Widening Gap Between Rich and Super-Rich: What Does it Mean?

wall-street-tin-ear

In the New York Times, we read:

Philip Rushton has been selling private jets to the global rich for more than three decades. In just about every economic cycle, sales of small jets and big jets tended to move together — rising and falling with financial markets and fortunes of the wealthy.

Now, however, the jet market is splitting in two. Sales of the largest, most expensive private jets — including private jumbo jets — are soaring, with higher prices and long waiting lists. Smaller, cheaper jets, however, are piling up on the nation’s private-jet tarmacs with big discounts and few buyers.

“The real demand is at the very top,” said Mr. Rushton, the president of Aviatrade, a private-jet brokerage and advisory company. “The big guys, the billionaires, have plenty of money, and they’re buying. But the middle and lower end has been much slower to recover from the crisis.”

The wealthy now have a wealth gap of their own, as economic gains become more highly concentrated at the very top. As the top one-hundredth of the 1 percent pulls away from the rest of that group, the superrich are leaving the merely very rich behind. That has created two markets in the upper reaches of the economy: one for the haves and one for the have-mores.

You may be reading this and thinking, “Oh boo hoo, some millionaires can’t afford their own jumbo jets. Cry me a river!” That is not the point. The point is that this is yet another confirmation of the “new normal” in the American economy: The Federal Reserve helps the rich get richer, while everyone else gets rich much more slowly.

This article indicates something interesting and alarming: that this paradigm has even crept into the upper echelons of the wealthy. The super-rich who are heavily invested in stocks and other financial assets, like the Warren Buffets and Carl Ichans, have had their boats floated by the Federal Reserve ever since the introduction of Quantitative Easing in 2009, and it shows. The markets have gone wild, drunk off the punch bowl of government-provided liquidity. However, the plain ol’ regular-rich have not tasted the same success. The rich folks with wealth more dependent on business and production have been less successful, because the real economy has been less successful. Despite all the hype and fanfare from Pro-Federal Reserve advocates, the economy has not recovered. If we really are in a recovery, then this is the most anemic recovery in history. But I wouldn’t call it a recovery. We are stuck in a period of prolonged stagnation.

Everything the Federal Reserve has been doing for the past few years – the stimulus, the Quantitative Easing, the shoveling of money into the coffers of banks and investment firms, the super low interest rates – has been a wild jackpot of a payday for Wall Street. That is why we continue to hear of record booms on Wall Street; the stock markets are having their wheels greased by the Federal Reserve, ostensibly in an attempt to heal the economy. But that is not the effect that the Federal Reserve’s intervention is producing on the real economy.

I have written about this before. Examine the below charts, as taken from Bloomberg Businessweek. This chart shows the share of the American economy going to the financial sector:

fin

…but compare that to the next two charts. This one shows long-term unemployment:

unem

…and this shows median household income in 2013 dollars:

hou

Think about this for a moment. What does this depict? First, consider this: the average American does not actively invest in the financial markets. The closest most Americans get is in holding a 401(k), which is probably managed by someone else anyway.

The second two charts, long-term unemployment and household income, are the only two that pertain to the average American. But those two charts paint a grim picture. This is 5 years after the start of the supposed recovery. What of the first chart, depicting the share of the American economy going to the financial sector? We can see that Wall Street has returned to its pre-2008 levels. In fact, it looks like it’s even gained. So Wall Street seems to have recovered. But Main Street is still suffering.

This might lead you to conclude that the Federal Reserve should just give money directly to Main Street. That would be a grave mistake. It is not a question of giving money directly to Main Street. “Pumping” money into the economy does little more than fuel a false boom, which inevitably leads to a very real bust. The money flowing into Wall Street is goosing asset prices and fueling a major bubble in the stock markets. When the money stops flowing, the stock markets are going to experience an enormous downturn. “Pumping” money into Main Street has the same results: it causes people to make poor investments and bad financial judgment calls, which eventually ends in bust. We saw this on a large scale during the housing bubble of the 2000s, when people working grunt retail jobs were taking out mortgages on suburban McMansions they could not afford; were it not for the Federal Reserve promoting idiotic banking practices, like extending massive credit to people who could not afford it, such disaster could’ve been averted.

Another example is clearly evident in the extremely malevolent student loan market. This is not directly a Federal Reserve issue, but the principle is the same. The federal government encourages students to borrow huge amounts of money to get a degree. Normally, no bank in its right mind would ever dish out tens of thousands of dollars in school loans to any student not in a valuable STEM program with a record of good performance. But thanks to the Federal Government underwriting the loans, the banks working in student loans are sitting pretty. And because of the mentality that a college degree in any major other than engineering or medicine is still worth spending $50,000+, the banks have a steady flow of suckers to wrangle up into the student loan debt trap. The worst part is that this debt is not dischargeable; you cannot declare bankruptcy on student debt. So if a student falls on hard times and cannot repay, that’s just tough luck. They truly have become a debt slave. Hello, lifelong interest payments. Hello, ruined credit.

So to reiterate, it is not a matter of giving money to Main Street. Whenever the government cooks up schemes to make money and credit readily available to both Wall Street and Main Street, the results are catastrophic. The question then is not of money, but of production. When will Main Street become productive again? When will entrepreneurship and innovation return to Main Street? When will capital resources tied up in poor investments and debt be re-allocated into productive and efficient uses? This is what is needed for a true recovery to begin. There is a name for this process: recession.

But the Federal Reserve cannot create entrepreneurship and innovation. In fact, the very essence of the Federal Reserve goes against the concepts of entrepreneurship, innovation, and risk-taking. The Federal Reserve strives to prop up failing sectors of the economy in any way possible. This leaves resources invested in poorly-performing sectors of the economy, when they would be liquidated and re-invested elsewhere in a better capacity if those sectors were allowed to experience a recession.

Notice that I said, “The rich get richer while everyone else gets rich more slowly.” A popular variation of this phrase says “the rich get richer while the poor get poorer.” That does not apply to the situation in America. My version is more accurate. Wherever the influence of capitalism and the free market is allowed to work, people will become richer. We have a lot of monstrous left-wing trends at work in America; but on-the-whole, the USA is still one of the world’s most free and capitalistic markets. The extent that Average Joe in America is able to accumulate any wealth at all is due to the influence of the free market and free capitalism. The extent that Average Joe finds it more difficult to accumulate wealth is due to increased government involvement in the market. Government meddling in the US economy is indeed making it harder for Average Joe to accumulate wealth, but it’s not so bad that the trend is reversing.

Where in the world is it true that “the rich get richer, while the poor get poorer”? North Korea. Cuba. Venezuela. Places where the government dominates the markets and industry, and controls the allocation of resources. America is not like any of these places, at least not yet. Let us hope it stays that way.

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