99 to 1; Wealth Inequality is Wrecking the Planet

 

 

                                               
                                        

 

One look at the books Chuck Collins and it becomes obvious what his passion is; inequality. Chuck is:

Chuck grew up in Detroit and at age 7 the Detroit Uprising  planted a seed in his mind that made him very aware of the presence of social inequality. By his early twenties, he decided to give away his Oscar Mayer inheritance of half a million dollars to a number of charitable organizations and work for a living; his conscience would not allow him to associate with the elite class which funneled wealth to itself to the detriment of the majority. Growing up with privilege, Chuck had a front row seat into the minds of the elite and how they saw their place in the world.

What he experienced was a worldview in which the elite  consistently felt they deserved where they were.  He discovered a high tolerance for  inequality based on the concept of “deserved-ness”, universally embraced by the wealthy. Collins calls this worldview that justifies lords, kings and emperors the Great Man Theory of wealth creation, men who felt they alone brought their individual gifts to make amazing things happen – glamorous stories repeatedly told but often neglecting  the significant role public subsidies played to enable these men to amass their fortune. Some of the wealthy do see the web of support that makes their wealth entirely possible and this motivates this minority to become Robin Hoods.

An Analysis of the 2008 Economic Meltdown of the United States

We now live in a global plutocracy not a democracy. In such a system, the world is governed by a minority of wealthy citizens who set policy for the majority of people based on self-interest. In a plutocracy, those at the top, such as the Walton family of Walmart fame, attempt to tilt the  laws and rules of the economy to increase their wealth even further.

In their 2010 Annual Wealth report, the Boston Consulting Group showed that wealthy households worth more than a million dollars increased their wealth from 37 to 39 percent. This was the result of couple of hundred thousand wealthy households using their wealth and power to change policies that further perpetuate their own wealth.

This growing trend of inequality will persist until it becomes so extreme that an economic meltdown occurs.  In 2008, the bubble collapsed and Collins argues that two triggers caused it:

  1. unsustainable consumption by the 99 percent based on borrowing rather than real wage growth
  2. reckless financial speculation by the 1 percent

1) Consumption Based on Borrowing, Not Real Wage Growth

  • Real wages for the bottom 80 percent of US households remained relatively stagnant since the late 1970s
  • People survived stagnant wages by:
    1. working more hours
    2. bringing more family members into the paid labor force
    3. borrowing more, thanks to easy access to credit
  • Working families subsequently suffered enormous stresses due to the work-consume-borrow treadmill. For many, this was the only way to attain or maintain a middle-class standard of living.
  • Most households were no longer able to save
  • In 1980, the US savings rate was 11 percent; in 2007, it was less than 2 percent
  • A typical family with a median income of roughly $50,000  bought new cars, smartphones took expensive vacations.
  • This consumption was not a reflection of rising wages, but rather families having easy access to credit which enabled consumers to live beyond their means
  • Total amount of credit card debt exploded, thanks in part to aggressive “debt pushing.”
  • The majority of home financing was for second mortgages, not new home acquisitions
  • Extensive borrowing became the social norm and this caused consumer debt to explode
  • Debt pushers contributed to this by advertising cheap credit and home equity loans
  • Overwork and debt masked falling and stagnant wages
  • These trends were fundamentally unstable, creating a growing credit card and housing mortgage bubble

In summary, the entire economy appeared very active – but it wasn’t due to healthy wage growth and shared prosperity. The consumption driving the boom between 2000 and 2008 was based on borrowing rather than real wage increases. Then in 2008, millions of people lost their jobs or significant household income. They also lost access to the easy credit, the critical buffer that enabled spending in the presence of an inadequate income. Without debt-driven consumer demand, the entire economy froze.

2) Financial Speculation

The current economic system is based upon greed. The rich have a propensity to want to become richer and in 2008, this tendency, along with exceeding the limits of debt-based consumerism, this perfect storm of greed caused the economic collapse.

  • In 2007, the richest 1 percent owned 36.5 percent of all the private wealth in the United States and over 42.4 percent of all financial assets
  • Part of this estimated $20 trillion in wealth was in the form of land, houses, artwork, jewelry, private jets, and other private property
  • The larger part of it was in the form of stocks, bonds, and ownership stakes in the world’s corporations
  • The 99 percent invest by putting their imoney into banks, bonds, and mutual funds
  • The 1 percent have investment professionals who advise them about allocating their invested wealth

Investor advisors advised their clients to have a diversified portolio. This strategy has been used by the elite for decades:

  • invest a portion in stable investments that yield a low rate of return in case of serious market downturns (typically 2 to 3% in 2005)
    • insured deposits in banks and credit unions
    • bonds backed by local, state, or federal governments
  • invest in long-term growth equities—Blue chip companies such as Ford, General Motors, and General Electric, the “blue chip” at a slightly higher rate of return – typically 5-6%
  • invest a small portion in a diversified mixture of small- and large-capitalization new companies outside the stock market. These can yield 7–10 percent rate of return

Now, however, thanks to hiring a new generation of bright mathematicians from Ivy league universities, Wall street devise a new class of very high risk investments that generate very high returns – in the area of 10 to 15 % – investments in hedge funds, derivatives, and credit default swaps. These are not investments in the “real economy,” in which firms make actual goods or services that people use. Rather, these are more like financial bets wagered on the movement of money and markets. Therefore, they are really casino-like speculative bets that really add no real value to the economy. If a bet is lost, however, it could spell disaster – institutions had no way of paying on a lost wager.

By 2007, speculative bets were wagered in all parts of society, from housing to oil and then in 2008, the proverbial sh*t hit the fan. Companies lost huge bets that they could not pay. It was bound to happen. Who ended up paying was not the 1% who wagered such bets, but rather, the 99%  – where bailout money came from.

Some Inequity Statistics

 

Figure 1a: The 1%’s share of pre-taxable income

Figure 1b: The total income of the 400 Richest Americans to 2010

In the late 70’s policy changes begin tomove in a direction that favored the rich. In 1980 Reagan did a good job selling the mythology that the wealthy are self-made and the government should not tax us. Reagan began the trend of cutting taxes to the rich and shifting priorities away from the middle class towards the wealthy elite. The results?

  • From 1976 to 2008, the share of wealth of the top 1% doubled – money that was pikpocketed from the pockets of the middle class and stuffed into the pockets of the wealthy
  • The 400 richest families control 1.3 trillion dollars of the 15 trillion dollar US economy
  • A 2010 IRS tax study showed that the tax rate of the wealthy was 50% in 1960 and is 18% in 2010 – all from tax law changes skewed by lobbyists for the rich

There is growing awareness of the 99% that budget cuts are not the answer. Rather, there is a recognition that there’s actually a huge untapped pool of capital at the top and the solution is to go after the corporate tax dodgers rather than more deep budget cuts. To do this, Collins advises strategically going after the Rule Riggers, who lobby government to change policies that support the elite.

Treasure Islands – Uncovering the Damage of Offshore Banking & Tax Havens

The Offshore System is the secret underpinning for the political and financial power of Wall Street today. It is the fortified refuge of big finance

- Nicholas Shaxson

We’ve all heard of tax havens but they aren’t just the Caymenne Islands. In fact, the UK and the US are perhaps the two biggest tax havens in the world. Journalist Nicholas Shaxson’s Treasure Island exposes the tremendous scope of tax havens. In fact, Shaxson argues convincingly that tax shelters are at the heart of the global economy. Half of all world trade find their way through tax havens and they are enablers of great inequity. It is estimated that $100 billion USD is lost due to tax havens. However, Shaxson claims that this amount is just the tip of the iceberg. They offer secrecy and escape routes from democratic rules back home. After Bretton Woods, for about 25 years, capital was tightly constrained. During this era there was broad-based economic development. However, Wall Street did not like these controls. The Bank of England and London invited Wall Street to come to the UK with no strings attached and no taxes to pay. This environment of no discipline allowed big banks to grow as quickly as they did.

Through it’s network of offshore satellite tax havens, money is captured and funneled through them and directly into London. By some measure London is now the world’s largest financial center due to this hidden network.

 Intermediaries such as private equity firms (such as Mitt Romney’s Bain Capital), accountancy & law firms set up these tax haven companies to help foreign investors to avoid paying taxes, and make huge profits at the same time.

Offshore is always a huge part of the story of debt crisis in developing countries. Leaders appropriate loans and offshore them, saddling the citizens with debt. Some studies show that private assets appropriated by African leaders can easily pay off all the debt payments. Global Financial Integrity estimated that in 2008,  1.2 trillion USD flowed into tax havens.