Thursday, July 10, 2014

Pursuit of inequality

Equality is a mirage. The harder people chase it, the more it eludes them. Eliot Paul Singer writes:

Inequality in the U.S. today is near its historical highs, largely because the Federal Reserve’s policies have succeeded in achieving their aim: namely, higher asset prices (especially the prices of stocks, bonds and high-end real estate), which are generally owned by taxpayers in the upper-income brackets. The Fed is doing all the work, because the President’s policies are growth-suppressive. In the absence of the Fed’s money printing and ZIRP [zero interest-rate policy], the economy would either be softer or actually in a new recession.

The greatest irony is that the President is railing against inequality as one of the most important problems of the day, despite the fact that his policies are squeezing the middle class and causing the Fed – with the President’s encouragement – to engage in the radical monetary policy, which is exacerbating inequality.

Why did quantitative easing fail? Why did the Federal Reserve’s $4 trillion shot in the economy’s arm not trickle down to “Main Street”?

After the 2008 scare a bunker mentality set in. Gary D. Halbert writes:

At the end of the day, Bernanke’s weapons were less powerful than assumed or hoped. What subverted their effectiveness was shifting public psychology. The financial crisis and Great Recession changed the way consumers, bankers, business owners and managers thought and behaved.

Before the financial crisis, there was a widespread belief in the economy’s resilience that greatly encouraged spending, borrowing and lending. People unconsciously assumed basic economic stability. After the crisis, there was a residue of fear and caution. Gone was the faith in automatic stability.

In an era of uncertainty, people put less of their money at risk. The trauma of the 2008 financial crisis/recession essentially turned a country of consumers into a country of economic doomsday preppers. Personal investors fled to the safety of savings accounts, money market accounts, and bonds, where the Fed’s policies burned them with virtually a zero percent rate of turn. In the meantime, stocks have been riding the crest of the quantitative easing wave, enriching those who were wealthy enough to risk disposable income after such a shock to the system.

Long story short, the rich have gotten richer.

Inequality is a fact of nature, and Marxists exacerbate it with their good intentions. Wealth turns to an illiquid paste under a redistributive, command-and-control economy. It sticks to itself and doesn’t flow into productive hands as it does in a free market. Corporatism, fascism, market centralization by government order centralizes wealth, increasing inequality. What’s worse, the seats of power in Marxist regimes attract demagogic megalomaniacs like Mao, Stalin, and Hitler.

“The Grand Narrative of the U.S. economy is a global petro-dollar empire that has substituted financialization for authentic, sustainable economic expansion.” –Charles Hugh Smith

P.S.: As the Fed exits the bond market, demand for bonds at near-record low interest rates sags. Interest rates, or the cost of debt, will have to rise to entice bond buyers, requiring fiscal restraint on policymakers, God willing.

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