A review of things you need to know before you go home on Monday; some smaller rates changes, housing and new car market strength surprises, Hatch hived off, FOMO is not a strategy, swaps and NZD stable, & more

Michael: Well, I certainly appreciated the book that you published on the accumulation of wealth, and how it’s concentrated in the hands of the 1%. I think everybody knew intuitively that this was the case, but economists being who they are, they don’t really accept something until it’s all there in statistics. You did just a wonderful job in tying together all of these statistics, and showing how the degree to which wealth the 1% have concentrated wealth in every country.

You also made what I think is the most important point, where you said, “What’s caused this?” You came up with the broad answer that I agree with. You said that financial returns exceed the overall rate of growth, and if financial returns exceed the overall rate of growth, of course, you’re going to have the rich getting richer and richer. The reason where we have a different approach is, how do you explain all of this?

Well, when your book came out, a number of writers said, “Well, this is the Marx of the 20th century.” You showed that there was an abrupt turning point in 1980 and everything changed. I think the 1% looked at your statistics as a success story. They said, “Yes, we’re really doing better than everybody else.” The head of Goldman Sachs said, “That’s because we’re so productive” – at making money, that is.

I think the reason your book was praised so much in the West is that you didn’t come up with a threatening political solution. When they said, “This was the Marx book, the Marx of modern times.” That meant “Don’t read Marx, read this book.” I suspect that after you put all of this enormous good work into the statistics that you did on wealth and income, I think the publisher probably said, “Well, what are your solutions?”

Well, you just came up with the solution that you said in the book: to tax income and wealth. This is not a threatening solution because there’s no way that you’re going to tax wealth, as long as you have offshore banking centers to conceal wealth. As long as you have what the oil industry put in place a 100 years ago, the flags of convenience pretending to make their income abroad in zero-tax enclaves.

The fact is, the 1% don’t really make much income. Their ideal, if you’re a billionaire, you want to do what half of American corporations do: You don’t make [00:15:30] a penny of taxable income. That’s the problem. I want to go into what your book was not about. I’m not criticizing you for not writing a different book, but it’s what I write about: what is it that has created this wealth and income disparity, and why has it widened so much since 1980?

The most obvious reason is that interest rates reached a peak of 20% in 1980, and they’ve gone down ever since. In the late 1970s my old boss’s boss at Chase Manhattan, Paul Volcker said, “Let’s raise interest rates very high, because the 99% are getting too much income. Their wages are going up. Let’s raise interest to slow the economy, and that will prevent wages from going up.” He did, and that was a large reason why Carter lost the election to Ronald Reagan.

Interest rates went down from 20% to almost 0% today. The result was the largest bond market boom in history. Bonds went way up in price. The economy was flooded with bank credit, and most of this credit, apart from going into the bond market, went into real estate. There is a symbiosis between finance and real estate, and also between finance and raw materials like oil and gas and minerals extraction, natural resource rent, land rent, and also monopoly rent.

Most of the monopoly rent has come from the privatization that you had from Ronald Reagan, Margaret Thatcher, and the whole neoliberalism. If you look at how did this 1% get most of this wealth? Well, if you look at the Forbes list of the billionaires in almost every country, they got wealth in the old-fashioned way: from taking it from the public domain. In other words, privatization.

You have the largest privatization and transfer of wealth from the public sector to the private sector in history, and specifically selloffs to the financial sector. And all of a sudden, instead of infrastructure, public health, other basic needs being provided at subsidized rates to the population, you have a privatized owners financed by the banks, raising the prices they charge to whatever they can get, without any market borrowing power.

In the United States, the government is not even allowed to bargain with the pharmaceutical companies for the drug prices. There’s been a huge monopolization, a huge privatization, a huge flooding of the economy with credit, and one person’s credit is somebody else’s debt. You’ve described the 1% wealth in the form of savings, but I focus on the other side of the balance sheet. This 1% finds its counterpart in the debts of the 99%.

The 1% have got wealthy by indebting the 99% for housing that has soared in price, 20% just in the last year in the United States, and also for medical care, utilities and education. The economy has been forced increasingly into debt just to function without wages and living standards rising.

How can one solve this? Taxation will not be enough. The only way that you can actually reverse this concentration of wealth is to begin wiping out the debt. If you leave the debt in place of the 99%, then you’re going to leave the 1% savings all in place. These savings are largely tax-exempt. Basically, I think you’ve left out the government’s role in this wealth creation of the 1%. Finance has indeed grown faster than the economy, and finance and real estate have merged into the Finance, Insurance and Real Estate sector, the FIRE sector.

High finance has absorbed the oil industry, the mining industry, and it’s absorbed most of the government. Financial wealth has become the economy’s central planner. It’s not planned in Washington or Paris or London. It’s planned in Wall Street, the City of London and the Paris Bourse. The economy is being managed financially, and the object of financial management is to make capital gains.

As your statistics point out, capital gains are really what explains [00:20:30] the increase in wealth. You don’t get rich by saving out of earnings and income. Rent is for paying interest. Income is for paying interest. You get rich off the government subsidizing an enormous increase in the value of stocks and bonds by the central banks.

The reason that inequality is occurring is that the largest public utility of all, money creation and banking, is left in private hands. Privatized banking in the West is very different from what government banking is in say, China. Government banking would create credit for public uses, for what the economy needs to grow. In the United States and throughout the West, banks create credit to slow the economy from growing, they make loans not to create new means of production and new factories. They make loans against property already in place – mainly to buy real estate already in place. Some 80% of bank loans in America and Europe are for real estate.

Banks make loans for corporate takeovers to buy other companies. They don’t make loans to build new factories, which is what government money creation in China would do. As long as you leave banking and credit in private hands, you’re going to have banks creating their product: debt. The more debt they create, the more debt service that borrowers, the 99%, have to pay the banks in order to obtain a house. or an education. or medical care, or just to break even.

The more money they pay the financial sector, the less they have to pay for goods and services. As the economy polarizes between the 1% and the 99%, the economy as a whole, shrinks, because more and more of its income is spent not on production and consumption, it’s spent just on debt service. My solution is to restore banking and credit to public hands to prevent the lending that simply finances asset-price inflation.

Second, you talked about taxing. Some taxes are more important than others. As long as the banks and the financial sector write the tax codes, as long as the government lawmakers are basically employees of the financial sector that finances their political campaigns, you’re not going to be able to tax them, or to close down the fictitious transfer pricing that corporations use to pretend not to make money except in artificial enclaves without an income tax.

You have to tax the source of the money that pays interest to the banks. That source is mainly economic rent. It’s primarily land rent. If you would tax on the increase in land values, if you’d have a land tax, which is what the whole 19th century was about – Adam Smith, John Stuart Mill and even Marx. You would not have this increased rent being paid to the financial sector to be monopolized by the 1%.

You’d have to change the way in which the tax code is based, away from earned income and wealth. But that is really not very practical in today’s political situation. You’d have to have a land tax and a natural resource tax to get rid of monopoly rent. You also have to return basic key infrastructure to the public domain, where it was before 1980, so that basic needs can be supplied at low prices, not creating monopoly rent for the 1%.

You have to realize that financiers use this wealth to take over the economy. This has to be reversed, because once you have wealth taking the form of financial claims and loans to other people as debt, you have compound interest. Any rate of interest is a doubling time, and compound interest is always going to grow faster than the economy’s real growth. The way to prevent this isn’t simply to lower the interest rate, which has been done today, to 0.1%. The only solution is to wipe out the overall debts that are stopping economic growth  Link

Not a fan of Church, but really start to believe this is only going to continue as the hole is to big to stop the stimulation. Sad to see gap grow till desperation takes over. 

Councils Sustainable Finance Framework might well be the most harrowing combination of 4 words that I’ve ever encountered