When we left you on Friday, we were delighted. We had found a kindred spirit… a like mind… a man as cheerful and as lighthearted as we are… in the person of Charles Hugh Smith, author and chief writer for OfTwoMinds.com.
Smith doesn’t whine about wealth inequality or call for wealth redistribution like the numbskulls on the editorial pages. Instead, he opens up the drain lines to see what is down there.
First, no society has ever successfully eliminated sewage or inequality. You can redistribute wealth. Money is fungible. Money is divisible. Money is quantifiable. Money is easily shared out. But giving everyone the same wealth would only magnify the unfairness of the rest of life.
One man would still be blessed with a full head of hair and a fetching wife. Another could hold his liquor. And a third would be struck by a crosstown bus on his way to a prayer meeting.
Occasionally, a particularly ambitious world improver tries to erase these particulars. He proposes a society in which we all wear the same clothes and get the same haircuts… and where women (and men) are shared equally, too. Utopia sometimes sounds good on paper. But it is always disastrous in practice.
But “too much inequality” is considered abhorrent.
How Much Is Too Much?
How much is too much? We don’t know. Most people accept a substantial gap between rich and poor as a fact of life. Most poor people know they are poor for good reason. They know they didn’t work as hard as they might have… or didn’t save as much as they should have. They accept their lot in life because they know they deserve it.
Rich people, on the other hand, are often embarrassed and guilty about their wealth – especially if they didn’t earn it. That’s why so many are eager to get rid of it – either by spending, charity, taxes or investments.
Other rich people fear that conspicuous inequality could make it more difficult for them to hold onto their status and wealth. They are the clever ones – Bill Gates, Warren Buffett, Mark Zuckerberg.
They have so much wealth that their marginal billions are almost worthless to them. But by giving away these low-value dollars, they gain status. In other words, by giving away money, they pull further ahead of the hoi polloi in status and power. Inequality grows.
Even in purely material terms, inequality can be difficult to obliterate. In the Soviet Union, “equality” was enforced by a group of implacable levelers. Titles were abolished in favor of the ubiquitous “comrade.” Fine clothes were replaced by drab uniforms. Apartments, education and job assignments were awarded at the discretion of the party bureaucracy.
These things were all more or less equal, at least in the sense that they were all uniformly horrible. Nevertheless, in the 1980s researchers found that the gap between rich and poor – in terms of housing, transportation, household help and consumer goods – was greater than it was in the US and Europe.
But it’s not the fact that some people win and others lose that bugs the world improvers. It’s not the lottery winner or the hard worker whom the losers resent. It is the schemer, the chiseler and the cheat that set them off.
They don’t mind winners… and don’t worry about losing. But nobody likes a rigged game, not unless they rigged it themselves. That is why the solution offered by the world improvers is so unsatisfactory. They rigged the game; now, they’re offering to rig it some more.
That is the charm of Charles Hugh Smith. He sees it wasn’t just bad luck that undermined middle-class wealth. It was also dirty dealing.
The bad luck came in the form of competition from low-wage workers in Asia and Latin America… and no-wage technological substitutes.
The bad luck is well documented, widely understood and taken in stride. It’s the dirty dealing we trip over; it’s still largely mysterious to most people. To fully understand it, you have to understand a neologism we just invented: “poligarchs.”
You see, in our modern democracy it takes two to tango. It has its elite, who control the system and take most of its benefits. But it needs masses of poor, dependent people whose eyes can be covered with claptrap slogans and whose votes can be bought – on the cheap.
That’s why we have food stamps… unemployment… Obamacare… Fannie Mae and Freddie Mac… and the War on Terror.
And that’s why we have such an interest in genuine inequality. The poligarchs can’t be bothered to think too much about who rigged the system… or how. But maybe they can be rallied to oppose “inequality” and to vote for the clowns who propose to do something about it.
Further reading: Diary of a Rogue Economist publisher Will Bonner is on a mission to level the playing field for America’s middle class. When he was just seven, Will sued then Treasury secretary James Baker to try to stop him from adding to the nation’s debt. Now, he’s continuing that mission in another unusual way. He’s showing ordinary Americans how they can escape the rigged system… and build wealth in an entirely independent way. You can read Will’s “call to action” here.
Why Are Bond Yields Falling as Stocks Rally?
From the desk of Chris Hunter, Editor-in-Chief, Bonner & Partners
One of the most striking features of 2014 has been falling Treasury yields in the wake of the Fed’s tapering of QE.
The standard theory goes that, as the Fed withdraws support for longer-dated bonds, bond prices will drop (as demand falls) and yields (which move inversely to prices) will rise.
So much for standard theory…
The opposite has happened in 2014, as you can see from the chart below. It tracks the yield on the 10-year T-note alongside the price performance of the S&P 500.
You’d expect bond prices to fall, and yields to rise, as the economy accelerated. That’s because economic acceleration tends to bring with it a certain amount of inflation… which is bad news for bond holders.
Bonds tend to do well (and yields tend to fall) when deflation and slumpy economic growth are on the horizon. That’s because bond investors are repaid their principle in nominal dollars. Inflation eats up their principle. Deflation leaves it more or less intact.
This is at odds with the rally in US stocks, which, goes the theory, respond to higher growth and higher inflation on the horizon.
In addition to the divergence between large caps and small caps (which we wrote about here and here), the divergence between falling bond yields and rising large-cap stock prices is another sign that the rally in the S&P 500 and the Dow may not be as strong as some believe.