Dow up another 86 points. Can anything stop it?
Yes. We’re just waiting to find out what.
We began this series with a question: Isn’t it possible the same savants who now presume to address the problem of wealth inequality were those most responsible for causing it?
The question arose as we discussed a publishing sensation: Thomas Piketty’s Capital in the Twenty-First Century. As you will recall, the book – all 700 pages – was recently number one on the Amazon.com bestseller list.
Whoever heard of an economics tome that sold so well? The reason, we suspect, is that the book tells us something that a lot of people were waiting to hear.
Criminals, Chiselers and Con Artists
Piketty’s gripe, as near as we can determine, is that the rich get richer – especially when economic growth rates are low. And that capitalism can lead to extreme wealth inequality.
Economic growth rates have been trending downwards for the last 40 years or so. And the average annual wage, adjusted for inflation, has stagnated. But Piketty claims the average annual rate of return on capital (from profits, rents, dividends, interest, royalties, etc.) has remained robust. As a result, private capital has grown as a percentage of national income. And, the rich have gotten richer. Of course, there are many reasons for this – some innocent, others corrupt.
We will not bother with the innocent ones. Criminals, chiselers and con artists are more revealing and entertaining. And just to make it more interesting, we will name names. In the 1970s – after President Nixon moved the world onto a purely fiat-based money system – the US economy was kissed by the magic of easy credit.
It was transformed from a handsome prince… into a toad. It used to be an economy where people earned money by making things for people who could afford to buy them. It became an economy of people who lent money to people so they could buy things they didn’t need with money they didn’t have.
Piketty thinks he is criticizing capitalism. But after the 1970s, real capital played a smaller and smaller role. It was replaced by credit and its sinister twin: debt.
The r in Piketty’s now famous annotation r > g (where r stands for the average annual rate of return on capital and g stands for the rate of economic growth) is supposed to represent the return on capital investment.
But where did the wad come from?
Savings rates went down. Real earnings went down. Growth rates went down. So how could there be more capital available and how could it produce higher rates of return (compared to economic growth)?
Distortions and Delusions
The whole thing is a headache for a thoughtful man. Capital investments with no real capital behind them. Profits that outstrip the economic growth from which they must come.
What to make of it?
We don’t dispute the basic fact: that the rich are getting richer. And that they are doing so by getting their hands on capital (something we believe is a damn good idea, especially for anyone hoping to build serious wealth).
For years, we’ve been complaining about the distortions caused by central banks. Rewarding the asset-owning classes (the rich) is just one of them. You could add: creating market bubbles, depressing middle-class incomes, increasing debt levels, misallocating resources to worthless, wealth-destroying activities, allowing government to avoid serious budget control, financing monster houses coast to coast… and our own personal favorite – putting dorky economists in positions of immense power and status.
And now we even have dorky economists with No. 1 bestselling books. What next?
Revolution! At least, that is what you might think if you listen to Piketty. He thinks r will continue to outpace g. And the natives will get restless.
The “market economy, if left to itself, contains powerful forces of convergence in the distribution of wealth,” he explains. But “it also contains powerful forces of divergence, which are potentially threatening to democratic societies and to the values of social justice on which they are based.”
A State Based on Fraud
Once again, Piketty misunderstands the modern, democratic state. It is not based on real social justice. It is based on fraud.
The masses are told they control the government. And although the masses busy themselves with reading the newspapers, arguing about Obamacare and voting, the elites profit from bailouts, zero-interest-rate policies, subsidies, tariffs, sweetheart loans – you name it.
That is how the rich really got so rich… with the eager connivance of the authorities.
And now Piketty concludes that the forces of “divergence” (of wealth) are likely to be much more powerful in the 21st century and that someone needs to do something about it.
Who? The same authorities who distracted the public while the elites picked their pockets!
Until 1968, the Fed was required to maintain 25 cents worth of gold for every dollar in circulation. Then in 1968, under President Johnson, that requirement was scrapped. Thenceforth, there was no limit to the amount of cash and credit in the system.
In 1971, under President Nixon, the US reneged on its commitment to pay off foreign-held debt in gold. Now, there was no limit to the amount of debt Americans could run up abroad. Instead of paying their bills in gold, they could just pay in dollars, which are essentially more debt instruments (although with zero maturity).
In 1987… and again in 2000… Alan Greenspan showed that the Fed would not permit a serious correction. When a credit contraction threatened, the Fed came up with more credit on easier terms.
By 2007, under the leadership of Ben Bernanke, the Fed was fully committed to credit expansion forever. Milton Friedman had convinced Bernanke that the Great Depression was caused by a shrinking supply of money and credit. Bernanke saluted Friedman with: “We won’t do it again.” Thanks to these numbskulls – and many others – real capital disappeared from the capitalist system. It was replaced by what Sisson called “a fictitious money” causing a “monstrous aberration.”
That is what we live with today. It was caused by the feds. They will continue making it worse… until the whole dreadful system blows up.
Editor’s Note: It’s up to you to prepare, or not, for the coming bust. But we recommend you take advantage of the recent falls in the price of gold to add some “insurance” to your portfolio. That’s why we’ve prepared a special report on gold. It includes full details of five ultra-cheap gold investments to make right now.
Were the Last 100 Years a “Once Off”?
From the desk of Chris Hunter, Editor-in-Chief, Bonner & Partners
Piketty’s book has, you might say, “hit a nerve.” Especially his call for a global tax on capital.
An insight that has been garnering less attention: The last 100 years of economic history may have been a “once off.”
Piketty argues that a succession of unique events – the Bolshevik Revolution, World War I, the Great Depression, World War II and the Cold War – destroyed a lot of capital in the 20th century. And that the post-World War II baby boom and the entry of women into the workforce (growth in the working population) plus big increases in productivity did a lot to boost real economic growth.
As a result, there weren’t high levels of inequality between 1945 and the 1970s, when real economic growth started to fall again… and the Fed took over the task of creating “demand” by encouraging the Americans to take on more credit.
The White House, Congress, the Fed – and most investors – have a hard time coming to grips with this tectonic shift. Whisper it, but economic growth rates of 10%… 5%… even 3% may not be “normal.”
Take a look at the chart below. It shows the real (inflation-adjusted) annual GDP growth rate in the US going back to 1935.
As you can see, America’s real annual GDP growth has been slowly, but surely, “tapering off” from highs of 8+% in the 1960s to the sub-3% rate today.
The average real economic growth rate over the period was 4.4%. The US economy is currently growing at 43% below that level. And that’s with the tailwind of the Fed’s QE and ZIRP.
Looking out ahead, you can forget the tailwinds of big growth in the labor force. And productivity growth over the last five years has been 42% lower than it was in the 1945-1973 period.
Barring a big surge in productivity, something closer to 1% real annual US GDP growth over the next 20 years or so wouldn’t be at all surprising.
Food for thought for those “too afraid” to invest in steeply discounted stocks outside the US…