recession, the Fed increases money supply in hopes that it will speed up velocity of $$$$$. This also naturally lowers interest rates in the market (and the Fed also lowered the short term Fed Funds rate) in order to encourage people taking out loans to promote money velocity and growth.
Stay with me.
Here’s the problem. Not enough people or companies took on these loans which is why we’ve seen a slower economy. People have been scared, so instead of spending the money, they sit on it by putting it in savings accounts or under their mattress or whatever. So what? Well here’s why all this matters. Consumer Spending accounts for about 70% of the United States’s total economic growth. 70%.
Dang. I guess now we can finally talk about income inequality.
If you really want to read an entire Wikipedia article about income inequality, then go for it. Only around 40% of Americans think that Income inequality has increased over the last decade. If you’re in that other 60% thinking that it has not, well I’m glad you are here.
So this is from CBO. You can see the Top 1% have seen much more income growth since the late 70’s. Yes this is adjusted for inflation. Directly from the Wikipedia article: The top 1% “earns” around 25% of total US income compared to only 10% from 1950-1980. Here’s a graph of the actual “Gap”.
Ok, last video, only about 5 minutes long and it brings it all home.
So why has this gap grown since 1979? Lots of arguments and explanations. Here are some of them.
- Technology (cheaper and eliminates need for as many workers)
- Rise of the banking sector (don’t get me started)
- Political Agendas & Lobbyists
- Rise of women in the workforce
- Demise of Unions & Workers’ rights
- Steady decline of Top Earners’ tax rates
I’ve thrown a lot of stuff at you, so lets connect the dots. We talked about the fact that people have been sitting on cash instead of spending it in the economy. The top 1% are doing this too. So their money is growing for their personal gains, while the middle class is just living paycheck to paycheck. There are many reasons and theories as to why real wage growth has been minimal, but the bottom line is that it has not grown.
Here is the funny and ironic and irritating part. You hear all these wealthy Venture Capitalists investing Millions into start-ups saying that they shouldn’t be taxed because they’re creating jobs, and if you think otherwise then you don’t know your economics. Guess what, these nuts don’t know their economics. Maybe they make a thousand jobs, but at the end of the day their investing to get personal gains. These people don’t get that when the middle class thrives, then they thrive even more than they would today by sitting on their mountains of cash.
Do I have a solution? Do I understand everything about this topic? No way, this is just how I spent this afternoon (Yeah, I know I’m cool). But I do have some ideas. For one, reducing big business’s influence in Washington would be, um (holding back from exploding), very very good. All these big businesses with money fund campaigns and have “access” to these politicians. They’re corrupting the system, disabling capitalism, and ruining democracy.
I hope that this has at least sparked your interest, and you recognize that this is an issue. Maybe you disagree with some of my points, and that’s fine. Get involved and do your own research. Do not ignore this. I was talking with my girlfriend about all of this and I commented about how messed up some things are. She said something like “That is why I stay oblivious”.
Do not stay oblivious. Dig deeper. I can’t put into words how much this issue will affect our lives. I hope that I have at least intrigued your interest. Remember, ignorance is not bliss when bliss is living in a cardboard box.
Only 30 more days until Christmas. I’m asking Santa for some chill pills and a sweet job.
Thanks for joining friends!