How money printing has made the rich richer

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Vivek Kaul

 

Raghuram Rajan before he became the governor of the Reserve Bank of India, wrote a book called Fault Lines. This was one of the first books that offered reasons for the financial crisis and that went beyond the greed of Wall Street.
One of the reasons that Rajan discussed in great detail was income inequality. He argued that this was one of the major reasons behind the financial crisis.
The top 1% of the households accounted for only 7.9% of total American wealth in 1976. This would grow to 23.5% of the income by 2007. This was because the incomes of those in the top echelons was growing at a much faster rate.
The rate of growth of income for the period for those in the top 1% was at 4.4% per year. The remaining 99% grew at 0.6% per year. What is even more interesting is the fact that the difference is even more pronounced in the 1990s and the first decade of the twenty first century.
The incomes of those in the top echelons grew at a much faster rate since the 1990s. Between 1993 and 2000, when the dotcom bull run happened and when Bill Clinton was the President of the United States, the income of the top 1% grew at the rate of 10.3% per year, and for the remaining 99%, it grew at 2.7% per year.
Between 2002 and 2007, when George Bush Jr was the President, the income for the top 1% grew at the rate of 10.1% per year. For the remaining it grew at a minuscule 1.3% per year. In fact, the wealthiest 0.1% of the population accounted for 2.6% of American wealth in 1976. This had gone up to 12.3% in 2007.
But it was not only the CEOs and the super rich who were getting richer. Even those below them were doing quite well for themselves. In 1976, the top 10% of households earned around 33% of the national income, by 2007 this had reached 50% of the national income.
In fact in 1992, before the dotcom bull run started, the top 10% earned around 41% of the national income, by the time it ended, the number was at 47% of the national income. When George Bush took over as President the number was at 45% and by the end of his term in early 2008, it had galloped to 50%.
The rich were getting richer in America. One reason for this was the fact that those at the upper echelons of organisations were making more money than ever before. At a more basic level there was also a huge increase in “college premium”. This meant that people who had a college degree earned much more than those who had stopped studying at the high school level

The advent of technology had made a lot of low level jobs redundant. Earlier secretaries used to be required to type letters and responses, or to communicate within the various offices and branches of the firm. With the advent of computers and internet, people did their own typing. And that in turn meant lower pays at lower levels.
The solution to this increasing inequality of income to some extent was more and better education. But that is something that would take serious implementation and at the same time results wouldn’t have come overnight. They would take time.
Hence, the American politicians looked elsewhere to deal with this increasing inequality. There solution was to ensure that loans were easily available to people. Rajan explains this in 
Fault Lines. As he writes “Politicians have therefore looked for other ways to improve the lives of their voters. Since the early 1980s, the most seductive answer has been easier credit. In some ways, it is the path of least resistance…Politicians love to have banks expand housing credit, for all credit achieves many goals at the same time. It pushes up house prices, making households feel wealthier, and allows them to finance more consumption. It creates more profits and jobs in the financial sector as well as in real estate brokerage and housing construction. And everything is safe – as safe as houses – at least for a while.”
This availability of easy money led to a big real estate bubble, which finally morphed itself into the global financial crisis which has been on since late 2008. In the aftermath of the crisis economic growth slowed down. Central banks around the world, led by the Federal Reserve of United States, the American central bank, started to print money.
The idea was to flood the system with money, keep interest rates low and encourage people to borrow, to get the economy up and running again. But that did not happen or at least did not happen at the pace that central banks expected it to.
Low interest rates led to financial firms borrowing and investing money all over the world driving up various financial markets to all time high levels, including the American stock markets. As Gary Dorsch, an investment newsletter, 
writes in his latest newsletter dated December 4, 2013, “The US-stock market rally is now 57-months old, and over this time period, the S&P-500 index has climbed a “wall of worry,” rising +170% from its March 9th, 2009 low, and hitting an all-time high, above the 1,800-level.”
The idea was that once the stock market started to go up, the wealth effect would come into play i.e. people would feel rich and they would go shop. But as it turned out, the retail investors have stayed away from the market for a large part of the last four and half years and have only now started to come back to the market. As Dorsch puts it “But only this year, did it begin to earn the grudging respect of smaller retail investors. They’ve plowed $175-billion into equity funds so far this year, after withdrawing $750-billion in the previous six years.”
Meanwhile the rich got richer. As Dorsch  wrote in a
 newsletter dated October 3, 2013, “Over the past 1-½ years, the Fed has increased the…money supply by +10% to an all-time high of $12-trillion. In turn, traders have bid-up the combined value of NYSE and Nasdaq listed stocks to a record $22-trillion. That’s great news for the Richest-10% of Americans that own 80% of the shares on the stock exchanges.”
He also adds in his latest newsletter that “US-equity values have increased $14-trillion over the past 57-months. Across the Fortune-500 companies, the average chief executives pockets 204-times as much as that of their rank-and-file workers, that’s disparity is up +20% since 2009. Perversely, the compensation of the S&P-500 chieftains is often linked to the ruthless slashing of jobs and wages in order to increase the companies’ profitability. In theory, that boosts stock prices, and CEO’s collect about 90% of their compensation through the exercise of stock options.”
And this has meant that the rich have got richer, while the average income of the middle class and the poor has been falling, as jobs are being slashed. “For Middle America, real disposable income has declined. The Median household income fell to $51,404 in Feb ‘13, or -5.6% lower than in June ‘09, the month the recovery technically began. The average income of the poorest 20% of households fell -8% to levels last seen in the Reagan era,” writes Dorsch.
Due to this nearly more than 100 million Americans are receiving one or another form of welfare from the government. “According to the latest data from the Census Bureau, the US has already passed the tipping point and is officially a welfare society. Today, more Americans are receiving some form of means tested welfare than those that have full-time jobs. No, that’s not a misprint. At the end of 2011, the last year for which data are available, some 108.6-million Americans received one or more form of welfare. Meanwhile, there were just 101.7-million people with full-time jobs, including both the private and government sectors.The danger is the US has already developed a culture of dependency. No one votes to cut his own welfare benefits,” writes Dorsch.
And this is clearly not a healthy sign. The irony is that the American politicians helped by the Federal Reserve created a real estate bubble to address income inequality. Once that bubble blew up, they started printing money. And that in turn has led to more inequality. The solution has aggravated the problem.

The article originally appeared on www.firstpost.com on December 6, 2013 

(Vivek Kaul is a writer. He tweets @kaul_vivek) 

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About vivekkaul
Vivek Kaul is a writer who has worked at senior positions with the Daily News and Analysis(DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System , the latest book in the trilogy has just been published. The first two books in the trilogy were published in November 2013 and July 2014 respectively. Both the books were bestsellers on Amazon.com and Amazon.in. Currently he works as an economic commentator and writes regular columns for www.firstpost.com. He is also the India editor of The Daily Reckoning newsletter published by www.equitymaster.com. His writing has appeared across various other publications in India. These include The Times of India, Business Standard,Business Today, Business World, The Hindu, The Hindu Business Line, Indian Management, The Asian Age, Deccan Chronicle, Forbes India, Mutual Fund Insight, The Free Press Journal, Quartz.com, DailyO.in, Business World, Huffington Post and Wealth Insight. In the past he has also been a regular columnist for www.rediff.com. He has lectured at IIM Bangalore, IIM Indore, TA PAI Institute of Management and the Alliance University (Bangalore). He has also taught a course titled Indian Economy to the PGPMX batch of IIM Indore. His areas of interest are the intersection between politics and economics, the international financial crisis, personal finance, marketing and branding, and anything to do with cinema and music. He can be reached at vivek.kaul@gmail.com

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