How the Fed Boosts the 1%: Even the Upper Middle Class Loses Share of Household Wealth to the 1%. Bottom Half Gets Screwed

Yves here. Wolf Richter gives an important, granular take on the way the top 1% is pulling even further away from everyone else in wealth accumulation, enabled by the Fed. There’s a lot of anecdotal confirmation for his view that even the top 10% ex the 1% aren’t really doing all so well. For instance, a colleague who regularly lectures at and attends conferences for what we might call 9% professionals says they are anxious about how much it costs and how difficult it is to get their children into elite schools. At most top colleges, the slots left to non-legacy, non-athlete (don’t get me started), non-rich foreigners is about 20% to 30% of the student body. The college bribery scandal has these parents up in arms because it tells them that their uphill battle is even harder than they thought. And all the money being poured into the children project means they typically aren’t saving enough for retirement. So unless they got lucky with the timing of their house purchase, they aren’t in terrific financial shape despite their high incomes.

By Wolf Richter, editor of Wolf Street. Originally published at Wolf Street

This is the transcript from my podcast last SundayTHE WOLF STREET REPORT:

OK, the Federal Reserve just came out with its quarterly data on the wealth of American households. It’s mostly the headline numbers that are being displayed in the media – how much wealth American households have – namely a new record of $107 trillion, thank you Fed, QE, interest-rate repression, and Wealth Effect. But the Fed’s data also shows the wealth distribution.

Everyone knows that if you’re in the bottom 50% of households in terms of wealth in this country, you’re essentially screwed. At the bottom 50%, you’re chasing after the American dream, and while a few are able to get out of the bottom 50%, for most, the American dream remains just a dream.

But the share that the bottom 50% of households have of the overall wealth, of that record $107 trillion, is minuscule. It’s just 1.9%.

That share is down by half from the already miserably low levels of 1999, according to the Fed’s data. So those folks in the bottom half of households are screwed and we knew that.

But today, we’ll take a closer look at the top 50% to 99% of households by wealth because even their share of the wealth is now declining, while the share of the 1% is surging.

This is the upper middle class and the top of the middle class, and they’re losing out to the 1%. And it’s a big deal in terms of dollars because those households have a lot of wealth, but their share is shrinking as the share of the 1% is gaining.

In other words, this economy – and I will point my finger straight at the policies of the Federal Reserve – is set up to shift an ever-larger share of the wealth to the top 1% and away from everyone else, according to the Fed’s own data. And the Fed is bragging about it.

We already know what is happening at the bottom half of the households: They’ve always been screwed. They’re just screwed even more today than they were 20 years ago, according to the Fed’s data.

As of the new data from the Fed, the bottom half of the households, owns 6.1% of all assets that Americans own. They own just 2.2% of all stocks and stock mutual funds. They own just 2.7% of what the Fed calls “pension entitlements.” The gold-plated executive pension plans are only for the few. They own just 13.5% of household real estate wealth. They own just 0.1% of the “private business wealth.”

But in terms of debt, the bottom half of households carry 36% of the total debt, such as mortgages, credit card debt, auto loans, and student loans. So they own 6.1% of the assets and they owe 36% of the debt.

And the wealth of the bottom half of households – wealth being assets minus debt – amounts to just $2 trillion, or 1.9% of the total household wealth.

These are the people who cannot save anything because their expenses for housing, healthcare, education, transportation, childcare, etc. are eating up their income. And because they cannot save anything, they have no means to invest. The whole system is set up that way.

Healthcare expenses cost roughly the same for rich and poor. The problem is that health care expenses are enormous in the US, and become an affordability issue for the bottom half of the households, a huge burden, and lots of people struggle to pay for it or cannot afford it.

The healthcare sector is now around 18% of GDP, or nearly $4 trillion a year. This business has become immensely profitable with its monopolistic structure, constant mergers, abuse of the patent system to prolong pharma monopolies, outrageous hospital bills as hospitals have become integrated into corporatized medicine. And so on. Paying even for basic healthcare has become a nightmare for the bottom half of households.

For the lucky ones who’re covered by an employer’s health plan, family coverage costs the employee on average $6,000, according to the Kaiser Family Foundation. This is just the insurance premium. Then there are copays and deductibles, etc. And those deductibles can be thousands of dollars.

For families without employer health coverage, the premiums alone for reasonable insurance plans run over $20,000 a year.

Then there are housing costs – whether people own or buy. They have surged in many places in the country. And for the bottom 50%, paying for a roof over the head in a lot of places is straining budgets, or exceeding budgets. Just check out the thousands of parked vehicles that people live in, around Silicon Valley, San Francisco, and other places. These are people with jobs that cannot afford housing.

The costs of higher education have become a huge burden at the bottom 50% of the wealth scale. This burden is carried by the family that now sacrifices in many ways, and it will be carried by the student who will end up with a pile of student loans.

It boils down to this: The households in the bottom half of the wealth spectrum are spending alltheir money just getting to the next paycheck, and they cannot accumulate money to invest, and they cannot benefit from the Fed’s ingenious Wealth Effect.

The wealth effect is reserved for the already wealthy that have the most assets, and when asset prices surge, those that hold the most assets benefit the most.

So now let’s look at the bottom 99% – and I mean, this sounds really funny, “the bottom 99%.” But that’s what it is coming down to.

And we’ll look at the top 1% to see how the share of wealth has changed since the Fed started its wealth effect, QE, and interest-rate repression. And we may soon add to this strategy the fantastical repo market bailout.

So over the past 10 years, the Fed has engineered an enormous amount of asset price inflation. And over those 10 years:

  • The wealth of the top 1% has soared by $18 trillion to $34 trillion.
  • The wealth of the next 9% has soared by $16 trillion to $39 trillion.
  • The wealth of the 50% to 90%, so that’s the upper middle class, has risen by a more modest $13 trillion to $31 trillion.
  • The wealth of the bottom half of households has ticked up by $1.4 trillion to $2 trillion, a tiny fraction of the wealth of the 1%.

In terms of percentage share of all household wealth, it looks whacky:

The top 1%’s share of household wealth over those ten years increasedby 5 percentage points to 32%. The 1% now own nearly one-third of total household wealth,

But over those 10 years, the share of household wealth owned by the next 9% fellby 3 percentage points to 37%.

And the share of the 50% to 90%, the upper middle class, also fellby 3 percentage points to 29%.

Today, the share of the 1% is nearly 4 percentage points higher than the share of the 50% to 90%.

Back in 2002, it was reverse: The share of the 1% was about 10 percentage points lowerthan the share of the 50% to 90%.

The first time that the 1% had a larger share of household wealth than the 50% to 90% was in 2013, and the gap has ballooned since.

So what is going on here? How is the 1% able to hog more and more of the household wealth that the Fed has so strenuously inflated, even at the expense of the next layers down?

There are several factors:

The Fed’s interest rate repression has destroyed returns on bank savings products. Households own about $10 trillion in these savings products, such as CDs and savings accounts. These types of products are a classic way of saving money at the lower income levels, and people have mostly gotten screwed doing it.

The stock market is open to all who have money to invest. And returns have been huge since the last collapse, and those with the most money invested in stocks gained the most.

But the wealthy have access to other types of investments. Many hedge funds, private equity firms, and venture capital funds require a $5 million minimum investment. Households that don’t have an extra $5 million to invest, in addition to their broader investment strategies, are excluded from the club.

Then there is a very small group of people who are super wealthy, who are billionaires and multi-billionaires, such as Amazon’s Jeff Bezos or Warren Buffett and others. Some of them, like Bezos, made their money on the immensely inflated stock price of their companies.

Warren Buffett’s entire finance and insurance empire got bailed out during the Financial Crisis, and he is probably the single biggest beneficiary of those bailouts. Then after the bailouts came QE, and his finance and insurance empire hugely benefited from that.

Then there are stock compensation plans. This includes people like Tesla’s Elon Musk. Tesla has been a financial nightmare throughout its entire existence, but its shares have been pushed by hook or crook to a valuation of $61 billion, and Musk has already awarded himself a bunch of them, and in addition has given himself an extraordinarily rich share compensation package valued at $56 billion that is now heading to court.

While Tesla fans have to buy shares, Musk just gets them – to the tune of billions of dollars. This principle is spread far and wide with stock compensation plans at the top of Corporate America.

Then there is the startup craze. Even if the shares flop after the IPO, the pre-IPO investors, such as VC funds made huge returns. These funds hold money that was invested by the top 1%. Again, a big minimum investment is required. Small fry cannot play in the VC arena.

And there are the stock compensation plans in the start-up craze where early employees make out with huge stock positions after the IPO. They’re also part of the 1%.

But this money at the top gets plowed into various real-economy things such as housing, and is one of the reasons why housing costs have skyrocketed over the past five years in areas where this wealth is, such as the San Francisco Bay Area. This is where the bottom half of the households suddenly find themselves tangled up in a housing crisis.

It is ironic that the Fed puts out this data on a quarterly basis, as if to show off its handiwork, its success, as measured by how much of the wealth is increasingly concentrated at the 1% of households, and how every time their wealth appears threatened even a tiny little bit, the Fed comes up with new bailouts, rate cuts, and other shenanigans, such as the repo market bailout recently. This data is like a report card that the Fed issues of how successfully its policies help the 1% gain an ever-larger share of household wealth.

You can listen to and subscribe to Wolf’s podcast on YouTube.

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61 comments

  1. Geo

    https://m.youtube.com/watch?v=mzJmTCYmo9g

    From early 2008, before the crash, these comedians called it. That anyone even pretends the whole economy isn’t a rigged system designed to steal money for the 1% is amazing. That everyone not in that 1% isn’t demanding the system be dismantled and remade is depressing.

    I’m actually glad the 10% are outraged that there were others scamming Ivy League Schools for admissions. Good for them to get a taste of what that “meritocracy” they preach to the rest of us is really like. The main difference is their grifters actually got penalized instead of rewarded for “smart business” like those that swindle the rest of us.

    Reply
    1. Joe Well

      I also feel some Schadenfreude and would hope the 10-percenters would fall out of love with this whole system and go Berner.

      The problem is the 10-percenters are still somewhat benefiting from college admissions, within that very narrow field, because the 30% of true merit admissions that Yves mentioned above overwhelmingly goes to them. Of course, as Yves also notes, the whole thing costs them a fortune and there are the broader social impacts, so they should be questioning the system, but they’ll still expect a system that gives them a leg up over the rest of the population.

      Reply
  2. Ignacio

    I wonder for how long this scheme of financial looting of the 90%, or even the 99%, can proceed until the system is reversed more or less quietly/abruptly or the system collapses dramatically into chaos. These days we are seeing protests almost everywhere except, quite interestingly, in the US (at least nothing I’ve seen in news rooms). This apparent stability gives ground to more and more looting.

    Reply
    1. Joe Well

      I feel like the US is turning slowly (like water boiling in a pot with a frog inside) into a high-middle-income Latin American country like Mexico or Chile with huge inequality and underfunded public services.

      The generational and racial divides makes this really hard to address, since older Americans vote more and yet, *on the whole*, are the least affected by rising inequality and on top of that they are mostly getting their information from legacy billionaire-owned sources, especially TV. It is really hard to explain what the US is really like to someone who graduated from college before the student loan boom or got some steady union job when they still existed, and bought a home before the real estate boom. I have tried to go over the arithmetic with older relatives and their memories of the old US prevent them from seeing the real US of today.

      >>These days we are seeing protests almost everywhere except, quite interestingly, in the US

      Most US Left energy these days is going toward either the Bernie Sanders campaign, or one of many pushes for concrete benefits like freeing prisoners. Personally, I don’t see the point of Chile or Ecuador-style mobilizations except as an absolute last resort. How do we know we won’t be hardening the opposition of all those contented people who vote? And unlike in Europe, US police are not slow to use force, maybe not tanks like in Chile, but how many Americans have lifelong brain trauma from the police?

      Reply
    2. notabanktoadie

      Our system is the richer loot the poorer.

      To not be a looter one’s self is to be a pure victim. And how many can bear that?

      So let’s not have a system that forces one to be a villain, victim or, in most cases, BOTH.

      Reply
      1. KYrocky

        Our system is the rich use our government to loot everyone else.

        The ROI being reaped by the most wealthy through buying off our elected officials is the greatest ROI in the history of the world.

        Reply
    3. eg

      This is a very old story, Ignacio — see Michael Hudson’s work with archaeologists on Bronze Age civilizations and the struggles between the state and rural userers (oligarchs). The only solution that avoids utter collapse or being conquered by neighbouring states is some form of “deror” or “jubilee”

      What is happening in the US (and indeed across the Western world) is exactly the same process — the oligarchs undermine the well-being of the citizenry, and states that cannot control their oligarchs are doomed.

      Reply
    4. John Wright

      I suspect the vast US entertainment industry plays a part in the passivity of the typical US citizen.

      Even large monthly cable and phone bills may appear small when divided by person-viewing hours.

      For some future possibilities, one can look at the work of historian Walter Scheidel (“The Great Leveler”).

      Here’s a snippet from a book review that I saved on my computer.

      “Scheidel chronicles long stretches of high inequality that were followed by bursts
      violent compression, owing to cataclysmic historical events – his book’s titular “great levelers.””

      “Specifically, Scheidel designates mass warfare, violent revolution, state collapse, and lethal pandemics as the “Four Horsemen of Leveling.” His most prominent examples are the twentieth-century world wars, the Russian and Chinese Revolutions, the fall of the Roman Empire, and the Black Death, respectively.”

      Perhaps accurate projections of our economic future will come from historians, not economists.

      Reply
  3. notabanktoadie

    The Fed’s interest rate repression has destroyed returns on bank savings products. Wolf Richter

    Lower interest rates are better than higher interest rates except when produced by unethical means such as welfare/privileges for depository institutions, aka “the banks”, e.g. deposit guarantees; and for the rich, e.g. asset purchases by the Fed from the private sector.

    Otoh, an equal Citizen’s Dividend is an ethical way to lower interest rates by providing citizens with more income to save and invest with. So too are negative interest* and yields on the the inherently risk-free debt of monetary sovereigns to encourage fiat hoarders to lend or invest their hoards productively.

    *except for an negative-interest-free exemption for individual citizens up to a reasonable account limit.

    Reply
    1. Grumpy Engineer

      Lower interest rates are better than higher interest rates except when produced by unethical means“?

      Oh, I must beg to differ. I believe many of our woes are related to interest rates that are too low. Low interest rates enable corporations to borrow more money for leveraged buyouts, to slurp up competitors and create oligopolies or flat-out monopolies. Low interest rates enable corporations to borrow more money for leveraged buyouts, which benefits wealthy stockholders the most. Low interest rates give venture capitalists a better excuse to pay themselves giant bonuses while leaving the “rescued” company with an even larger debt load that is more difficult to repay.

      And do low interest rates help individual borrowers? Less than you’d think. If low interest rates make a $200k home affordable to a less wealthy couple, does this mean they can buy it now? If the housing market is tight at all, the answer is “no”. Why not? Because a slightly wealthier couple can use those same lower interest rates to bid $250k instead. Housing prices will move up as rates go down, while the payments remain the same. Except that now the loan principals are larger, which makes an early payoff more difficult.

      Low interest rates also drive people to invest their savings into the stock market rather than simple savings accounts, where they will compete with billionaires who can time their transactions better because they’ve hired people to monitor the market for them all day, every day. Joe and Jane Public can’t compete with that, and they’ll eventually get burned while the billionaires get in (or get out) early.

      Reply
      1. Grumpy Engineer

        Whoops. My first paragraph should have included the following sentence: “Low interest rates enable corporations to borrow more money for stock buybacks, which benefit wealthy stockholders the most.” Not “leveraged buyouts” twice.

        Reply
      2. notabanktoadie

        Low interest rates also drive people to invest their savings into the stock market rather than simple savings accounts, GE

        Under an ethical finance system, except for the richest, what people would lose in interest income on risk-free savings, they would more than make up for via an equal Citizen’s Dividend to replace all fiat creation beyond that created by deficit spending for the general welfare.

        Besides which, the MOST risk-free savings should return is zero percent – otherwise we have welfare proportional to account balance. You want a higher return then risk the principal. If you’re old and can’t afford to take risks, then that’s what a generous social safety net is for.

        Reply
        1. Grumpy Engineer

          You can’t have it both ways. If the Federal Reserve suppresses interest rates so that people get zero interest on their savings, then it simultaneously becomes easy for corporations and super-wealthy people to borrow large amounts of money at very low rates, which leads all of the negative consequences and abuses that I mentioned earlier. If you raise interest rates on lending to deter these unwanted side-effects, then people will get more interest on their savings. The two are intrinsically coupled.

          And if we eliminate the Federal Reserve’s lending to private markets (which is one of the major means of dollar creation in the US economy) and instead rely on per-citizen fiat dollar creation (which actually isn’t a terrible idea), then there would no explicit control over interest rates at all. Interest rates would move around as the supply of saved dollars vs. the demand for loaned dollars moved around. They would never go zero or negative.

          Reply
          1. Grebo

            Under an ethical finance system, surely, lending would only be allowed for ethical purposes and the abuses you mention would once again be illegal.

            Reply
            1. notabanktoadie

              There should definitely by limits on real asset ownership such as of land – regardless of the finance method, i.e. no one should own so much of the necessities of life that they deprive other citizens. (c.f. Leviticus 25)

              Reply
          2. notabanktoadie

            And if we eliminate the Federal Reserve’s lending to private markets (which is one of the major means of dollar creation in the US economy) and instead rely on per-citizen fiat dollar creation (which actually isn’t a terrible idea), then there would no explicit control over interest rates at all. Interest rates would move around as the supply of saved dollars vs. the demand for loaned dollars moved around. Grumpy Engineer

            You get the general idea.

            They would never go zero or negative. ibid

            Once all privileges for depository institutions are abolished, such as deposit guarantees, then only the monetary sovereign and its central bank can offer true risk-free accounts and, except for an individual citizen exemption up to a reasonable account limit, can and should levy negative interests on those accounts and use the proceeds to at least partly fund an equal Citizen’s Dividend.

            So risk-free interest rates can certainly be zero (for individual citizens up to a reasonable account limit) and negative (for everyone else). And if the negative risk-free rates are negative enough they could even drive market interest rates to zero or below, I suppose. Not that I am advocating this, just mentioning the possibility.

            Reply
    2. workingclasshero

      I don’t get it when progressive commentators bring up low interest rates as screwing the middle class!you have to be roughly in the top %5 percent of wealth earners to even make earnings off of interest in my opinion.and then your raising bussiness investment and financing costs on top of it

      Reply
      1. Another Amateur Economist

        It’s all part of the finance scam. You get your little passbook savings rate. Yay! You’re a Capitalist, just like the big boys, on your way to fortune and fame. Just like them!

        Financial secrecy is another one. By getting to keep your little financial secrets. Whee! Maybe you get to avoid some sorts of little financial screw jobs, I guess. But at the same time, the big boys with their BIG secrets get to lay the big screw job on you and everyone you know (with your precious little financial secrets, and which the IRS pretty much knows all of anyway,) from above.

        And there’s essentially nothing you can do about it. Because of financial secrecy, none of us little guys have any idea how and how badly or by whom we’re all getting screwed.

        And that’s all of us. I would rather have my finances published in the newspaper, and everyone else had to, also. Screw this divide and conquer.

        I’m not against private property. But there should be a hard limit on how much any one person can own. If they think they deserve a big income, fine. But they have to spend it on consumables. All they can eat, if that’s what they want. But they should have to eat it.

        JBTW, I know of no ‘advanced’ society in history where great wealth did not tie in with great political power. Nor of any where the wealthy were not out to screw and impoverish everyone else. In every way they could.

        Reply
  4. KLG

    ZIRP has devastated my older relatives who worked very hard as farmers for 50+ years to save $200,000. The $8,000 to $10,000 per year they expected from very safe “investments” plus functional Medicare and a small Social Security benefit was all they would have needed to live well in retirement. Instead their savings are disappearing and Medicare requires supplemental insurance they cannot afford. But the true constituents of Pelosi Schumer Clinton & Obama LLC are doing very well. So all is good.

    Reply
  5. cnchal

    > . . . and how every time their wealth appears threatened even a tiny little bit, the Fed comes up with new bailouts, rate cuts, and other shenanigans, such as the repo market bailout recently.

    . . . and using Wolf’s example of a REIT churning through trillions of repo loans to fund their investments in “uncle sugar”‘s mortgage backed securities with profits and management fees flowing directly to the .01% hedge fund, one wonders what could have happened if the FED just stood back and said “let them eat risk”. How long could they have withstood a 10% repo loan rate before going tits up? Their leverage ratio of $9 billion of capital (and really, where did that come from?) pushing around roughly $100 billion of MBS would blow up in every rich bastard’s face. Can’t have that.

    Socialism for the rich and capitalism for the rest doesn’t even come close to describing what is really going on.

    Time for a strike. If a big corp is selling it, buy nothing.

    Reply
    1. inode_buddha

      “Time for a strike. If a big corp is selling it, buy nothing.”

      I have been doing just this, and advocating thus, for a couple of decades. Buy used, buy local, use cash.

      Sort of like an economic version of “Tune in, turn on, drop out”

      Reply
  6. DakotabornKansan

    The Nobodies

    “Fleas dream of buying themselves a dog,
    and nobodies dream of escaping poverty:
    that one magical day good luck will suddenly rain down on them in buckets.
    But good luck doesn’t rain down yesterday, today, tomorrow, or ever.
    Good luck doesn’t even fall in a fine drizzle,
    no matter how hard the nobodies summon it ….
    The nobodies: nobody’s children, owners of nothing.
    The nobodies: the no ones, the nobodied,
    running like rabbits,dying through life, screwed every which way.” – Eduardo Galeano

    Reply
  7. rob

    It is still time for monetary reform. The fed and its wall street kin have been a problem for a century now. They have been creating boom bust cycles, and benefitting themselves at every turn.
    Since the thirties when hundreds of the renowned economists at the time created the “chicago plan” to end the private banking cartel enshrined by the federal reserve act of 1913, people have been proposing a fix to the problem of private bank created money for our nation.
    As that plan grows to keep up with the times,and forces at play… we still have a bill that has been proposed as recently as 2011/2012 by dennis kucinich in the 112th congress, “the NEED act”
    If you want to fight the power…. take away THEIR power to make money from nothing…. and give it to their friends ..first at almost no interest…. for them to buy everything with, political power included…
    End the free lunch on wall st… kill the golden goose.
    https://www.congress.gov/bill/112-thcongress/house-bill/2990/text

    Reply
    1. Another Amateur Economist

      Wall Street is killing the Golden Goose. That’s what the children’s story is all about. All the eggs the Golden Goose lays- all at once.

      So. Either our ruling masters are incredibly stupid.

      Or something else.

      Reply
  8. rob

    the concentration of wealth is the “fruit” that is born by the “tree” of the current federal reserve system and practice as it is aligned with wall street intimately.
    I believe the facts as they exist and have existed for many decades for all to see. show that we should not have any faith that pretending the MMT mantras will do anything to change the current reality of wealth concentration and degradation of our country and lives.
    The fact is “the fed must go” . We must stop trusting that an incestuous relationship between the federal reserve system (which are private banking entities), and their usual clients(wall street)… will ever work in our favor.
    People calling MMT progressive, are just saying the lipstick they are putting on the pig…. is environmentally friendly… and is really a good way to make that pig ready for polite society. In a new and exiting way…
    The proof is in the pudding…
    The fed serves the interest of their social circles… always has, always will..

    Reply
    1. Susan the Other

      I beg to differ here. MMT is not a means for the already wealthy to continue to loot. It is truth in accounting. It should never be considered money for nothing. It must always be money spent to accomplish something society needs. Money spent directly into the economy by the Treasury, not borrowed from any institution, to maintain a healthy society. That’s all it is. It is a question of policy what the money is used for. But inn addition to MMT, if we want to maintain our banking system, which is pretty sophisticated, we’ll need to maintain the Fed. It would be a good idea to do so. The mess we are in now didn’t swoop in like a black swan. Everybody knew it was coming. Even those of us who didn’t understand how totally dysfunctional the system had become. Wolf is outlining in very clear terms just how devastated the economic system is. The banks are out of ideas and they just keep doing same old same old. There’s no logic to it except this: The Treasury/Fed are keeping the system itself going. Not just here in the US, but worldwide. They are dedicated to controlling demand inflation for basic goods and services in order to keep prices low. And they are dedicated to maintaining those prices. Hence Nirp and Zirp. So the solution they came up with was to keep feeding the finance industry. Because this country needs an 8% return just to keep pension funds in the black and businesses going – even tho’ they are flying on one wing. Shorter: we are in deep shit. Here’s the question: How do we get off this financialized treadmill, sell assets and reinvest (capitalist style) when nobody is buying houses, let alone investing in new enterprises? Answer: Take as much time as you need – otherwise the whole world will sink too far into recession and economies will have few options. At least now we can keep pretending that we can “afford” to transition to a greener, more sustainable, world and we can make it the goal. It’s the Fed’s big Minsky moment. Do or die.

      Reply
      1. Susan the Other

        So stg. I heard on NPR (I know, but still) makes more sense. There was a ditzy reporter telling us that the Fed doesn’t want to be a payments/settlement bank any more for consumer (?) purchases. It wants out. It and its big banks only want to do “lending”. OK then . This fits in nicely with a plan to go forward for the big banks who have a considerable war chest thanks to the Fed. They will be able to finance a new infrastructure (thanks to the amazing largesse of the US Treasury). And, as semi-private institutions, they will deal with both private capital and the federal Gov. Sounds like PPP to me. I think we need a watchdog for the coming PPPs; maybe not so much for Google taking over consumer payments/settlements.

        Reply
      2. rob

        I guess it is in my reading of the situation that I do not think much of MMT. I understand the traditional view of MMT being only descriptive of mechanisms already in play. If I actually thought the Federal reserve was part of “the government”, and was transparent in any way as to where its powers actually flow…. other than in the hundred years of history as to who in society actually has benefited from its entire existence, and the streams of money it produces. I also do not discount the fact that the interest the federal reserve charges to “create” our money for us,is actual debt. A real thing that is added to “our bill”.
        I can understand it is possible for all things to be made seem unreal, when someone “catagorizes” realities ,so that they are not perceived as to what they actually are. The whole idea of double entry accounting makes things SEEM as if it is just a cost of doing business, and the columns will “balance out” later…. so no harm ,no foul.. But,,
        I think this is the heart of the problem. It takes a “reality”. money is made from nothing ,except the ability for people to have faith in the issuer.It is not a thing… it is a social,legal construct.
        The federal reserve is a contractor to the government. a contractor who is a consortium of private banking interests, everyone of which are THE major players on wall street.Despite companies being different entities, they are all part of the same “community of interest”. Meaning their interests are to further their profit… and personal enrichment. The federal reserve act enshrined these private interests this power.
        People often point out how the head of the fed is appointed.. which always strikes me as funny… with the revolving door of politics,business,academia… who really believes there is “oversight” going on.Who really thinks these people aren’t schmoozing it up with their old chums who they went to school with, or belong to the same elite clubs or invited to the same celebrity circles..
        That is the reason MMT doesn’t hold water. It presupposes that all relationships between wall street and the big banks and the fed are proper. It is just a contractor doing its job. and it has no duty to the people. But the creation of money, was something put in the constitution because it was a real thing for a people to create their own money.
        A reform act like “the NEED act” would reform the fed, by bringing it back into the treasury, so that it could be transparent. If say like it did after the 2008 crash, and created 16 trillion dollars, and transferred the “notional value” to the “books” of these institutions(not even just american ones),people might actually have to account for their choices to a committee that actually has jurisdiction over them…
        It would also change the nature of the creation of the US dollars, in that they would be created without debt. And the proposal even includes plans on how to retire the outstanding debt so no one “loses” in the transition. Banks would no longer be allowed to “create” money when they made loans. They would have to loan out “their” money.
        All the other economic systems would operate just like they do today, except there would be no national debt. there would also be no back door money funnels to wall street speculators.
        All the “work” the fed does.. will still be done… except those people would be government employees, as opposed to federal reserve employees.The treasury would take over.
        Also the world is teetering because no one really believes all this BS. Everything is a fraud. Everyone “smart” enough… is just making as much money for themselves and their families as they can… before the “crash”. There is nothing to believe in . religion,politics and economics are the tools of oppression. The world is divided by the lies the people believe in. we are aligned against each other. which is why we make no progress.
        If we were to embark on real debate as to reforming our monetary system, and letting MMT try and establish its merit. We would do something akin to what the Green party did in letting the MMT people debate the monetary reformers who are behind their “greening the dollar” platform. The MMT entusiasts were allowed all their experts to sway the panel of 100 or so… and they failed . pretty miserably. It is clear the MMT story doesn’t really stand up to scrutiny. And for the progressive minded people to be tricked into thinking that the status quo of MMT will get them where they need to go… “if only everyone understood” .. is part of the obfuscation of the real world, by the world of glitz and glamour.
        And while I think monetary reform is only a part of a larger thing. It is a huge part. The other huge issues all are dying because everyone has their superstitions they cling to. And these beliefs are our prison walls.
        And the dynamism that could be unleashed by people waking up…is what it is all about…

        Reply
    2. Another Amateur Economist

      No. MMT says you have to control the money supply. Taxation (according to MMT) destroys money. So you have to tax concentrations of financial wealth. Not let concentrated wealth grow beyond all bounds, out of fear of economic distress.

      It was not the banks who should have been bailed out. It was the homeowners. The big banks should have been pitched overboard.

      As it is, the present concentration of money is so dysfunctional that all profit is in finance, and not in the production of goods and real services.

      Of course, being real, the ultimate cause of this is the increasing decline in Energy Return on Energy Investment. Happens at this stage in the development of every economy, though out all history. (Well, there are exceptions. But they’re exceptional.) When there is no longer enough real stuff to go around, the rich keep it all to themselves. Finance is just how they go about it.

      And if we want to spread the blame and get ultimate ultimate, it’s the failure to control the population. It’s the excess of labor which drives labor’s share of national income down to sub-subsistence levels, even as real national income declines.

      Don’t believe GDP ‘growth’ figures. It’s all growth in funny money. The dollar is hugely (HUGELY) over-valued, as will be seen when our corporate masters start to panic.

      Reply
      1. Margret Brady

        If you have 10 billion dollars, 1% earning enables you to enjoy a comfortable life.

        If you managed to save $100,000. 1% in earning leaves you in poverty. Few even have that much.

        Reply
  9. Sound of the Suburbs

    The FED have always hated free markets and price discovery.
    The FED have been propping up the markets since the first Greenspan “put” in 1987, they hate price discovery and free markets.
    The markets should always go up, and have nothing to do with the real economy.
    The FED always look after those with financial assets, which goes against any belief in price discovery and free markets

    What happens when the markets try and correct after the FED’s “wealth effect”?
    Hopefully, they can keep propping the markets up, but they are so inflated it’s getting harder and harder.

    How did the FED create its “wealth effect”?
    QE has to be borrowed from the banks.
    There weren’t enough borrowers, so the QE couldn’t get into the real economy.
    QE could get into the markets, via margin lending and share buybacks, financed with debt.
    QE widened the gap between economic fundamentals and the markets, the “wealth effect”.
    This was supposed to trickledown, but it never happened.

    Where are we now?
    What lifted US stocks to 1929 levels in 1929?
    Margin lending and share buybacks.
    What lifted US stocks to 1929 levels in 2019?
    Margin lending and share buybacks.
    As long as US companies keep doing share buybacks things should be OK, otherwise it’s all going to fall off the edge of a cliff as all that psychic wealth will disappear.
    A former US congressman has been looking at the data.
    https://www.youtube.com/watch?v=7zu3SgXx3q4

    The FED have got their work cut out keeping this bubble inflated.

    Reply
    1. Chauncey Gardiner

      Control of the Fed is pivotal to control of markets in a land where law and policy are for sale in nearly imperceptible feedback loops that benefit the few at great cost to the many.

      As Charles Hugh Smith asked in a post a couple of days ago on his blog, “Why do we celebrate a rising stock market?”

      Reply
      1. Sound of the Suburbs

        “Everything is getting better and better look at the stock market” the 1920’s believer in free markets

        “Stocks have reached what looks like a permanently high plateau.” Irving Fisher 1929.

        This 1920’s neoclassical economist that believed in free markets knew this was a stable equilibrium.
        He became a laughing stock.

        Better shelve this for a few decades until everyone has forgotten.
        Now everyone has forgotten we can use it for globalisation.

        Reply
  10. The Rev Kev

    There is a quote that says “Never Interfere With an Enemy While He’s in the Process of Destroying Himself’ and I believe such is the case here. The elite, with the aid of the professional classes, has been cannibalizing the lower classes for decades but over time, to keep up the inflow of money, they have been moving up the ranks. The precariousness of the middle class is the result of this process. Apparently this has not satisfied them.
    But it appears that the elite are now going after the professional classes that support them and their efforts because “they have nowhere else to go”. We’ll see how well that works out. What they have forgotten is the military adage that you should always be part of a large group. It gives your opponents other people to shot at. Sooner or later it is going to occur to the majority of the population that the social structure of America could be radically altered. And you would only need about 1,000 bullets to do it.

    Reply
    1. eg

      Yup — there will come a tipping point where too few are benefiting from the current arrangement of political economy. A little while later (because there is always an information lag) enough of the citizenry will figure it out.

      Then there is either an orderly transition to a system which benefits a sufficient number of citizens to be sustainable, or the whole edifice comes crashing down in violent insurrection, civil war and chaos.

      Smart oligarchs (who apparently are in increasingly short supply) do NOT want option B, since they have the most to lose. They are the ones who need to get busy saving capitalism from itself.

      I’m not holding my breath …

      Reply
      1. Another Amateur Economist

        Actually, it is to everybody’s benefit that this happen sooner than later. Thanks to our persistent and long standing overconsumption of natural resources, (Capitalism and capitalists can’t help themselves.) this will result in more resources still in and on the ground, and more and more viable surviving real capital.

        Reply
    2. inode_buddha

      I recall learning here at NC that the French Revolution didn’t get started until the upper-middle/”professional” classes started feeling the pinch. In other words, the 10%. The lower 90% of society simply endured everything before.

      Reply
      1. Synoia

        The Managerial Class has to believe it has nothing to gain by not rebelling, and noting to loose by join the revolution.

        Revolutions, like all other endeavors need plans, organization, etc which is provided by the management class.

        Reply
        1. hunkerdown

          Concentrated, not provided. Thanks to relatively high quality education in some times and places over the past half century, we have plenty of spares. That’s one manifestation of the term “elite overproduction”. We don’t need people associated with the class. We just need the skills. And the spreadsheets.

          Reply
  11. Steve Ruis

    Re “At most top colleges, the slots left to non-legacy, non-athlete (don’t get me started), non-rich foreigners is about 20% to 30% of the student body. (emphasis mine)” I almost never disagree with the esteemed Yves, but why pick on athletes? The athletes recruited by these colleges are part of the college’s marketing program. They get the college’s name into the news at a regular clip and provide a basis for donors to support their alma maters with donations, not all of which go to athletics. And there are stringent requirements for their acceptance. In fact, these athletes must meet more stringent requirements for admission than ordinary students. Imagine if the shoe were on the other foot and all of the intellectual nerds had to also supply proof of their elite athletic prowess! The athletes have to have some intellectual prowess, unless the colleges are being totally disingenuous, but that shouldn’t be put at the feet of the athletes.

    We seem to be discounting the role of a trained body relative to that of a trained mind.

    Reply
    1. Mr grumpy

      Athletes at the elite colleges do, in fact, get an advantage in admissions and do not have to meet the same requirements that other students do. Coaches can give admission departments a list of who they want. It’s also not uncommon for a coach to tell an athlete to apply early decision with a wink that the fix is in. Of course only those families sure of their ability to pay regardless of aid can really do that. Also, a great bulk of the athletes play sports that require a lot of $$ being shelled out by parents in order to get good coaching. Soccer, swimming, lacrosse, field hockey, golf, tennis, gymnastics among others are overwhelmingly white and upper class (top 15% or so).

      Relative of mine has a kid at Yale. Went to most elite public high school in city, all kids from top 10%. Twelve got into Yale his year. Six legacies, 3 athletes (two lacrosse), only 3 just because they are smart.

      There’s been a lot written about this lately. It gets even worse when you look at the tier just below the most elite, who have to hit tuition income targets each year.

      Reply
  12. RBW

    As a young polisci student researching in the library about revolutions they always come when the upper middle classes are left behind by the system

    Reply
  13. James E Keenan

    While the article marshals good evidence on the increasing inequality in the distribution of wealth, I think it’s short on details with respect to the role of “Fed interest rate suppression” in that process.

    Suppose the Fed were to embark on a policy of raising interest rates. Would that tend to decrease wealth inequality? If so, how?

    Reply
    1. marku52

      The problem is that interest rates are a really blunt tool to tune the economy, and very low ones hurt savers, but enable speculators. Speculation is the only “industry” where the cost of capital is a major concern. If rates were 5% you’d see a lot less debt fueled stock buybacks and LBOs, none of which is useful or productive.

      But Aunt Sally could have a 5% CD at her local S&L that would help her out quite a bit.

      But as a tool to reduce inequality, it’s barely a start.

      Reply
      1. inode_buddha

        I’ve long held that we could eliminate corporate taxes altogether and then permanently set the capital gains rate at 2x labor. That would eliminate the right-wing crying point about corporate taxes, *and* kill speculation. It might even encourage longer-term thinking. Of course, I also think we should also outlaw executive compensation via stock, it should be salary only. And outlaw buybacks.

        Reply
        1. marku52

          Buybacks used to be outlawed as price manipulation, which they obviously are. St Ronnie undid that regulation, one more act to set market values free of reality.

          Reply
    2. cnchal

      Raising interest rates means the FED sucks instead of blows.

      It would make all the bond debt bought at the current rate go down in price, stawk buybacks done with debt to enrich corporate executives by goosing share prices quite a bit more problematic with the result of price discovery returning and the very likely result that stawk prices would decline untill an equilibrium was reached between dividends paid and what one could get with a bank deposit. The big corporations, instead of having access to cheap debt that can be tranferred to a handful of people at the top, would be competing with bank deposits for money.

      Since it is the very rich that hold all that high priced paper, right there on a relative basis inequality would be less.

      Higher interest rates would also cause housing prices to go down as the housing scam is based on what payment an individual or family will bear, with the price determined by interest rates.

      This is why the FED blows. To put air under the confidence fairy’s wings. Even a tiny hiccup, where it can’t blow even for a few seconds, causes the confidence fairy to lose altitude, and were it to suck, the confidence fairy would leave an impact crater in the ground. All this is done to make sure the richest of the rich never have to suffer the indignity of the tiniest loss.

      Reply
  14. Keith Newman

    Hmmmm…… My interpretation is rather different. From an absolute point of view all the groups involved have done rather well on the wealth front. After all increasing your net worth by say 69% or 71% is pretty good (see data below). Of course the top 1% have done much better (121%) and this accounts for their increased SHARE of wealth. But people don’t spend much time thinking about how others have done so long as they have done pretty well themselves. The bottom 50% have increased their wealth by 250% but from a very low level. None of this contradicts what Yves says about problems encountered regarding education and healthcare nor the fact the top 1% are feeding off of everyone else but it probably accounts, in part at least, for the lack of protest.
    The Fed numbers are below. Wolf quotes them about right altho he rounds them off for the purposes of his podcast.
    The absolute numbers in trillions for net worth in 2009Q2, 2019Q2, the difference calculated by me, and the percentage increase within each group over the ten years, also calculated by me, are:
    Top 1%: 15.7, 34.7, difference: +19.0; +121%
    Next 9%: 23.1, 39.6, difference: +16.5; +71%
    Next 40%:18.2, 30.7, difference: +12.5; +69%
    Bott 50%: 0.6, 2.1, difference: + 1.5; +250%
    Data at https://www.federalreserve.gov/releases/efa/efa-distributional-financial-accounts.htm.

    Reply
    1. Tim

      See my comment below.

      There never are riots in the street as long as the majority of the breadwinners can’t feed their kids. We are still not in bad enough shape.

      It’s the information age that is helping us react before we get to that point, which at that point it is way too late and a revolution has started.

      Reply
    2. tegnost

      I think their increased share of the wealth is the problem. I think your methodology is 250% wrong. You should calculate your percentage from the entire group rather than isolating each group and conjuring up some kind of bland statistic. Meh.

      Reply
  15. RickV

    Interesting statistics from William Manchester’s biography of Winston Churchill, The Last Lion:

    Circa 1895 1% of England’s population owned 67% of capital and bottom 87% owned 8% of wealth. Not too different from today. Of course the lower classes had no workers comp, no pensions, no social security, no Medicaid, no public schools, etc. So I guess we are a little better off

    Reply
  16. Tim

    “The wealth of the bottom half of households has ticked up by $1.4 trillion to $2 trillion, a tiny fraction of the wealth of the 1%.”

    This is the republican argument against socialism. Ignore the disparity, you are better off on an absolutely basis.

    BUT it isn’t true when you consider cost of living affects from the 1%’s rent seeking as discussed in the article as it related to healthcare spending.

    As a wise financial analyst said. Negative interest rates are the markets last resort way of trying to make the elite pay their fair share, after avoiding it at all cost.

    Reply
  17. Anarcissie

    Funny money has been mentioned, so I would like to ask a question. The figure of $107 trillion was given. Does this correspond to anything real? By real I mean exchangeable for actual goods and services in the present. Thus, not inflated valuations of real estate, equities, collectibles, mysterious financial instruments, etc. I suppose this is a dumb question….

    Reply
  18. Sound of the Suburbs

    We need to follow the laws of economics.
    Step 1 – Carefully select desirable economics

    What was the good thing about neoclassical economics?
    It concentrates wealth
    For the people that chose it, this was its USP.

    What was the bad thing about neoclassical economics?
    It blows your economy up in a Minsky Moment.

    We should know because this is what they used in the 1920s, and it brought capitalism to its knees in the 1930s.

    Mariner Eccles, FED chair 1934 – 48, observed what the capital accumulation of neoclassical economics did to the US economy in the 1920s.
    “a giant suction pump had by 1929 to 1930 drawn into a few hands an increasing proportion of currently produced wealth. This served then as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied themselves the kind of effective demand for their products which would justify reinvestment of the capital accumulation in new plants. In consequence as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When the credit ran out, the game stopped”

    Minsky Moments have gone global.
    At 25.30 mins you can see the super imposed private debt-to-GDP ratios.
    https://www.youtube.com/watch?v=vAStZJCKmbU&list=PLmtuEaMvhDZZQLxg24CAiFgZYldtoCR-R&index=6
    1929 – US Minsky Momemnt
    1991 – Japanese Minsky Moment
    2008 – US, UK and Euro-zone Minsky Moments
    China has done the same thing, but the PBoC saw it coming before the financial crisis.
    Chinese central bankers are in a different class to the other central bankers.

    With all that information we now available, can we work out what’s wrong with neoclassical economics?
    I don’t know about the “we” part; I have done it, but as far as I know I am the only one.
    It wasn’t even that hard.

    1) The belief in the markets and price discovery gets everyone thinking you are creating real wealth by inflating asset prices.
    2) Bank credit pours into inflating asset prices rather than creating real wealth (as measured by GDP) and no one is looking at the debt building up.
    3) No one realises bank credit impoverishes the future.
    4) It hides rentier activity in the economy.

    In the land of the blind, the one eyed man is king.

    Reply
    1. Sound of the Suburbs

      To be fair, the economist trained in neoclassical economics is going to be the last person who is going to work out what’s wrong. The problems are so low down and fundamental, they lie in the areas that the neoclassical economist will never question.
      I used engineering problem solving skills to dig down as far as necessary to find the problems.
      2008 was a huge event.
      This indicated the problem was low down and fundamental.
      I got right to the bottom, money itself, and how it is created and destroyed.
      As no one was listening, I started to look for other fundamental problems and discovered we don’t know what real wealth creation is, amongst other things.

      Reply

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