The Growing Wealth Inequality — How Does It End?

Jeff Bezos and Nick Hanauer are mates. Nick was a seed investor in Amazon…he’s done very nicely.

In the July/August 2014 edition of Politico, Hanauer penned an open letter titled ‘My Fellow Zillionaires’.

In the letter, Hanauer counselled his fellow 0.01 percenters…

If we don’t do something to fix the glaring inequities in this economy, the pitchforks are going to come for us. No society can sustain this kind of rising inequality. In fact, there is no example in human history where wealth accumulated like this and the pitchforks didn’t eventually come out. You show me a highly unequal society, and I will show you a police state. Or an uprising. There are no counterexamples. None. It’s not if, it’s when.

Those glaring inequalities in 2014 are now blindingly obvious in 2021.

The divide between the haves and have nots is getting to Grand Canyon-like proportions…

The [wealth inequality] numbers have been trending in this direction for a long time. The data provided by the Federal Reserve tracks back to 1989, and it shows that over the past three decades, the top 10% of U.S. households have seen their wealth rise by almost ten percentage points (from less than 61% of all wealth to 69%), while the total wealth controlled by the bottom 50% has been cut nearly in half (from 3.6% to 1.9%).

Forbes October 2020

The Fed’s use and abuse of the Greenspan put over the past three decades means the blame for simmering tensions within society can be placed fairly and squarely at the feet of Messrs Greenspan, Bernanke, Yellen and Powell.

EXPOSED: The truth behind Australia’s ‘miracle’ economy

This gaggle of pontificating economic blowhards should be the first to feel the sharp end of those pitchforks (metaphorically speaking of course).

But they won’t.

Having safely cowered behind the fortified walls of academia, they’ll concoct some idiotic theory to explain away society’s ills…using the same groupthink ‘brilliance’ that came up with ‘let’s use even more debt to solve a debt crisis’.

As the self-appointed ‘solution providers’, central bankers are far too conceited to ever acknowledge their true role of problem creators.

I’m not sure how many asset bubbles one actually has to inflate before one has a ‘light-bulb’ moment…but at three bubbles and counting, you’d think someone might’ve twigged that something might not be right with the game plan.

Nope. Not a chance.

Central bankers might be intellectually gifted in theory, but when it comes to practical application, they are beyond clueless.

Who in their right mind could possibly think the addition of a further US$130 trillion in debt since the 2008/09 debt crisis, constitutes prudent economic management?

Doing the same thing over and over again and expecting a different result is insanity. Central bankers are the inmates running the economic asylum. God help us.

On 3 February 2021, the RBA Governor, used the old ‘trickle-down wealth effect’ theory to extol the economic merits of ballooning property prices:

Sustainable increases in asset prices support household balance sheets and encourage spending through positive wealth effects,

ABC News

Note the use of the word sustainable.

Therein lies the Achilles heel for central bankers.

Asset bubbles DO NOT create sustainable increases. The artificially inflated paper profits are temporary, but the debts are permanent.

If the trickle-down effect really works, then why has the US economy needed to rely so heavily on debt to fund its GDP growth?

Since 1997, US total debt (blue line to RHS) has increased by US$60 trillion. Whereas GDP (red line to RHS) is only up by US$12 trillion. $5 of debt to produce $1 of GDP…not a good trend.


Federal Reserve Economic Data

Source: Federal Reserve Economic Data

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The more central bankers encourage people to gear up the household balance sheet, the slower the economy becomes.

Why?

That green line (to LHS) is the velocity of money. This is the rate at which a dollar circulates within the economy.

The speed with which money changes hands has been in steady decline for almost 25 years.

Why?

Those debts need to be serviced. Money that would normally have gone towards consumption is now being diverted (in ever greater amounts) to loan repayments.

Wealth Inequality:

The growing divide in the US between the haves and have nots, is proof this trickle-down wealth effect is nothing more than the economic equivalent of an old wives’ tale.

The wealth has not trickled down…which is why debt levels have needed to rise.

While the problem creators slavishly adhere to their (tested, tried and failed) ‘solutions’, the only item of household spending that could be on the up is the en-masse purchase of pitchforks.

Home Depot and Bunnings should do a roaring trade.

As I wrote on 9 February’s Rum Rebellion, the early identification of trend changes can be a patience-testing exercise.

What Nick Hanauer identified in 2014 has not gone away…it’s just building to a flashpoint.

Black Lives Matter. Trump’s ‘basket of deplorables’.

To paraphrase Ernest Hemingway’s famous quote…

How did the trend change? Two ways. Gradually, then suddenly.

As Nick Hanauer wrote…

You show me a highly unequal society, and I will show you a police state. Or an uprising. There are no counterexamples. None. It’s not if, it’s when.

When could we suddenly see a change in society’s mood?

If Ray Dalio’s study of history is any guide, it’ll be when this massive asset price bubble finally pops.

As a reminder from 9 February’s Rum Rebellion:

…that going from one extreme to another in a long cycle has been the norm, not the exception—that it is a very rare country in a very rare century that doesn’t have at least one boom/harmonious/prosperous period and one depression/civil war/revolution, so we should expect both.

Yet, I saw how most people thought, and still think, that it is implausible that they will experience a period that is more opposite than similar to that which they have experienced.

Ray Dalio — The Changing World Order

The last time income inequality reached this level was 1929…and we know what followed.


Income Inequality Chart

Source: US Center on Budget and Policy Priorities

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The greater this ‘everything’ bubble inflates, the closer it’s getting to the pointy end of a pitchfork.

Regards,

Vern Gowdie Signature

Vern Gowdie,
Editor, The Rum Rebellion

PS: In a brand new report, market expert Vern Gowdie warns of the dangers waiting in a post-COVID-19 world. Plus, he outlines the steps you should take now to protect your wealth. Learn more.


Vern has been involved in financial planning since 1986.

In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners.

His previous firm, Gowdie Financial Planning, was recognised in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top five financial planning firms in Australia.

In 2005, Vern commenced his writing career with the ‘Big Picture’ column for regional newspapers and was a commentator on financial matters for Prime Radio talkback.

In 2008, he sold his financial planning firm due to concerns about an impending economic downturn and the impact this would have on the investment industry.

In 2013, he joined Fat Tail Investment Research as editor of Gowdie Family Wealth. In 2015, his book The End of Australia sold over 20,000 copies and launched his second premium newsletter, The Gowdie Letter.

Vern has since published two other books, A Parents Gift of Knowledge, all about the passing of investing intelligence from father to daughter, and How Much Bull can Investors Bear, an expose on the investment industry’s smoke and mirrors.

His contrarian views often place him at odds with the financial planning profession today, but Vern’s sole motivation is to help investors like you to protect their own and their family’s wealth.

Vern is Founder and Chairman of The Gowdie Advisory and The Gowdie Letter advisory service.


The Rum Rebellion