Economic Inequality: It’s Far Worse Than You Think

Economic Inequality: It’s Far Worse Than You Think. By Nicolas Fitz.

In a candid conversation with Frank Rich last fall, Chris Rock said, “Oh, people don’t even know. If poor people knew how rich rich people are, there would be riots in the streets.” …

In their 2011 paper, Michael Norton and Dan Ariely analyzed beliefs about wealth inequality. They asked more than 5,000 Americans to guess the percentage of wealth (i.e., savings, property, stocks, etc., minus debts) owned by each fifth of the population.

Next, they asked people to construct their ideal distributions. Imagine a pizza of all the wealth in the United States. What percentage of that pizza belongs to the top 20% of Americans? How big of a slice does the bottom 40% have? In an ideal world, how much should they have?

The average American believes that the richest fifth own 59% of the wealth and that the bottom 40% own 9%.

The reality is strikingly different. The top 20% of US households own more than 84% of the wealth, and the bottom 40% combine for a paltry 0.3%. The Walton family, for example, has more wealth than 42% of American families combined.

Eye-opening and powerful, though a tad slow.

We don’t want to live like this. … As the journalist Chrystia Freeland put it, “Americans actually live in Russia, although they think they live in Sweden. And they would like to live on a kibbutz.”

Norton and Ariely found a surprising level of consensus: everyone … wants a more equal distribution of wealth than the status quo. …

In a study published last year, Norton and Sorapop Kiatpongsan used a similar approach to assess perceptions of income inequality. They asked about 55,000 people from 40 countries to estimate how much corporate CEOs and unskilled workers earned. Then they asked people how much CEOs and workers should earn. The median American estimated that the CEO-to-worker pay-ratio was 30-to-1, and that ideally, it’d be 7-to-1. The reality? 354-to-1. Fifty years ago, it was 20-to-1. Again, the patterns were the same for all subgroups, regardless of age, education, political affiliation, or opinion on inequality and pay. “In sum,” the researchers concluded, “respondents underestimate actual pay gaps, and their ideal pay gaps are even further from reality than those underestimates.”

This is an inevitable consequence of the system we currently use to manufacture money.

Money is created by borrowing. It is created out of thin air, by banks. (Governments can also “print” it, but that only accounts for about 5% of the money created since the current system began in 1971.)

The best financial strategy for the past 40 years has been to borrow as much money as you can and buy an asset — real estate, stocks, bonds, it doesn’t really matter. Sit back and wait.

Others are borrowing too, which creates more money. More money sloshing around bids up the prices of everything. But the new money is lent by the banks for a purpose, like buying a property, so the prices of things for which the new money is created go up the fastest. So all that new money bids up prices, but especially asset prices. Ergo, asset prices rise (much) faster than wages or inflation.

Surprise! All asset prices are currently at record highs, by any ratio. (Except gold and silver, the old money, whose prices are suppressed by governments and banks because rising gold and silver prices would alert people to the high underlying rate of inflation and reduce confidence in the paper stuff.)

Almost without exception (mainly entertainers or technical innovators), today’s rich got rich by borrowing and getting lucky. Pick the right asset of the moment, the one that’s about to go for a run and rise the fastest for the next decade, and fortunes are made.

Guess wrong, and you lose. For example, the latest hedge fund to blow up is Archegos:

Rehypothecated Leverage: How Archegos Built A $100 Billion Portfolio Out Of Thin Air… And Then Blew Up. By Tyler Durden.

One week after the biggest, and most spectacular hedge fund collapse since LTCM, we now have an (almost) clear picture of how Bill Hwang’s Archegos family office managed to single-handedly make a boring media stock the best performing company of 2021, but then when its luck suddenly ended it was margin called into extinction, leading to billions in losses for the banks …

It’s like going to a casino where the odds are stacked in your favor. Some people are going to win, hugely, especially if they have insider information, connections, fewer ethics, and luck. Got to be in it to win it.

And this is how our current oligarchic class was created. That top 1% mostly made their money by luck, with relatively little skill. They are not particularly talented, but they now have such stupendous wealth that they buy everyone and run society as a somewhat-unified group.

From the video above, that’s the 1% guy on the end with his own ten columns of green because they wouldn’t fit on the graph otherwise

Which is how our society ended up being run by a fairly stupid and mediocre elite. Which is why they keep making such foolish blunders. We are no longer led by a talented upper class selected more by merit, as per most of the West for the century up until the 1970s. Now we are led by a financial aristocracy that lucked its way to power. A wise ruling class? Forget it, not any more. Today we are ruled by lucky donkeys.

Btw, notice how money manufacture and the extent of wealth is rarely talked about, and how most people have quite the wrong idea (see video above). That’s not by chance. The word comes from the top not to talk about how money is manufactured or how concentrated it has become. It’s not forbidden or secret exactly, but the topic is rarely raised. Funny that. Instead, we are distracted by confected divisions over race, identity politics, etc.

The biggest problem is class, and it’s becoming too big to hide. Each year it gets bigger. These grotesque imbalances are not sustainable in a democracy. Which is why democracy is crumbling.

All this stems from ability to manufacture money out of thin air. Which started in 1971, when the financial system cut its last ties to gold, and thus became technically unconstrained. See WTF Happened In 1971?