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OK here goes.

The 1% have done very well in the last 40 years. The bottom 90% have not. The middle 9%, meh.

That’s really a matter of the 0.01% doing VERY well while the bottom 90% have experienced stagnation or decline in absolute terms.

THAT is unprecedented. The divergence has occurred before but generally in the context of some people rising faster than others.

This is the bottom 90% not moving up.

How and why is that the case?

How do the 0.01% make their money? Investments.

How do the 99% make their money? Wages and salaries.

What fields have really taken off and are representative of the middle 9%?

Finance and finance-related fields.

The 0.01% own an outsized share of financial assets — stocks, bonds, real estate, commodities and other securities and securitized assets.

The bottom 90% own hardly any.

The middle 9% own some.

Returns on capital assets have outpaced GDP growth over the last 40 years.

Wages and salaries have been flat.

Now, some of that is because most measures of wages and salaries exclude company-paid benefits. But that is not all of it.

The gains to the 0.01% have been tied to capital asset returns.

So, there are the rentiers and the workers, and the rentiers have benefited while the workers have stagnated, because capital has appreciated dramatically while the purchasing power of wages has stagnated.

The trend began in the mid-1970s. It stabilized in the early 1980s but reoccurred in the mid to late 1980s. It accelerated in the 2000s and 2010s.

What could have caused that?

Tax policy? Unlikely. The trend began in the 1970s — pre-dating the tax cuts. It reoccurred just after tax cuts in the 1980s, and 2000s, but accelerated in the 2010s when tax rates were raised.

Also, how would tax cuts impact pre-tax inequality? Investors get to reinvest the tax savings. But a capital gains tax cut from 20% to 15% improves your return by just over 6%. And the capital gains tax cut was temporary — it went up, and inequality continued to accelerate. It also applied only to long term capital gains — not the kind realized by most speculators.

Hmmmmmm….. what else could it have been?

What happened in the early 1970s, and then sped up in the mid to late 1980s, and took off like wildfire in the 2000s and 2010s?

In 1971, Nixon ended dollar convertibility to gold. There was no longer any finite asset constraining the ability of the FOMC to create money. And the presses were turned on.

The immediate result was runaway CPI. Volcker put the clamps on that — and the Gini leveled off. But then when CPI fell back, Volcker took his foot off the brakes — ushering in the 30 year plus bond bubble and rising Gini. Inequality really took off during highly expansionary rate policies under Greenspan and Bernanke — 1-IRP and ZIRP.

What’s the connection?

New money causes inflation — it erodes the purchasing power of wags. CPI has not been that high by 20th century standards. But it has been high by 19th century standards — in the 19th century, real wage gains often came from prices falling faster than wages, as wages are sticky. And it has been high relative to what it would be but-for Fed policy. Events such as the tech revolution, the end of the Cold War and the liberalization of China are all deflationary. That deflation was offset by the Fed, because it was feared — irrationally.

What did the Fed do to stave off deflation?

It did what it always does. Conduct Open Market Operations.

How does that work?

The FOMC, a part of the Fed, determines and announces a target Federal Funds Rate — on the short end of the yield curve. It then commits to buying, and buys (or sells, but it’s almost always buying) the amount of securities necessary to achieve that stated short rate — and then to maintain it, no matter how many loans and investments are made that use up the new money. It does so not really on the “open market” but in exchanges with 23 banks.

This suppresses, as noted, the short end of the yield curve, and it can similarly affect the entire curve.

It suppresses interest rates, and that is the secret sauce to the inequality. That is how the wealth is redistributed upwards, to the already-rich from everyone else.

What does that mean? Well these are exchanges, swapping of assets, but these are done in a manner that supports, and lifts, the values of all the assets held by the banks, and all capital assets generally. But as we said, those assets are owned by the 0.01%, and not owned by the bottom 90%. How does it lift values? The rate being suppressed is the Risk Free Rate — Rf in the CAPM equation, from your Corp. Fin. textbook. It’s the discount rate for measuring the present value of future cash flows. Cut the discount rate, boost the value. The same rate works for bonds. It works for commodities since they have become financialized by Wall Street. And real estate, financed at high loan to cost/value and long amortization, has always been interest rate sensitive.

This is why, if you chart FFR versus S&P 500 PE over the last 40 years, you’ll find them to be inversely correlated.

And THAT is why, if you chart FFR versus Income Gini over the last 40 years, or alternatively if you chart FFR YOY change versus Income Gini YOY change over the last 40 years, you’ll find them to be inversely correlated.

Loose monetary policy of the FOMC erodes the purchasing power of the wages earned by the 99% while suppressing the discount rate in CAPM, inflating the value of financial assets owned by the 0.01%.

What about the middle 9%? They largely work in finance or finance-related fields — their jobs are to help the 0.01% ride the wave and short the crash.

This is important because it means that an even steeper income tax system could only hope to partially offset, and would not undo or reverse, pre-tax inequality. In fact, if you came to rely upon the tax revenue to support the 90%, you would actually be hoping for pre-tax inequality to continue — much like states rely on cigarette taxes, thus cigarette use, to fund health programs.

It is important also because it shows that the problem is not a market failure or a market phenomenon at all — but is the result of a State sponsored banking cartel intervening in the free market.

It is important lastly because we now know that the problem can be reversed quite simply. The problem is simply a regressive tax — and all that must be done to undo the problem is to repeal the regressive tax. End Open Market Operations. Stop suppressing interest rates.

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