The Rich Get Richer Explained by the Bears

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For US substitute UK .. the financial sector is not bound by national borders.

The Rich Get Richer Explained

Published on Oct 10, 2012

An explanation of the growing disparity between the poor and the rich in America.
by Omid Malekan

“Through the tax code, there has been class warfare waged, and my class has won,” Buffett told Business Wire CEO Cathy Baron Tamraz at a luncheon in honor of the company’s 50th anniversary. “It’s been a rout.”

Between 1979 and 2007, the richest one percent of Americans saw their incomes rise by 275 percent, according to a recent report by the Congressional Budget Office. The bottom fifth of Americans experience only a 20 percent jump.

http://www.huffingtonpost.com/2011/11/15/warren-buffett-tax-code-l_n_1095833.html

Michael Hudson describes how the financial overclass suggest a solution to increase their wealth still further:

‘As TARP Special Inspector General Neil Barofsky has described, “saving the banks” has been a euphemism for saving Wall Street from losses, not to mention criminal prosecution.’

‘The U.S. and European governments assume that the solution to clean up the financial wreckage is for economies to “borrow their way out of debt,” by creating yet a new bubble. The new article of faith is that high finance cannot lose; only the economy can be made to suffer losses, regardless of responsibility.

There is an alternative, of course. It requires overcoming today’s tunnel vision to undo the economy’s tragic detour that led to the bubble, the bailout, austerity, and economic polarization between creditors (the 1%) and the 99% in debt to them. The bank lobbyists’ narrative underlying the claim that governments need to bail out the banks at the expense of the “real” economy is that austerity will enable debts to be paid down by enough so that people can begin to borrow again. A new bubble will rescue us – and this time it will be better managed.

The counter-narrative is to recognize the financial sector comprises the Liabilities side of the economy’s balance sheet of assets and debts. As such, it has become a separate and indeed a perverse mirror image of the “real” production and consumption economy. A new debt bubble cannot succeed as a solution based on the economy “borrowing its way out of debt” in an attempt to re-inflate real estate and other asset prices. More bank lending will only impoverish the economy more, indebting the bottom 99% further to the 1%.

The dream is that borrowing can become part of increas(ing) the Magic of Compound Interest, continuing to enrich a financial overclass. But this cannot go on for long. It is a fantasy for governments to accept the financial lobbyist’s dream that the way to pull the economy out of austerity and debt deflation is to create a new bubble – to restore real estate as a speculative activity, to “create wealth” by re-inflating asset prices. It cannot be done honestly.’

Interesting use of the phrase “borrowing its way out of debt” which the UK associates with the Tory jeer against the opposition.  Of course, the Tories are meaning government borrowing and not private sector borrowing.  In fact, they are extremely keen on personal and household borrowing to pull the economy out of its hole .. as Michael Meacher reported in 2011:

Incredible as it might seem, the last straw that the Chancellor is clutching at is a huge increase in personal and household borrowing, which is already at more than £1.5 trillion—well above the level of Britain’s entire gross domestic product. Although it was falling at the last election, the OBR is now forecasting that it will reach £2.13 trillion by 2015—half as large again as Britain’s entire GDP. That is an extraordinary admission. The Government’s only way of imposing massive public expenditure cuts is by pumping up a gigantic financial bubble in the private sector, which can only end in another colossal financial crash.

 

As Michael Hudson says this is the financial lobbyist’s dream of continuing to enrich the financial overclass at the expense of the real wealth producers, the 99.9%.

http://neweconomicperspectives.org/2013/01/the-delicious-irony-of-morris-greenbergs-aig-suit-against-the-us-treasury.html#more-4415

http://www.michaelmeacher.info/weblog/2011/06/the-osborne-budget-1-year-on/#more-2527

Related Think Left post:

Neil Barofsky: How Washington Saved Wall Street and Abandoned Main Street

Plutonomy – Invasion of the Political Body Snatchers.

The Fiscal Cliff is just another disaster-politics scam in action

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Professors Michael Hudson, James K Galbraith and Bill Black variously describe the so-called ‘fiscal cliff’ as a scam, a Trojan and disaster politics. They contend that Obama has deliberately contrived this so-called crisis to ‘discipline’ the Democrats into voting for cuts in securicare, medicare and other privatisations, in return for Republican concessions on higher tax rates for top income brackets.  In the words of Michael Hudson, ‘There is no crisis at all’. Obama has to repay his Wall Street donors with ‘Romney-lite’ austerity cuts.

The possibility of a fiscal cliff was set in motion over the past two years as a way to force action on mounting government debt.

Now, legislators risk looking politically cynical by seeking to weaken the measures enacted to try to force them to confront tough questions regarding deficit reduction, such as changes to government programs like Social Security, Medicare and Medicaid…

Obama’s latest offer set $400,000 as the income threshold for a tax rate increase, up from his original plan of $250,000. It also had a new formula for the consumer price index — called chained CPI… and would result in smaller benefit increases…..

..the change would mean Social Security recipients would get $6,000 less in benefits over the first 15 years of chained CPI. Liberal groups have openly challenged the plan, calling it a betrayal of senior citizens who contributed all their lives for their benefits.

http://edition.cnn.com/2012/12/28/politics/fiscal-cliff/index.html

 

Fiscal Cliff Trojan November 25, 2012

Michael Hudson: Fiscal cliff was manufactured to shift more of the burden of the crisis onto ordinary people.  (Full transcript at http://michael-hudson.com/2012/11/fiscal-cliff-trojan/)

Why the Fiscal Cliff is a Scam – Published on Nov 29, 2012  TheRealNews

James K. Galbraith: Is there a looming crisis of debt or deficits such that sacrifices in general are necessary?

Black: Too Big to Prosecute and It’s Obama’s Fiscal Cliff

Published on Dec 22, 2012

Bill Black – ‘Its Obama’s Fiscal Cliff’ starts at 5.00 mins (after the scandals of HSBC and UBS, banks which are too big to prosecute.)

Hat-tip http://www.scoop.it/t/monetary-reform

The fundamental deceit of ‘There’s No Money Left’

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There’s No Money Left?  by alittleecon

http://alittleecon.wordpress.com/2012/09/24/the-british/ First posted 24.09.12

“The British Government has run out of money because all the money was spent in the good years,”

George Osborne, Feb 2012

“…in the years of plenty they put nothing aside. They didn’t fix the roof when the sun was shining”.

David Cameron, March 2008

“There’s no money left”

Letter left by Liam Byrne, May 2010

For the last 4 years you will have seen or heard quotes like this in the media. How we were on the brink of bankruptcy and how “there is no money left”.  Those advocating a “Keynesian” response to the current crisis are rebuffed with the argument that we cannot increase borrowing now because we didn’t run budget surpluses in the years before the crisis – “Gordon Brown spent all the money”. Keynesianism has now been reduced to “surpluses in the good times, deficits in the bad”.

Liam Byrne’s famous note left as Labour left office was particularly heinous and the Coalition never miss an opportunity to use it as a stick with which to beat Labour. It may surprise you to hear this, but Liam Byrne is not an expert on the economy (or anything else), and should be ignored on all matters economic.

The Government say Labour want to increase borrowing by £200bn, and this would be disastrous as, if the ‘markets’ thought we were increasing borrowing, they would start to worry that we would be unable to repay our debt (or “pay our way in the world” as David Cameron is fond of saying), and interest rates would start to rise. This is basically what has happened in some of the states in the Eurozone, and Coalition ministers have not been shy in pointing this out (repeatedly and at length). Currently, Labour have no coherent response to this.

But is there any truth to this narrative? Is there an alternative path?

Perhaps surprisingly considering they have provided the intellectual cover for austerity, economists have long known that the idea of balancing budgets over the cycle is a bit like a fairy story we tell to frighten the kids. Here’s Paul Samuelson, “father of modern economics” and Nobel Prize winner, being interviewed in 1995:

“I think there is an element of truth in the view that the superstition that the budget must be balanced at all times [is necessary]. Once it is debunked [that] takes away one of the bulwarks that every society must have against expenditure out of control. There must be discipline in the allocation of resources or you will have anarchistic chaos and inefficiency. And one of the functions of old fashioned religion was to scare people by sometimes what might be regarded as myths into behaving in a way that the long-run civilized life requires. We have taken away a belief in the intrinsic necessity of balancing the budget if not in every year, [then] in every short period of time. If Prime Minister Gladstone came back to life he would say ‘uh, oh what you have done’ and James Buchanan argues in those terms. I have to say that I see merit in that view.”

So the idea that budgets must be balanced is a myth. Samuelson believed this myth was necessary to place a leash of governments who might be tempted to spend, spend, spend, but a myth it is never the less. But why is it a myth? Aren’t governments limited in their spending by what they can raise in taxation plus the amount the private sector is willing to lend them?

Categorically no! A country like the UK which issues its own floating currency, does not depend on anyone else for money. It can issue more currency at will and without limit. Therefore, it can never go run out of money and can always afford to purchase anything for sale in its own currency. This is a very simple (and perhaps obvious) point, but one that is generally ignored in all discussions about government finances. When it is discussed, it is discussed in somewhat hysterical terms: “PRINTING MONEY!! HYPERINFLATION!!” etc. etc. More sensible people realise that government creation of money is no more inflationary than bank creation of money. Creation of new money could be inflationary, but only at the point where output is unable to expand any more in response to new demand.

But if a government doesn’t need to collect taxes or borrow from the markets in order to spend, why does it do these things? In a country like the UK, taxes serve a number of purposes. Firstly, tax ensures there is a demand for the government’s currency. We must all pay taxes in pounds (some more than others), so we accept pounds as payment for goods and services so we can pay our taxes. Secondly, taxes make room for government spending. If the government just spent without taxing, very quickly we would reach maximum output and start to experience accelerating inflation. Taxation helps keep a lid on inflation. Finally, taxation is used to meet social aims. These may be to redistribute wealth or to discourage harmful activities, like polluting or smoking.

Why does the government sell bonds? It does this primarily to maintain its target rate of interest. If the government wanted, it could stop selling bonds altogether. This would mean the overnight interest rate would fall to 0%. Bonds also serve as a risk free asset which institutions like pension funds like to hold as part of their portfolios, so they serve a purpose in that way also.

So armed with this knowledge about government finances, what should government do?

  1. The do nothing approach. Like Paul Samuelson says, we can accept the truth about government finances, but also be concerned about letting governments spend without constraint, and so continue to tie our hands with regards to policy options. Taking this approach means we are in for a prolonged slump and a very slow recovery. We could still borrow more from the markets for investment, but this adds no new money to the system, just brings old money back into use.
  2. Use the knowledge that a government is not constrained by revenue and borrowing to actively pursue policies which would restore full employment and raise living standards. One possible approach would be to adopt an idea devised by the economist Abba Lerner (a contemporary of Keynes), known as functional finance. Lerner set out three rules for fiscal policy under functional finance:
    1. The government should ensure there is sufficient aggregate demand to ensure there is full employment. It should do this by lowering taxes and/or raising spending. If inflation beckons, government should do the opposite.
    2. Government should borrow money when it wishes to raise the interest rate and repay debt when it wishes to lower it.
    3. The government press shall print any money that may be needed to carry out rules 1 and 2.

I prefer option 2 as clearly it offers the shortest path back to prosperity. There are issues around how our political system would cope with functional finance, but this is a political problem, not an economic one. If the general public were fully aware of the realities of our monetary system, and the policy options that presented, we could all have a much more grown up debate about which course we should take.

For a full discussion of the nature of modern money, I recommend this video of a presentation given recently by Michael Hudson and L. Randall Wray. It’s a bit long, but well worth the effort:

http://mikenormaneconomics.blogspot.co.uk/2012/09/randy-wray-and-michael-hudson.html

Further Reading

The following are a few blogs I find useful for helping to understand economics:

http://mikenormaneconomics.blogspot.co.uk/

http://bilbo.economicoutlook.net/

http://neweconomicperspectives.org/

http://www.3spoken.co.uk/

http://www.creditwritedowns.com/

What is George Osborne playing at?

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RichardJMurphy@AnnPettifor: Extraordinary how a private banking crisis became a welfare state crisis – with just the swish of an ideological wand…

On a day when previously supporting economists urged George Osborne to change tack (1) we learnt that many billions are being put aside, doing nothing in an economy with 0.7% negative GDP growth!

As explained in ‘Simon says: QE is the biggest confidence trick of all time.’ (2) Quantitative Easing has the unspoken-about capacity to eliminate government debt. So far, it has in effect reduced the debt burden down to about 45% of GDP (3).  Alternatively, those gilts could be monetised (turned into money) and spent on stimulating the economy. In spite of being asked, by Paul Mason of the BBC and others about this possibility, Mervyn King did not acknowledged that this is a reality (4).  But then he did not deny it either!

Richard Murphy of Tax research writes:

… we haven’t got national debt of just over a trillion now, it’s just under £700 billion. Now that’s a lot, but it’s only 45% of GDP and that was so commonplace during, for example the Thatcher years, that no one noticed it. (3)

Not only are we not being told this but it gets worse! 

Payguy2 writes (2)

… we have a situation where over a third of the outstanding National debt is sitting in the Government owned Bank and another section of the Government, the Debt Management Office – an arm of HMT – is paying interest to the Bank which is again just sitting there unused.

 

 

This is corroborated by Neil Wilson who has unearthed a piece of astounding news when investigating that the Asset Purchase mechanism was slowly unwinding’:

That is when I discovered that the UK’s version of Quantitative Easing, unlike any other QE system in the world, doesn’t automatically sweep the interest paid on the government bonds back to the Treasury.” (5)

As you teach any child it is good to save for a rainy day. The UK Chancellor of the Exchequer appears to have taken that advice to heart and has a nice fat piggy bank set aside.

The question is: how much more rainy does it have to get before he spends it?

£31bn sat there doing nothing in an economy with negative GDP growth. (5)

 

 

That is right!  £31 billion that Government has spent on interest for Government gilts which the Government has bought back from banks, pension funds and other institutional investors.

Now, in the ‘real world’, if you buy back or pay off an IOU, you assume that you have cancelled that debt.  You don’t put the IOU into a special drawer marked ‘money that I owe myself’ and pay interest, on that ‘money that I owe myself’, into an account that you have opened for yourself to hold that interest.  It is nonsensical!

So what does this ‘nonsense’ suggest?

Richard Murphy says:

What it shows is that despite the Treasury taking all the risk on quantitative easing it is refusing to take the income back into the Treasury coffers even though it could at any time. The result is that the government is artificially inflating the apparent cost of borrowing in its accounts as an excuse for imposing cuts on the UK economy. That’s something called fraud, I think. And it’s one that has to stop. (6)

The comments thread following Richard Murphy’s blog further concluded:

JohnM says:

August 15 2012 at 10:57 am

The scandal is that the free (tory) press also know this.
While it is possible that it may generate a lot of vote-buying for the election, it may also be used to enrich the rich further.

Ivan Horrocks says:

August 15 2012 at 11:46 am

My thoughts entirely: all there to try to buy the next election. Its been a successful strategy in the past.

At the next PMQ (which is some way, away, I know) Miliband needs to make this the first subject that he questions Cameron about.

 

As to the health of the UK economy, the latest set of statistics speak for themselves:

http://bilbo.economicoutlook.net/blog/?p=20369

There is no way to put a sugar coating on the data. All sectors (industries) contracted. The ONS said that:

1. Real GDP “decreased by 0.7 per cent in Q2 2012 compared with Q1 2012″.

2. “Output of the production industries decreased by 1.3 per cent in Q2 2012 compared with Q1 2012, following a decrease of 0.5 per cent between Q4 2011 and Q1 2012″.

3. “Construction sector output decreased by 5.2 per cent in Q2 2012 compared with Q1 2012, following a decrease of 4.9 per cent between Q4 2011 and Q1 2012″.

4. “Output of the service industries decreased by 0.1 per cent in Q2 2012 compared with Q1 2012, following an increase of 0.2 per cent between Q4 2011 and Q1 2012″.

So production and construction have now contracted for two consecutive quarters and are thus unambiguously in recession. And now the service sector, which had resisted the broadening gloom until now, is also in decline.

What an appalling indictment of government policy.

Larry Elliott observes in If the economy was a sick patient, George Osborne would be struck off :

‘Britain’s economic performance has been similar to that of the eurozone crisis countries Spain and Portugal, even though the Bank of England has the luxury of being able to set bank rates and the pound has the freedom to fall.’

I take this to mean that George Osborne is deliberately holding back economic recovery.  Michael Burke (7) has shown that the UK’s budget deficit is rising not falling, and Professor John Ross has calculated (8) that:

‘Gauged by decline in GDP, using a common international purchasing measure, dollars, no other economy in the world has shrunk even remotely as much as the UK.’

As usual, Payguy2 pulls the evidence together in a coherent whole (9):

Monetization of government debts is perfectly safe in a liquidity trap. It would solve the need for austerity and allow governments to repair their economies. Unfortunately the global elite want depressions as unemployment lowers wage demands, increases the time debtors owe money to creditors and increases interest rates and their yields. …

The second part of QE is the insane bit. Sitting in the wholly publicly owned Asset Purchase Facility is £325 billion of outstanding government debt. The same debt Cameron says it is critical we eradicate. His plan for it is that in a few years time, the Asset Purchase Facility should sell it back out to the banks we bought it off and then rip up the money the banks give us for it.

Given the original reserve crediting didn’t cause the money supply to widen this is just treasonous and insane. The resale obviously can’t be inflationary – the money creation bit from part one happens over 5 years before the reissue of gilts.  Re-issue will obviously be deflationary as banks will allocate liquidity to buy the gilts instead of using the money for something else. But it cannot be inflationary as there is no money creation at that point.

The second part of QE should be abandoned. A sensible government would announce that the money supply is shrinking, that the £325 billion in the Asset Purchase Facility can be safely monetized and that public sector cuts are cancelled and a £175 billion stimulus package can safely be afforded.

How likely is this? Given how corrupt, incompetent and misleading [it] is [of] the current government to mis-explain how the economy works in order to justify selling off the public sector to their friends and funders.

The Tories and their backers want high unemployment and household debts to rise as this lowers wage demands and increases corporate profits. They are deliberately engineering a slump in order that the banks who provide 50% of their funding and the donors who can afford the £250,000 dinners with Cameron can slightly increase their profits.

Business is sitting on £700 billion of retained profits, banks are rich enough to pay an average of £350,000 to their staff. So what does Cameron do? He abolishes the bankers’ bonus tax, drops the 50p highest tax rate, lowers corporation tax and exempt overseas subsidiaries of multinationals from paying tax.

The rest of us get a 5% hike in VAT, trebling of university tuition fees, youth unemployment raised …

Banking reform debate hots up as party conference season approaches

15 August 2012 10:25PM

It seems that the only conclusion that can be drawn, is that George Osborne et al are deliberately misleading the electorate and deliberately wrecking the economy in order to justify lowering wages, lowering benefits, increasing unemployment, increasing household debt, running-down the NHS/state education and dismantling public services.  Furthermore, there is a little nest-egg of £31 billion ready to be pulled out as a sweetener for the 2015 General Election.

But this behaviour of a government raises deeper questions.  Professor Michael Hudson offers this global overview (10):

In these respects neoliberalism is a doctrine of power and autocracy, a weaponization of economic theory in today’s financial war against the economy at large. Its fiscal program is to un-tax banks and insurance companies, real estate and monopolies. The result is a financial war not only against labor but also – indeed, most of all – against industry and government, because that is where the money is. Gaining the power to indebt economies at increasing velocity, the banking and financial sector is siphoning resources away from the real economy. Its business plan is not to employ labor and expand output, but to transfer as much of the existing flow of revenue as possible into its own hands, by capitalizing it into interest payments.”

And David Malone concludes (11):

I don’t think the banks will lend in to the real economy because they calculate that such a socially useful strategy gives low returns to them. Should they ‘defect’ from this generous strategy and chose instead the selfish strategy of ‘hoard and wait’ then they could make not just a large return but an epic one. They could emerge as owners of everything people will need in order to rebuild their lives. Water, power, rail, hospitals, you name it.

This is what the banks are waiting for. And our politicians are giving them our money so they can.

 

It is probably a great mistake to think that George Osborne, or at least those advising him, do not know what they are doing.  What George Osborne might gain as a result of taking the flak for being the ‘worst Chancellor’ of all times is a matter for speculation.

Related post:

https://think-left.org/2012/08/04/neil-barofsky-how-washington-saved-wall-street-and-abandoned-main-street/

 

(1) http://www.telegraph.co.uk/news/politics/georgeosborne/9477918/George-Osborne-no-longer-enjoys-faith-of-former-prominent-economist-backers-over-deficit.html

(2)  https://think-left.org/2012/07/27/simon-says-qe-is-the-biggest-confidence-trick-of-all-time/

(3) http://www.taxresearch.org.uk/Blog/2012/07/13/the-untold-truth-about-quantitative-easing-is-it-simply-cancels-debt-and-that-means-national-debt-is-now-just-45-1-of-gdp/

(4)   Financial crisis, five years on: Q&A

9 August 2012 9:33AM

Paul Mason and Jeremy Werner asking Mervyn King yesterday about monetizing the debts in the Asset Purchase Facility. King does not deny the monetization.

It is time somebody FOI-ed the Bank to ask for full break down of the maturity dates of all the gilts in the APF. The shortest we know is 3 years and this was bought 2009 so some of the gilts will start to monetize … about now.

There is no prospect of selling the gilts back put into the private sector until 2017 at the earliest (OBR projection is … the government to have large deficit spending requirements until at least then).

Come on guardian- read some MMT and then ask the right questions. Do not let the establishment get away with an utterly fraudulent description of the economy.

(5)  http://www.3spoken.co.uk/2012/08/the-uk-governments-rainy-day-fund.html

(6)  http://www.taxresearch.org.uk/Blog/2012/08/15/16938/

(7)  https://think-left.org/2012/08/04/the-uks-budget-deficit-is-rising-not-falling/

(8)  https://think-left.org/2012/08/10/the-incredible-shrinking-uk-economy/

(9)  http://www.guardian.co.uk/business/blog/2012/aug/15/banking-reform-vickers-report

(10)  http://goo.gl/G0lk3

(11)  http://www.golemxiv.co.uk/2012/08/a-waiting-game/#comments

Michael Hudson and Max Keiser: Fictitious Capital explained

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Max Keiser: fictitious capital with Michael Hudson – Professor Michael Hudson interviewed by Max Keiser about his new book ‘Bubble and Beyond’.

Published on Jul 28, 2012 by 

In this edition of the show Max interviews Michael Hudson from Michael-Hudson.com. He talks about the fictitious capital; what it is? And who is pushing it? Michael Hudson is President of The Institute for the Study of Long-Term Economic Trends (ISLET), a Wall Street Financial Analyst, Distinguished Research Professor of Economics at the University of Missouri, Kansas City and author of Super-Imperialism: The Economic Strategy of American Empire (1968 & 2003), Trade, Development and Foreign Debt (1992 & 2009) and of The Myth of Aid (1971).