The Rich and the Really Rich

By Charles      Goyette  Fed Chair Janet Yellen, we learned last month, is "greatly concerned" with America's growing wealth gap. That's a little like Al Capone being concerned with bank robberies. Is it possible that Janet Yellen has not noted the correlation and causation of Fed policies and the concentration of wealth at the top in America? Because it's pretty hard to miss. It's not just a question of the richest 1 percent getting richer. The concentration of wealth has grown even more top-heavy than that. A recent New York Times story on the phenomenon begins with the account of a private jet broker. He says that in the past the sale of big and small jets rose and fell together with the turns of the economy. But now the market is divided. According to the Times, "Sales of the largest, most expensive private jets — including private jumbo jets — are soaring, with higher prices and long waiting lists. Smaller, cheaper jets, however, are piling up on the nation's private-jet tarmacs with big discounts and few buyers." Stocks and homeless kids (2.5 million) are at all-time highs. U.S. wealth inequality was driven to all-time highs in that fateful year 1929. And while the disparities fell all the way from 1929 to 1978, a new National Bureau of Economic Research paper on wealth inequality finds that since then the super-rich have been getting super-richer. Since 1979, the top one-tenth of 1 percent's wealth share has more than tripled, jumping from 7 percent to 22 percent — back to 1929 levels. To state it differently, the top 1 percent owns about 42 percent of the wealth. Or out of a population of 1,000, the top 10 individuals own about 42 percent of the wealth. That's the rich. In that population of 1,000 people, the wealth of the single richest individual would be equal to all the wealth of the bottom 900 people put together. That's the super-rich. Needless to say, the modern intellectual consensus being what it is, the authors of the NBER report knee-jerk their way to statist recommendations to fix the lop-sided state of wealth affairs, as if government intrusion and monetary corruption hasn't done enough harm already. So they recommend things like cost controls and minimum wage policies. And of course, always the first tool out of the bag of the statist's solutions: Progressive taxation. As though slower runners could be made to run faster by strapping burdens on the swift. Such policies — to make everything right — are, I'm afraid, exactly what we need to fear from Yellen. In 2006, when she was president of the San Francisco Fed, Yellen gave a speech on income inequality in which she applauded the Fed's performance on that front, citing improvements in economic stability and productivity. Stability? Thanks to another Fed bubble, the most gut-wrenching economically destructive episode since the Great Depression had taken aim at the heart of the middle class and was squeezing the trigger as Yellen spoke. Productivity? For a half century, from 1949 to 2000, the economy grew on average 3.6 percent a year. Since then the hyper-interventionist Fed has been hard at work with Alan Greenspan's market distortions only foreshadowing those of Ben Bernanke and Yellen. The result has been annual growth of only 1.8 percent. Half that of the prior 50 years! Those are impersonal numbers, so let me frame the wealth disparity more vividly by citing a slap-in-the-face headline on Zero Hedge the other day: Mission Accomplished: Stocks & Homeless Kids Hit All-Time Highs And that is not the stuff of which social stability is made. It is always sharp moves in the markets that expose a host of problems. But for the mortgage meltdown, Bernie Madoff might still be running his Ponzi scheme. Right now a sharp decline in oil prices — although great for us at the gas pump — means stress for many shale oil producers, stress that will be reflected in the junk bond markets. In the same way lower oil prices are already exacerbating financial conditions among foreign producers like Russia, Iran, and Venezuela. Oil is not alone among the commodities signaling deflation. Gold and silver are sending the same message. It's helpful to remember the signals all three sent before the market meltdown in the fall of 2008. Gold broke $1,000 an ounce for the first time in March 2008 before it sensed trouble and zigzagged its way down. Silver topped out at $20.80, also an all-time high, the same month before it started signaling deflation. Oil peaked at $148 in the summer of 2008 and started coming down fast. While gold, silver and oil are signaling deflation today, the stock market is making new highs, trusting in a coming wave of growth. A friend notes that commodity prices and the stock market can't both be right. "If markets are discounting mechanisms, somebody has this wrong." He's right. Something has to give. It is my view that the withdrawal of Fed liquidity and the massive debt buildup tilt the scales decisively in favor of deflation. To make the case airtight, factor in the spreading global downturn: The recession in Japan despite all its money printing, deterioration in European conditions, and a continually slowing China. Because today's bubble economy is so much bigger than the last time a bubble popped in 2008, the fallout will be much bigger as well. The impact will be systemic and more painful. Social upheavals are usually the work of the young. America's growing wealth divide has provided plenty of dry tinder for a youth rebellion. The young have taken on a $1.2 trillion mountain of student loans debt. Already 6.7 million student borrowers are delinquent borrowers. And with all that debt (and presumably education), a majority of young people are unsure or outright pessimistic about their job prospects. At the same time, shifting demographics mean that the young are bearing the burden of the elderly and their retirement. For example, in the 1960s there were 5.1 workers per Social Security retiree. Currently there are 2.8. Soon there will be only two. And then, as if to add insult to injury, there is Obamacare. It has cynically shifted the health care costs of older Americans onto the backs of the healthier young. How much more abuse will they take? Already economic disparities are making civil society wobbly in other places around the world. If a major credit event means that the U.S. can no longer count on the rest of the world financing its debt and the money runs out, widespread violent and social disruptions will follow here. Is it too much to expect a revolution in the United States? Maybe. But not everything that happens is expected. As Monty Python observed, no one expected the Spanish Inquisition either.