What It Really Takes to Get Rich – A Little Help from the Federal Reserve

Impeachment! Trade war! Inequality!

Amid all the noise and distractions, we almost missed the important news: The US is going broke…

WASHINGTON (AP) — The federal government, which ended the 2019 budget year with its largest deficit in seven years, began the new budget year with a deficit in October that was 33.8% bigger than a year ago as spending hit a record.

Over the last 12 months, as a percent of GDP, the US borrowed more than any other major developed nation.

But we’ll come back to this slo-mo financial catastrophe on Monday. Today, let’s finish gawking at the rich…

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New attack

Yesterday brought a new attack. Yahoo Finance:

A trio of lawmakers wants to crack down on ‘outrageous’ CEO pay…

‘[Rep. Barbara] Lee [D-CA], Sen. Bernie Sanders (I-VT) and Rep. Rashida Tlaib (D-MI) introduced the “Tax Excessive CEO Pay Act” this week, which they say would combat income inequality and corporate greed. Sanders is also running to become the Democratic nominee for president in 2020. He and Sen. Elizabeth Warren (D-MA) are running for the Democratic presidential nomination on platforms targeting the wealthiest Americans.

If a corporation wants to waste its money overpaying its CEO, it’s none of our business. And if the rich come by their wealth honestly, who can complain?

But that is the question on the table. How did the rich get so rich? Fair means…or foul? Did they get by giving, like Henry Ford, whose assembly lines helped make autos affordable to ordinary people? Or by taking, like Hunter Biden, who used his political connections to get $50,000 a month from a Ukrainian energy company? Win-win? Or Win-lose?


Quack science

Yes, now quack science is piling on. Writing in Scientific American, Bruce Boghosian, a professor of mathematics at Tufts, claims to have made a simple model of the economy, based on similar exercises in physics and materials science.

His model shows that capital flows tend to accumulate (the rich get richer) in a manner that is purely chaotic and haphazard. That is, it has nothing to do with what the rich think or do; it’s just dumb luck.

Boghosian says intelligence, hard work, self-discipline, or conniving only account for 0.3% of the results. The rest just happens…like the collision of particles or the smattering of paint.

Luck plays a much more important role than it is usually accorded,’ he writes, ‘so that the virtue commonly attributed to wealth in modern society — and, likewise, the stigma attributed to poverty – is completely unjustified.

And he’s got a solution, too, for what he considers the inherent injustice of a free economy:

He claims that only a mechanism consciously established to redistribute wealth can offset this ‘natural tendency of wealth to flow from the poor to the rich in a market economy’.

Act of God

Of course, if wealth distribution were really an act of God, the idea of ‘injustice’ hardly seems appropriate. Hydrogen and oxygen get together to form water; should helium feel left out? The Amazon gets more rainfall than the Sahara; should the desert demand a redistribution?

But if it were true that the rich always get richer, old money would just get older and older. Instead, the threads grow thin on Old Money’s shabby Savile Row suits…as New Money wears designer jeans and tee shirts. Capitalism’s creative destruction destroys old fortunes and creates new ones.

And if it were true that it doesn’t really matter what you do or what you think (because wealth is distributed randomly), there would be no need for your children to go to school…or for you to go to work.

A penny saved would not be a penny earned…it would be a penny that fell from Heaven and landed in your pocket. And the early bird wouldn’t get the worm, either. So the bird could sleep until noon…

Terrifying bout of sanity

‘They earn money while they sleep’, was how France’s socialist president François Mitterrand described capitalists. He had a point. But while they sleep, their money works for them. And sometimes, they have help.

People who bought stocks seven years ago, for example, had no way of knowing whether they would go up or down. As it turned out, they doubled in value, grosso modo. Their money was working hard, right?

Not exactly. It was the Federal Reserve’s money that did the heavy lifting. QE — quantitative easing — put nearly an extra $4 trillion into the markets. All that liquidity was bound to float up stock and bond prices.

Then, five years on, a sudden and terrifying bout of sanity struck our Fed governors. They decided that they better get back to ‘normal’ rates and normal monetary policy. So they began letting the bonds they had acquired in QE mature and expire in QT, quantitative tightening.

This is the policy that Donald Trump still complains about. Instead of increasing the money supply, they were decreasing it. And that meant, instead of pumping up the stock and bond markets, they were allowing the liquidity to drain away.

Panic pivot

We saw the effect of that last year at this time. There was a sell-off in the stock market…and a panic ‘pivot’ in December 2018. Thenceforth, the Fed gave up all pretence of returning to ‘normal’ policies.

It has since returned to cutting rates rather than increasing them, and to filling the glasses of the drunks at the bar rather than draining them. Economist Richard Duncan tells the tale:

Between August 28th and November 6th [of this year], the Fed created $280 billion and injected it into the financial markets through a combination of Repurchase Agreements and Quantitative Easing. Moreover, the Fed announced it would continue creating $60 billion a month at least into the second quarter of next year.

So, within a matter of just a few months, the Fed went from destroying $50 billion a month through Quantitative Tightening to creating $60 billion a month through a new round of Quantitative Easing, QE4.

This, of course, made the stock market go up…and made the rich richer. It is as if you auctioned off the contents of your house…and someone from the government came along and bid on everything. You might get twice as much as you expected. Good luck? Yes. An accident? Not quite.

Still, how can you blame the rich? The system is corrupt…but not necessarily its beneficiaries. They were mostly innocent…more like the bystanders who come upon an overturned beer truck than the villain who robbed the driver.

And a few among them figure out how to get the beer truck back on the road. Those, if they are lucky, become the richest of them all.


Bill Bonner,
For The Rum Rebellion

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Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries.

A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities.

Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally.

With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance.

Bill has been a weekly contributor to The Rum Rebellion.

The Rum Rebellion