Op-Ed Politics, Money, and Wealth Inequality: How Fiat Money and The Political System Entrench Wealth Inequality, and What You Can Do About It.

Executive Brief

Growing income and wealth inequality has afflicted most nations, regardless of the political and economic systems in place. Credit creation by banks and the government inflates the money supply; creates stock and property bubbles; and leaves the general populace to pay the taxes used to repay debt owed to affluent bond-holders. The overall effect is to make the rich richer.

Read the full story below. 

“I gave to many people [politicians], before this, before two months ago, I was a businessman. I give to everybody. When they call, I give. And do you know what? When I need something from them two years later, three years later, I call them, they are there for me. And that’s a broken system.” — Donald Trump, 2015

In 2014 Gabriel Zucman and his peer Emmanuel Saez released a research paper that improves our understanding of the fact that wealth is becoming more concentrated in the hands of a few. The wealthiest one percent of U.S families take double the share of new income that they did two decades ago. One in every thousand people now own more than twenty-two percent of the total U.S economic pie.

Wealth inequality is not unique to the USA. Other western nations like Canada, Sweden, Britain, Australia and New Zealand; and China; and even developing nations like India have all seen increases in wealth disparity over time regardless of their economic or political regime.

Denmark and Sweden have highly re-distributed incomes, and are among the worst developed countries for wealth inequality. Most studies on the issue employ official personal-tax statistics that fail to account for two traits that are typical of highly-taxed societies:
(1) that people represented in those statistics may hold great wealth overseas, and;
(2) that people represented in those statistics may hold great wealth in family firms.

It is therefore highly probable that the true wealth inequality in highly-taxed societies is even greater than the data suggests. That is, systems designed to reduce wealth inequality could actually increase it!

Saez and Zucman attribute much of the recent rise in income and wealth inequality to an “upsurge in the labor incomes earned by senior executives and successful entrepreneurs”. But that conclusion obfuscates the causes by conflating them with the symptoms. It’s like watching a house burn down and saying the house is burning because there is a fire. It is more important to know how that fire began.

In 1971, when Nixon’s administration abandoned the Gold Standard, US law had required that U.S currency notes be exchangeable in gold, severely limiting credit creation. Before then, wealth inequality had been decreasing.


Zoran Balac studied the relationship between money supply and wealth inequality. (Money supply -- ‘M1’— is cash plus liquid assets.) He found that money supply is almost as closely correlated with wealth inequality as education levels are.


How Is This Happening?

There are several ways in which wealth transfers result from money creation. The most important is the printing of money by central banks. In the USA, it is the Fed that prints and distributes new currency to its member banks. Those banks then keep that money as a ‘reserve’ which legally allows them to create up to ten times that reserve as loans to the public. Once the loans are made, the borrowers may purchase market assets like property, stocks, and government debt securities -- which allows the government to continue maintaining budget deficits.

This investment creates bubbles that are very profitable for people invested in those asset classes. In the United States, the top-five-percent-wealthiest families own more than two thirds of all stocks. In the housing market, rising house-prices result in higher rents. Therefore, increasing the cost of living for those unable to afford a home themselves.

Credit creation diverts investment and jobs from the real economy – the creation and marketing of goods and services – to an ethereal economy of stock-and-property speculation and hedge-fund-manager salaries.

This scheme is paid at the expense of everyone who couldn’t or wouldn’t join the money-creation game early. Those ordinary citizens who are the last in line to get their hands on the new money can only spectate as commodity prices rise around them. It is also the working-class citizens who must repay, via taxes, the debts owed to the wealthy who own the bonds.

The worst part is that there is never enough money in the system to repay all the debt/interest on the debt. To prevent collapse, the markets must receive a theoretically open-ended number of ‘monetary injections,’ administered every time the markets slow down. Our economic prosperity, job-markets, and personal well-being are at the mercy of those profiting from this scheme, and their inclination and ability to continue blowing air into an overinflated balloon.

The fiat monetary system may be the most brilliantly orchestrated ponzi scheme of all time: taxes are imposed on middle-class workers to pay interest on government debt that is owed to rich people, and to the bankers who created the money out of thin air.


What Can We Do?

Many voters still expect bureaucrats to make decisions in their best interests, and perhaps this is why there has been no outcry over ‘quantitative easing’. For their part, the politicians certainly understand that money-printing makes for happy voters (in the short-term).

Digital currencies like Bitcoin and DNotes are controlled by mathematics and not governments. They are not just payment protocols that allow instant transfer of payments worldwide at near-zero cost. They are resistant to inflation. They protect the economy. They could protect your job, your income, and your savings from the quintessential perils of reckless money printing. They are, the solution to the perpetual-money-creation problem.

Think it over, readers. Roll the words off your tongue:

they are the solution to the money-creation problem.

The views expressed by the authors on this site do not necessarily represent the views of DCEBrief or the management team.

Author: Timothy Goggin

Timothy Goggin is an Austrian School economic analyst with an interest in the application of moral philosophy and decentralized systems. He studies economics at the Business School at Victoria University of Wellington, New Zealand. His area of research is the consequential and moral dimensions of implementing digital currencies and the resulting synergies for consumers in the trading environment.

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