Monday, 19 May 2014

“The Crash of 2008 has been used to engineer a historic redistribution of wealth in favour of the financial aristocracy”

French leftist Thomas Piketty’s best-selling book Capital in the Twenty-First Century continues to make waves with his argument that rising inequality is inevitable in mature capitalism, that the rich gets richer as their capital inexorably snowballs,  and his conclusion that “a global wealth tax” is the only solution.

His conclusions have been enthusiastically embraced by high-taxers and the envy-ridden, even if few of them have bothered to read his arguments.

Piketty’s book “is meant to be a return to the kind of economic history, of political economy, written by predecessors like Marx and Adam Smith.” Ironically, for a French book with this allegedly historic sweep, it utterly ignores an earlier French book which first described the mechanism now known as the Cantillon Effect, the result of massive expansion of counterfeit capital by governments’ central banks that rewards those closest to the states’ money spigots.  In essence, that an expansionist monetary policy tends to benefit the rich at the expense of the poor.

You see, in the world outside the French economist’s ivory tower, new money doesn’t come into the system by magic; it is borrowed into existence. It matters who gets this money first, since the new new money’s first users get to spend it before prices change as the new money ripples out into the community.

A bank gets newly-issued currency first and even augments it by creating extra credit out of thin air. By the time this new money is fully in circulation, the low-paid and small savers find its purchasing power has fallen with no corresponding rise in their income. This is known as the Cantillon effect to this day.

Big borrowers, big government and big government cronies are the big winners. Big savers and those on fixed incomes are the big losers.

It’s best to be the government, it’s second-best to be the defence contractor or Wall Street banker who get sweetheart deals, it’s third-best to be the fancy restaurant that caters to the Wall Street bankers, etc. If you’re running a deli in Idaho, you’re going to see your input prices rise before your customers are able to pay more for your sandwiches. So there will be a general redistribution of wealth to the people closest to the money spigot, every time there is a new injection of money that disturbs [prices].

Massive monetary injections in recent years have made the injustice worse, not better.  In particular,

Massive credit expansion entering the stock and real estate markets has created artificial inequality as it drives up the prices of stocks and real estate, which are owned predominantly by the rich.

If you’re currently locked out of buying your first home because house-price inflation has put buying one beyond your reach, then you should understand that the Cantillon Effect is partly responsible. Understand that, and you’re already one step ahead of Monsieur Piketty.

Piketty, in his haste to give government his approval to tax the rich in the pursuit of equality, seems completely unaware that it is government itself that is the problem. By embracing crony-capitalism and inflationary monetary policies, the state enriches the rich and impoverishes the poor. This is the exact opposite of the effect intended.

In a further irony, Piketty’s own argument is that inequality has increased in the last four decades. Why is this ironic? Well, see here:


Any idea what happened in 1971? Yes, that was the year Richard Nixon permanently detached the dollar from gold, unleashing the monetary spigots and starting a four-decade spend-up by the borrowers.

Nixon’s move, with the country’s gold, ‘meant the end of national financial discipline and the start of a four-decade spree during which we have lived high on the hog’….

A spending spree that couldn't be achieved just through stealing money from citizens through the tax system, but one which could only be kept going by the creation of more money.
    It was, you could argue, the beginning of the 'consume, don't produce' Western economies…

And the biggest consumers have been who? Answer: those who were closest to the governments’ money spigots.

In other words, the biggest cause of unearned inequality in the last four decades has not been free markets, but state management of markets – the state causes the inequality it later claims to solve.  The irony here is that Piketty’s research has actually

reinforced the hard money free market argument in a way that no hard money, free market economist could. Piketty cites the split in the wealth trends of the 1% in the USA and the rest of the country as having started in earnest in the early 1970s without mentioning the most important economic development of that time, the end of honest money. The end of the gold standard which facilitated the “financialisation” of the economy.
    Much to the shock of many statist economists, fiat money  actually contributes to inequality. Gold it turns out is not in fact a “barbarous relic” at all. It is a key, perhaps the key to a sustainable economy. It keeps things in check. It encourages saving and wise investment. Fiat money encourages the reckless creation of bubbles and the economic polarisation of society.

You would think a decent researcher would have noticed this?

Worse, a researcher working in today’s vastly expansionist monetary environment would have to be blind not to have noticed “that the Crash of 2008 has been used to engineer a historic redistribution of wealth in favour of the US financial aristocracy.”

The wealth of the [moochers] who own the bulk of stocks, bonds, hedge fund shares and other financial instruments has never been greater, and is growing at a record pace. The wealthiest 1 percent of the US population raked in 95 percent of all income gains between 2009 and 2012. As reported … earlier this week, the world's billionaires saw their combined wealth soar more than $1 trillion last year alone.
    Piketty’s … "revelation" that has brought him American fame is that the return on "capital" has exceeded economic growth for some time, exceeding any possible productive proportion - dating back curiously to the early 1970's without mention of the major event that took place in August 1971.

An unconscionable omission.

The ascendancy of financial domination to such a degree … can lead to nowhere but concentration; such is inevitable. If you want to classify it as income inequality, fine. In truth, it is a mixture of cronyism and fascism, the sum total of intense monetarisms. The inefficiency to which it all infects the real economy is what ends up as socialists’ collective ire. What it is not is capitalism.

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