From Bernie Sanders to Warren Buffett, many say that US wealth inequality is a problem. In 2019, big ideas about how to solve it have been in the air. One of the most unlikely solutions is emerging from the Federal Reserve (Fed) … Ut oh.
Neel Kashkari, the outspoken dove at the Minneapolis Fed, says monetary policy can play the kind of redistributing role once thought to be the preserve of elected officials. While that likely remains a minority view among US central bankers, Mr. Kashkari has helped lay the groundwork for a shift in Fed communication this year.
It is true that elected officials have been the biggest abusers of currency debasement via deficit spending. But the Fed has also done its fair share of currency debasement. Under the Obama administration, the Fed has accumulated and is holding on its balance sheet nearly $4.5 trillion in assets purchased with fiat currency – currency debasement. In addition, many believe the nature of a fiat currency along with fractional reserve lending (leverage) is also a leading cause of wealth inequality. Odd to see a Fed as the primary administrators of the rise in wealth inequality, to now think that they can be the solution.
First, let’s look at deficit spending. Many are seeing big headlines about how Trump is blowing the budget, and a deficit spending crisis is imminent. But let’s take a closer look at the deficit numbers (in trillions):
|President||Start||End||Amount increased||Percent increased|
|Obama (this does not count the $4.5 the Fed put on its balance sheet)||$11.6||$20.2||$8.6||74%|
|Trump (8-year CBO projections and Fed balance sheet is $4.0)||$20.2||$29.3||$9.1||30%|
Regardless of the reasons for the rise in the US deficit, Trump is reducing the growth in the US deficit by more than 50% than his predecessor Obama. The lowest growth in deficits in 16 years. Could it be better? For sure, but we are going in the right direction. Especially looking at some of the Progressive plans (Bernie Sanders), which would add in 10 years hair raising amounts of $30 to $40 trillion – oh, then there is the cost of the New Green Deal on top of all this ($51 – $93 trillion).
We could just balance the budget immediately. But to do this, we would have to make massive cuts in entitlements, which is nearly already absorbing 70% of all federal spending. These budget items grow automatically and do not even come up in Congress’ annual appropriations process. Imagine stopping food stamp payments, cutting social security checks by 30%, and increasing Medicare and Medicaid co-pays to 50% – not going to happen. Cutting the military would do little, as it is only 15% of all federal expenditures.
What about that – balance the budget immediately question? I use the allegory of a car going 100mph in the wrong direction – what would happen if you slam on the breaks and turn 180 degrees in the opposite direction? The car would spinout and crash – the economy would go into recession or even depression. The best one can do is to press the brakes firmly to slow the car down and then begin to reverse direction. This outlines what Trump is trying to do – threading the needle by balancing the needs of today’s economy against long-term budgetary responsibility.
Is wealth inequality an issue? See the inset chart – a rather eye shocking view of wealth distribution in America. Wealth inequality does have a measure – Gini coefficients. Currently, the United States Gini score is around 0.81, one of the highest in the world, according to the 2016 Allianz Global Wealth Report.
This is problematic for all political affiliations. Why? It often is the cause of political movements to change the status quo – revolutions. The left will try to use the wealth inequality issue to fight for socialism (more entitlement spending) and massive redistribution programs by stirring the pot of envy of the rich. Conservatives would rather attack the causes of wealth inequality and promote more fair free-market solutions.
So what causes wealth inequality? Many have weighed in on this question and many have differing opinions. But it is the belief of this author and many others – it is all about fiat money that allows for currency debasement. To get extremely wealthy, there is really only one way – other than winning the lottery, having a special skill, special situation, or some special new innovation. But for the majority of others who want to get rich, you buy assets on credit at today’s fiat currency value and pay it back later with debased fiat currency. Real estate is often the vehicle used to do this, but there are others. It’s truly magic and the biggest not understood, openly available to be understood, but little spoken of secret.
Take a look at this inset chart – it explains it all. Prior to the US going on a fiat currency system, money had a fixed value. Money was tied to gold but it doesn’t necessarily have to be. This fixed value of money allowed both rich, middle class, and poor all to rise at nearly the same speed. But due to the costs of the Vietnam war and the Democratic socialist programs of the 1960s, the US faced a bank run – people wanted gold instead of valueless paper currency. Hence, Nixon in the early 1970s had no choice but to closed the gold window for any redemptions and print paper fiat money – the rest is history.
Once we delinked from fixed money and started the fiat money printing – it sent the US on the meteoric rise in wealth inequality – the rest of the world followed. So why not just go back to fixed money and watch the wealth inequality go down? Ahh, if it was only so simple as this. If one has fixed money, how would we finance all the government debt? We would need to balance the budget. Instead, we just print money and debase the currency. To be clear, fiat money is the fuel for politicians to buy votes. For those rich, it is a market distortion to get richer. For the poor, they tread water at zero – while the wealth gap widens.
Solutions? The left says – print money and debase the currency and propose redistribution programs. The current US 2020 presidential candidates are proposing just this – and then putting it on steroids. Many countries around the world have tried this – we call them Banana Republics, it ends badly. Sure I get it, in the short run, giving out freebies does help people – like giving sugar to children. One might say that if it gets out of hand, we just tax the rich even more – until you tax any productivity out of the economy you have. Any short-term economic buzz will soon give way to the horrors of generational economic malaise and collapse. Where is the compassion in this?
What can the Fed do? Little, other than making a bad situation worse. The Fed is merely deflecting any blame on what they know will happen. Any political or Fed-induced redistribution programs will either exacerbate the wealth inequality or make us all poor. Is it a conspiracy that politicians know the things in this posting but do it anyway? Some do understand, most do not and don’t care. They live for today. It is a conspiracy of sharks seemingly swimming in an aligned formation towards its prey – you.
There is really only one long-term humane solution. Stay on the Trump course to bring down the deficits and begin to deal with the behemoth entitlement programs – with a goal to get back to a balance the budget. Once we do this, we then need to get back to a fixed money system and not allow politicians to cheat the system and buy votes with a fiat currency.
It took us nearly 50 years to get to where we are at today, and it won’t be reversed overnight – but lets at least head in the right direction. Trump has often talked about the concept of Sound Money. This is the right direction, though it seems like a far off dream at the moment. But for sure if America elects one of these far-left Democrats, prepare for the worst.