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Raging Inequality May Cause Unrest and Violence In America and the Rest of Western World

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? Washington’s Blog


Preface: While conservatives are against redistribution of wealth and liberals want to tax the affluent, conservatives and liberals, the affluent and the less well-heeled should all agree that we have to stop the surge in inequality from rising further:

  • As Robert Shiller said in 2009:

    And it's not like we want to level income. I'm not saying spread the wealth around, which got Obama in trouble. But I think, I would hope that this would be a time for a national consideration about policies that would focus on restraining any possible further increases in inequality.

  • The father of modern economics - Adam Smith - didn't believe that inequality should be a taboo subject
  • Warren Buffet, one of America's most successful capitalists and defenders of capitalism, points out, "There's class warfare, all right, but it's my class, the rich class, that's making war ...."
  • Conservatives - as well as liberals - are against rampant inequality. But all Americans underestimate the amount of inequality in our country

And while I am not calling for violence, I wonder if this is like South Africa at the end of the Apartheid era, where those in power had to hand over the reins to the majority to prevent violence.

Raging inequality was largely responsible for the Great Depression and for the current financial crisis.

I noted in January:

Egyptian, Tunisian and Yemeni protesters all say that inequality is one of the main reasons they're protesting.

However, the U.S. actually has much greater inequality than in any of those countries.

Is there any way that the growing inequality could cause unrest in America or the rest of the Western world?

Initially, the Greek and Spanish riots have grown out of bailouts and other windfalls for the big banks and hedge funds (see this, this and this), and austerity for the working stiff. So in a sense, they are about inequality.

Moreover, I pointed out in February:

Agence France-Press reports today:

The International Monetary Fund stands ready to help riot-torn Egypt rebuild its economy, the IMF chief said Tuesday as he warned governments to tackle unemployment and income inequality or risk war.

Forbes reported in February:

Harvard economist Kenneth Rogoff, co-author of a best-selling book on financial crises, “This Time It’s Different,” told Forbes today in an exclusive interview, that the high unemployment rate and high levels of debt in the U.S. will sooner or later trigger serious “social unrest from the income disparities in the U.S.”


The Obama administration has “no clue,” he told me what do about this terrible disparity in the economy that is bound to erupt sooner or later, he feels.

“I don’t understand why people don’t wake up to the crisis they are creating,” he said to me just minutes after appearing at a Council on Foreign Relations round-table on “Currency Wars.”

And I wrote in June:

CNN's Jack Cafferty notes that a number of voices are saying that - if our economy continues to deteriorate (which it very well might) - we are likely headed for violence, and civil unrest is a growing certainty.

Watch the must-see CNN viewer comments on this issue:

Newsweek wrote two weeks ago:

Reality is beginning to break through. Gas and grocery prices are on the rise, home values are down, and vast majorities think the country is on the wrong track. The result is sadness and frustration, but also an inchoate rage more profound than the sign-waving political fury documented during the elections last fall.

***

In search of the earthly toll of this outrage, NEWSWEEK conducted a poll of 600 people, finding vastly more unquiet minds than not. Three out of four people believe the economy is stagnant or getting worse. One in three is uneasy about getting married, starting a family, or being able to buy a home. Most say their relationships have been damaged by economic woes or, perhaps more accurately, the dread and nervousness that accompany them.

Could these emotions escalate into revolt?


Why Are People So Angry?

Why are people so angry?

Well, as the Newsweek article points out:

Corporate earnings have soared to an all-time high. Wall Street is gaudy and confident again. But the heyday hasn’t come for millions of Americans. Unemployment hovers near 9 percent, and the only jobs that truly abound, according to Labor Department data, come with name tags, hairnets, and funny hats (rather than high wages, great benefits, and long-term security). The American Dream is about having the means to build a better life for the next generation. But as President Obama acknowledged at a town-hall meeting in May, “a lot of folks aren’t feeling that [possibility] anymore.”

By way of background, America - like most nations around the world - decided to bail out their big banks instead of taking the necessary steps to stabilize their economies (see this, this and this). As such, they all transferred massive debts (from fraudulent and stupid gambling activities) from the balance sheets of the banks to the balance sheets of the country.

The nations have then run their printing presses nonstop in an effort to inflate their way out of their debt crises, even though that effort is doomed to failure from the get-go.

Quantitative easing by the Federal Reserve is obviously causing food prices to skyrocket worldwide (and see this, this and this).

But the fact is that every country in the world that can print money - i.e. which is not locked into a multi-country currency agreement like the Euro - has been printing massive quantities of money. See these charts.

Moreover, the austerity measures which governments worldwide are imposing to try to plug their gaping deficits (created by throwing trillions at their banks) are causing people world-wide to push back.

As I warned in February 2009 and again in December of that year:

Numerous high-level officials and experts warn that the economic crisis could lead to unrest world-wide - even in developed countries:

  • Today, Moody's warned that future tax rises and spending cuts could trigger social unrest in a range of countries from the developing to the developed world, that in the coming years, evidence of social unrest and public tension may become just as important signs of whether a country will be able to adapt as traditional economic metrics, that a fiscal crisis remains a possibility for a leading economy, and that 2010 would be a “tumultuous year for sovereign debt issuers”.
  • The U.S. Army War College warned in 2008 November warned in a monograph [click on Policypointers’ pdf link to see the report] titled “Known Unknowns: Unconventional ‘Strategic Shocks’ in Defense Strategy Development” of crash-induced unrest:

    The military must be prepared, the document warned, for a “violent, strategic dislocation inside the United States,” which could be provoked by “unforeseen economic collapse,” “purposeful domestic resistance,” “pervasive public health emergencies” or “loss of functioning political and legal order.” The “widespread civil violence,” the document said, “would force the defense establishment to reorient priorities in extremis to defend basic domestic order and human security.” “An American government and defense establishment lulled into complacency by a long-secure domestic order would be forced to rapidly divest some or most external security commitments in order to address rapidly expanding human insecurity at home,” it went on. “Under the most extreme circumstances, this might include use of military force against hostile groups inside the United States. Further, DoD [the Department of Defense] would be, by necessity, an essential enabling hub for the continuity of political authority in a multi-state or nationwide civil conflict or disturbance,” the document read.

  • Director of National Intelligence Dennis C. Blair said:

    "The global economic crisis ... already looms as the most serious one in decades, if not in centuries ... Economic crises increase the risk of regime-threatening instability if they are prolonged for a one- or two-year period," said Blair. "And instability can loosen the fragile hold that many developing countries have on law and order, which can spill out in dangerous ways into the international community."***

    "Statistical modeling shows that economic crises increase the risk of regime-threatening instability if they persist over a one-to-two-year period."***

    “The crisis has been ongoing for over a year, and economists are divided over whether and when we could hit bottom. Some even fear that the recession could further deepen and reach the level of the Great Depression. Of course, all of us recall the dramatic political consequences wrought by the economic turmoil of the 1920s and 1930s in Europe, the instability, and high levels of violent extremism.”

    Blair made it clear that - while unrest was currently only happening in Europe - he was worried this could happen within the United States.

    [See also this].

  • Former national security director Zbigniew Brzezinski warned "there’s going to be growing conflict between the classes and if people are unemployed and really hurting, hell, there could be even riots."
  • The chairman of the Joint Chiefs of Staff warned the the financial crisis is the highest national security concern for the U.S., and warned that the fallout from the crisis could lead to of "greater instability".

Others warning of crash-induced unrest include:

Unemployment is soaring globally - especially among youth.

And the sense of outrage at the injustice of the rich getting richer while the poor get poorer is also a growing global trend.

Countries worldwide told their people that bailout out the giant banks was necessary to save the economy. But they haven't delivered, and the "Main Streets" of the world have suffered.

As former American senator (and consummate insider) Chris Dodd said in 2008:

If it turns out that [the banks] are hoarding, you’ll have a revolution on your hands. People will be so livid and furious that their tax money is going to line their pockets instead of doing the right thing. There will be hell to pay.

Of course, the big banks are hoarding, and refusing to lend to Main Street. In fact, they admitted back in 2008 that they would. And the same is playing out globally.

As I noted in February:

No wonder former U.S. National Security Adviser Zbigniew Brzezinski ... warned the Council on Foreign Relations that:

For the first time in human history almost all of humanity is politically activated, politically conscious and politically interactive. There are only a few pockets of humanity left in the remotest corners of the world that are not politically alert and engaged with the political turmoil and stirrings that are so widespread today around the world.


***

America needs to face squarely a centrally important new global reality: that the world's population is experiencing a political awakening unprecedented in scope and intensity, with the result that the politics of populism are transforming the politics of power. The need to respond to that massive phenomenon poses to the uniquely sovereign America an historic dilemma: What should be the central definition of America's global role?



[T]he central challenge of our time is posed not by global terrorism, but rather by the intensifying turbulence caused by the phenomenon of global political awakening. That awakening is socially massive and politically radicalizing.

It is no overstatement to assert that now in the 21st century the population of much of the developing world is politically stirring and in many places seething with unrest. It is a population acutely conscious of social injustice to an unprecedented degree, and often resentful of its perceived lack of political dignity. The nearly universal access to radio, television and increasingly the Internet is creating a community of shared perceptions and envy that can be galvanized and channeled by demagogic political or religious passions. These energies transcend sovereign borders and pose a challenge both to existing states as well as to the existing global hierarchy, on top of which America still perches.

***

That turmoil is the product of the political awakening, the fact that today vast masses of the world are not politically neutered, as they have been throughout history. They have political consciousness.


***


Politically awakened mankind craves political dignity, which democracy can enhance, but political dignity also encompasses ethnic or national self-determination, religious self-definition, and human and social rights, all in a world now acutely aware of economic, racial and ethnic inequities. The quest for political dignity, especially through national self-determination and social transformation, is part of the pulse of self-assertion by the world's underprivileged


***


We live in an age in which mankind writ large is becoming politically conscious and politically activated to an unprecedented degree, and it is this condition which is producing a great deal of international turmoil.


That turmoil is the product of the political awakening, the fact that today vast masses of the world are not politically neutered, as they have been throughout history. They have political consciousness.

Watch an excerpt:



 

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Wed, 07/20/2011 - 01:24 | 1472944 gwar5
gwar5's picture

Ouch, South Africa is a bad example.

There is more violence now in South Africa than before. Over 3000 white farmers have been hacked to death with machetes in racist attacks over the last 10 years. Black on black violence has also escalated and they're devolving into violent factions led by youth movements. The government is dysfunctional and the standard of living has not improved. South Africa is going backwards. 

America and the West are examples of nations with healthy middle classes. Every spot on the planet has wide wealth disparities. MENA? China? Russia? Brazil?  Even Germany, France and the UK. Take your pick. The Roman, Byzantine, Egyptian, Mayan, Sioux Indians, and Old Mesopotamian empires also had huge disparities of wealth. 

Wealth disparities are also called diversity and it's a fact of life. Life is graded on a curve and some people will never ackowledge that fact.  Life is based on a mixed bag of genetics, intelligence, ambition, creativity, your environment and hard work. Diversity is the spice of life. If you're rich, be like Hef and share your genes with all the hot poor women you want. If you're poor, nobody is stopping you from marrying up or working harder or smarter. Either way, not all the salmon are supposed to make it upstream.  

Throughout history no civilization has ever been able to achieve anything less than about 10% in poverty over time. Under Bush 11%, under Obama 13%. But big picture historically, over 5000 years, we're doing pretty damn good.

And the notion that the 10% in poverty is always made up of the same people over time is just wrong. Who is classified as "poor" fluctuates over ones lifecycle.  Young people are poor when they go to college and start out, then move up, and then become poor again when they get old and retire. You can be rich and poor and back again all in just a few years.  Deciding who is rich and who is poor is a very dynamic undertaking.

The 3% permanent underclass are mostly the disabled, mentally ill, career criminals, alcoholics/addicts, and the HS drop outs & unskilled,  or about 10 million people in the USA.  Even those pemanent "poor" now have cars, A/C, flat screens and X-boxes. Hookers, pandhandlers, and drug dealers are considered "poor" and get food stamps, but could be hauling in $20K - $200K per year tax free.

 

 

Wed, 07/20/2011 - 00:24 | 1472903 JMT
JMT's picture

{{{Corporate earnings have soared to an all-time high. Wall Street is gaudy and confident again. But the heyday hasn’t come for millions of Americans. Unemployment hovers near 9 percent, and the only jobs that truly abound, according to Labor Department data, come with name tags, hairnets, and funny hats (rather than high wages, great benefits, and long-term security). The American Dream is about having the means to build a better life for the next generation. But as President Obama acknowledged at a town-hall meeting in May, “a lot of folks aren’t feeling that [possibility] anymore.”}}}

 

Over 9.25 IPADS were sold, 20 million Iphones. Seems like everyone under the age of 30 owns one -- wonder how they can afford the $130 a month bill for 2 years (or likely forever) when they are servicing well over $100,000 in Credit Card, Student Loan & Auto Debt by age 25.

I was there myself. By 2008 I had over $76,000 in credit card debts alone spread across at least 12 different cards. Now got it to just over $15,000..   But I wasn't much different than the next person who just rationalizes it with excuses (while mommy gives them a handout to pay their rent & car payment) ..  I do sacrifice and drive around in a three year old Honda with just under 28,000 miles on it.

Wed, 07/20/2011 - 00:23 | 1472902 JMT
JMT's picture

{{{Corporate earnings have soared to an all-time high. Wall Street is gaudy and confident again. But the heyday hasn’t come for millions of Americans. Unemployment hovers near 9 percent, and the only jobs that truly abound, according to Labor Department data, come with name tags, hairnets, and funny hats (rather than high wages, great benefits, and long-term security). The American Dream is about having the means to build a better life for the next generation. But as President Obama acknowledged at a town-hall meeting in May, “a lot of folks aren’t feeling that [possibility] anymore.”}}}

 

Over 9.25 IPADS were sold, 20 million Iphones. Seems like everyone under the age of 30 owns one -- wonder how they can afford the $130 a month bill for 2 years (or likely forever) when they are servicing well over $100,000 in Credit Card, Student Loan & Auto Debt. 

I was there myself. By 2008 I had over $76,000 in credit card debts alone spread across at least 12 different cards. Now got it to just over $15,000..   But I wasn't much different than the next person who just rationalizes it with excuses (while mommy gives them a handout to pay their rent & car payment) ..  I do sacrifice and drive around in a three year old Honda with just under 28,000 miles on it.

Wed, 07/20/2011 - 00:42 | 1472921 RockyRacoon
RockyRacoon's picture

I do sacrifice and drive around in a three year old Honda with just under 28,000 miles on it.

I'll assume that to be sarcasm, so I'll let it go.   If not, god help us all.

Tue, 07/19/2011 - 23:20 | 1472817 Pool Shark
Pool Shark's picture

 

So, let me get this straight:

To prevent the great unwashed from taking things from the 'rich' by force, the gubmint has to take things from the 'rich' by force, first.

Makes sense to me...

 

Tue, 07/19/2011 - 22:42 | 1472746 penisouraus erecti
penisouraus erecti's picture

You people kill me - all this ranting about 'income inequality' and blaming all the wrong entities ('Big business', Wall Street, etc). Have you asked yourself how the eff did things get that way?: Who makes the rules and turns a blind eye to Wall Street, the Fed, and the uber wealthy?

Place the effing blame on DC where it belongs instead of thinking they are somehow going to solve these problems. They are the assholes that created and enabled these problems to exist and continue for f$%cks sake.

Tue, 07/19/2011 - 20:07 | 1472390 DosZap
DosZap's picture

“Under the most extreme circumstances, this might include use of military force against hostile groups inside the United States.

 

Yes, and what if that HOSTILE GROUP includes 50-75+ million Americans.....what do you do with that group?.

Think the entire Armed Forces could handle that?.

Hell no.

Tue, 07/19/2011 - 21:29 | 1472589 New_Meat
New_Meat's picture

Dos-lotsa' "unlawful orders" complaints would be in the making.  The OIF/OEF/etc. vets have had "no civilian casualties" ROE drilled into their heads, and seen political pig-fuckers like Murtha and Durban e.g. evidence:

http://www.youtube.com/watch?v=b7FaSEQ-fKc

and http://www.youtube.com/watch?v=hMedVWUsSFU where he attempted to "walk back" his slander.

I don't think that it would happen, that is, U.S. military assaulting U.S. citizens.

But, of course, we have this (Obama arguing for a "civilian defense force", as though the military isn't under Civilian control) {and there are many others}:

http://www.youtube.com/watch?v=gwaAVJITx1Y

and we can see many instances of this attempt to inject the meme.  I'd guess it catches on with some.

- Ned

 

 

Wed, 07/20/2011 - 00:08 | 1472882 FeralSerf
FeralSerf's picture

The military has assaulted and killed US citizens many times in the past.  They will do so again.

Tue, 07/19/2011 - 20:00 | 1472377 DosZap
DosZap's picture

The Obama administration has “no clue,” he told me what do about this terrible disparity in the economy that is bound to erupt sooner or later, he feels.

I disagree,(IMHO) HE wants this to happen..............it would be the Go signal  he has wanted to give, in order to wield, to take power for as long as he can hold it.

This would be the Coup de grace, for him.

The man is pure incarnate evil.
Your are known by the company you keep..................

Tue, 07/19/2011 - 19:28 | 1472307 PulauHantu29
PulauHantu29's picture

"Deficits don't matter" Cheney said.

Tue, 07/19/2011 - 20:02 | 1472380 DosZap
DosZap's picture

They dont, as long as the ratios are in line,w/income/GDP, and the deficts can be repaid.............

Tue, 07/19/2011 - 20:07 | 1472170 New_Meat
New_Meat's picture

"Raging inequality was largely responsible for the Great Depression and for the current financial crisis."

Wrong, although it might be an outcome of the reason

First was the Great Contraction, where the central bankstaz reigned in the money supply, e.g. http://www.abebooks.com/servlet/BookDetailsPL?bi=4524117574&searchurl=an...

Then there was FDR and Henry Morgenthau doing their Keynsian thingie, buying elections, wasting money, and extending the "Great Depression" almost only in the U.S. (Europe recovered much more quickly).

Morgenthau: “We have tried spending money. We are spending more than we have ever spent before and it does not work.”  http://www.nationalreview.com/articles/251822/guess-who-thomas-sowell

- Ned

{and I spit out my coffee when GW is quoting Zbiggie as anything other than a Buffoon, but, then again, Zbiggie was a biggie in the Carter admin.}

 

 

Tue, 07/19/2011 - 20:10 | 1472400 New_Meat
New_Meat's picture

Pussy, drive-by Junksta'.  Although, I admit that I didn't refute GW's assinine assertion that the inequality is "largely responsible" for the "current situation".  Any casual review of ZH contradicts this jejune assessment.

Where is above wrong?  Bring it.

- Ned

Tue, 07/19/2011 - 20:33 | 1472459 George Washington
George Washington's picture

Numerous prominent economists in government and academia have all said that large inequalities can cause - or at least contribute to - financial crises, including:

Add Alan Greenspan to the list, who says

:

Our problem basically is that we have a very distorted economy, in the sense that there has been a significant recovery in our limited area of the economy amongst high-income individuals...

Large banks, who are doing much better and large corporations, whom you point out and everyone is pointing out, are in excellent shape. The rest of the economy, small business, small banks, and a very significant amount of the labour force, which is in tragic unemployment, long-term unemployment - that is pulling the economy apart. The average of those two is what we are looking at - that they are fundamentally two separate types of economies.

And several IMF economists. As Bnet wrote in May:

New research [shows] that high income inequality may actually hurt long-term economic growth. Two economists at the International Monetary Fund, Andrew G. Berg and Jonathan D. Ostry, released a paper in April that concludes that countries with high inequality are more likely to have shorter spells of positive growth compared to countries with less inequality. That’s another way of saying that high inequality hurts the economy.

Instead of looking purely at the relationship between inequality and growth, Berg and Ostry examined the relationship between inequality and the duration of periods of positive growth. They measure a growth spell as a period of sustained growth and estimate the effect of inequality and other factors on how long growth spells last.

Their model included a variety of factors that economics have previously found to affect economic growth, such as external shocks, the initial income of the country (ie., did it start out very poor or wealthy?), the institutional make-up of the country, its openness to trade, and its macroeconomic stability.

The finding: Only income inequality stood out “as a key driver of the duration of growth spells.”

The [economists] concluded with the following:

“The main results in this note are that (i) increasing the length of growth spells, rather than just getting growth going, is critical to achieving income gains over the long term; and (ii) countries with more equal income distributions tend to have significantly longer growth spells. …. growth and inequality-reducing policies are likely to reinforce one another and help to establish the foundations for a sustainable expansion.”

Likewise, economics professors Saez (UC Berkeley) and Piketty (Paris School of Economics) show that the percentage of wealth held by the richest 1% of Americans peaked in 1928 and 2007 - right before each crash:

The Washington Post's Ezra Klein wrote in June:

***

Krugman says that he used to dismiss talk that inequality contributed to crises, but then we reached Great Depression-era levels of inequality in 2007 and promptly had a crisis, so now he takes it a bit more seriously.

The problem, he says, is finding a mechanism. Krugman brings up underconsumption (wherein the working class borrows a lot of money because all the money is going to the rich) and overconsumption (in which the rich spend and that makes the next-most rich spend and so on, until everyone is spending too much to keep up with rich people whose incomes are growing much faster than everyone else's).

(The graphics above are slightly misleading, as Saez notes that inequality is actually worse now than it's been since 1917.)

Robert Reich has theorized for some time that there are 3 causal connections between inequality and crashes:

First, the rich spend a smaller proportion of their wealth than the less-affluent, and so when more and more wealth becomes concentrated in the hands of the wealth, there is less overall spending and less overall manufacturing to meet consumer needs.

Second, in both the Roaring 20s and 2000-2007 period, the middle class incurred a lot of debt to pay for the things they wanted, as their real wages were stagnating and they were getting a smaller and smaller piece of the pie. In other words, they had less and less wealth, and so they borrowed more and more to make up the difference. As Reich notes:

Between 1913 and 1928, the ratio of private credit to the total national economy nearly doubled. Total mortgage debt was almost three times higher in 1929 than in 1920. Eventually, in 1929, as in 2008, there were “no more poker chips to be loaned on credit,” in [former Fed chairman Mariner] Eccles' words. And “when their credit ran out, the game stopped.”

And third, since the wealthy accumulated more, they wanted to invest more, so a lot of money poured into speculative investments, leading to huge bubbles, which eventually burst. Reich points out:

In the 1920s, richer Americans created stock and real estate bubbles that foreshadowed those of the late 1990s and 2000s. The Dow Jones Stock Index ballooned from 63.9 in mid-1921 to a peak of 381.2 eight years later, before it plunged. There was also frantic speculation in land. The Florida real estate boom lured thousands of investors into the Everglades, from where many never returned, at least financially.

Wall Street cheered them on in the 1920s, almost exactly as it did in the 2000s.

I am convinced that a fourth causal connection between inequality and crashes is political. Specifically, when enough wealth gets concentrated in a few hands, it becomes easy for the wealthiest to buy off the politicians, to repeal regulations, and to directly or indirectly bribe regulators to look the other way when banks were speculating with depositors money, selling Ponzi schemes or doing other shady things which end up undermining the financial system and the economy.

As John Kenneth Galbraith noted in The Great Crash, 1929, Laissez-faire deregulation was the order of the day under the Coolidge and Hoover administrations, and the possibility of a financial meltdown had never been seriously contemplated. Professor Irving Fisher of Yale University - the Alan Greenspan, Robert Rubin or Larry Summers of his day - had stated authoritatively in 1928 that "nothing resembling a crash can occur".

Indeed, when enough money is concentrated in a couple of hands, the affluent can lobby to appoint to government positions, pay to endow prominent university chairs, and create think tanks and other opportunities for economics professors who spout the dogmas "everything will always remain stable because we've got if figured out this time" and "don't worry about fraud" to gain prominence. For example, Bill Black has written about The Olin Foundation's promotion over the last couple of decades of these dogmas.

As Joseph Stiglitz says:

One big part of the reason we have so much inequality is that the top 1 percent want it that way. The most obvious example involves tax policy. Lowering tax rates on capital gains, which is how the rich receive a large portion of their income, has given the wealthiest Americans close to a free ride. Monopolies and near monopolies have always been a source of economic power—from John D. Rockefeller at the beginning of the last century to Bill Gates at the end. Lax enforcement of anti-trust laws, especially during Republican administrations, has been a godsend to the top 1 percent. Much of today’s inequality is due to manipulation of the financial system, enabled by changes in the rules that have been bought and paid for by the financial industry itself—one of its best investments ever. The government lent money to financial institutions at close to 0 percent interest and provided generous bailouts on favorable terms when all else failed. Regulators turned a blind eye to a lack of transparency and to conflicts of interest.

***

Wealth begets power, which begets more wealth .... Virtually all U.S. senators, and most of the representatives in the House, are members of the top 1 percent when they arrive, are kept in office by money from the top 1 percent, and know that if they serve the top 1 percent well they will be rewarded by the top 1 percent when they leave office. By and large, the key executive-branch policymakers on trade and economic policy also come from the top 1 percent. When pharmaceutical companies receive a trillion-dollar gift—through legislation prohibiting the government, the largest buyer of drugs, from bargaining over price—it should not come as cause for wonder. It should not make jaws drop that a tax bill cannot emerge from Congress unless big tax cuts are put in place for the wealthy. Given the power of the top 1 percent, this is the way you would expect the system to work.

(Congress is also exempt from insider trading laws.)

The fourth factor exacerbates the first three. Specifically, when the wealthy have enough money to drown out other voices who might otherwise be heeded by legislators and regulators, they can:

  • Skew the tax code and other laws so that they can get even wealthier
  • Encourage a debt bubble (Bill Black has repeatedly explained that the fraudsters blow huge bubbles, knowing that the government will bail them out when the bust leads to defaults)
  • Create new Ponzi schemes for speculation

(Admittedly, there might not always be a direct connection, but all of the factors are at least intertwined.)

Reuters discussed Reich's first three factors last year:

Economists are only beginning to study the parallels between the 1920s and the most recent decade to try to understand why both periods ended in financial disaster. Their early findings suggest inequality may not directly cause crises, but it can be a contributing factor.

***

There is little agreement among economists about what precisely links high inequality to crises, which helps explain why so few officials saw the financial upheaval coming.

Rapid expansion of credit is one common thread.

***

Raghuram Rajan, a professor at the University of Chicago's Booth School of Business and a former chief economist of the International Monetary Fund, believes governments tend to promote easy credit when inequality spikes to assuage middle-class anger about falling behind.

"One way to paper over the rising inequality was to lend so that people could spend," Rajan said.

In the 1920s, it was expansion of farm credit, installment loans and home mortgages. In the last decade, it was leveraged borrowing and lending, by home buyers who put no money down or investment banks that lent out $30 for each $1 held.

"Housing credit gave you an instrument to assist those falling behind without them feeling they're beneficiaries of some sort of subsidy," Rajan said. "Even if their incomes are stagnant, they feel really good about becoming homeowners."

Another theory is that concentration of wealth at the top sends investors searching for riskier interest-bearing savings. When so much cash is sloshing around, traditional safe investments such as Treasury debt yield very little, and wealthy investors may seek out fatter returns elsewhere.

Mark Thoma, who teaches economics at the University of Oregon, wonders if the flood of investment cash from the ultra-rich -- both in the United States and abroad -- encouraged Wall Street to create seemingly safe mortgage-backed securities that later proved disastrously risky.

"When we see income inequality rising, we ought to start looking for bubbles," he said.

Kemal Dervis, global economy and development division director at Brookings and a former economy minister for Turkey, said reducing inequality isn't just a matter of fairness or morality. An economy based on consumption needs consumers, and if too much wealth is concentrated at the top there may be times when there is not enough demand to support growth.

"There may be demand for private jets and yachts, but you need a healthy middle-income group (to drive consumption of basic goods)," he said. "In the golden age of capitalism, in the 1950s and 60s, everyone shared in income growth."

The fact that economists are even examining the link between inequality and financial crises shows just how much the thinking has changed in the wake of the Great Recession.

***

Ajay Kapur, a Deutsche Bank strategist, spotted the inequality parallels between the 1920s and the most recent decade, but didn't see the meltdown coming. The former Citigroup strategist created a stir five years ago when he built an investment strategy around his thesis that essentially divided the world into two camps: the rich and the rest.

Kapur told clients in 2005 that the United States and a handful of other economies were developing into "plutonomies" where the wealthy few powered economic growth and consumed much of its bounty, while the "multitudinous many" shared the leftovers.

Plutonomies come around only once or twice a century, he argued -- 16th century Spain, 17th century Holland, the Gilded Age. The last time it happened in the United States was during the "Roaring 1920s".

***

At least one new arrival to Washington's policy-making scene, Fed Vice Chairman Janet Yellen, has expressed concern that extreme inequality could ultimately undermine American democracy.

"Inequality has risen to the point that it seems to me worthwhile for the U.S. to seriously consider taking the risk of making our economy more rewarding for more of the people," she wrote in a 2006 speech.

Tue, 07/19/2011 - 22:51 | 1472763 penisouraus erecti
penisouraus erecti's picture

Quite a list of opinionated morons you list there, most all in the process of having their economic theories and beliefs disproved by reality.

Keep up the good work...........

Tue, 07/19/2011 - 20:36 | 1472466 George Washington
George Washington's picture

Other than that, there's not a shred of evidence ...

Tue, 07/19/2011 - 23:17 | 1472811 old naughty
old naughty's picture

we can keep fighting for what we believe in...But missing the target.

"...One big part of the reason we have so much inequality is that the top 1 percent want it that way."

Needn't say no more, GW.

Thanks for sharing.

Tue, 07/19/2011 - 21:05 | 1472529 New_Meat
New_Meat's picture

Good carpet bomb, but not root cause.  I'd say that blathering and opinion are not evidence.

And good to have a discussion.

What is the cause of income inequality?

Then we can do the other four "Why's" and get closer.

- Ned

{climb up the logic hand-over-fist}

Tue, 07/19/2011 - 18:01 | 1472084 Mr. Anonymous
Mr. Anonymous's picture

Maybe there will be unrest somewhere else in the world, but not here in the States.  Dopey American sheeple are incapable of critical thought, let alone looking out for themselves enough to rise up against their malefactors.  You want revolution, you best look somewhere else. 

Tue, 07/19/2011 - 18:12 | 1472077 Hannibal
Hannibal's picture

Like 9/11 was an inside job?... and no outrage, yawn!

Tue, 07/19/2011 - 19:48 | 1472350 smore
smore's picture

Obama exposed as a KGB Manchurian candidate.  No one cares.

http://rense.gsradio.net:8080/rense/special/rense_T_Fife_031009.mp3

 

 

Tue, 07/19/2011 - 18:18 | 1472126 sun tzu
sun tzu's picture

The majority don't think it was an inside job, so why would they riot? The government-media industrial complex is too strong. They will shut down the internet in the name of national security if need be

Tue, 07/19/2011 - 17:57 | 1472071 The Alarmist
The Alarmist's picture

You don't need riots to make the point ... the increasing inner-city violence spreading out to the burbs is ample evidence of the spreading breakdown of civil society.

The quest for stability and security is what took Rome from a republic of relatively free men (assuming you were not a slave) to an Empire of indentured servants bonded to their land and obligated to work it to keep a privileged elite in a luxurious lifestyle, all the while  wearing the ancient garb of citizen. 

History may not always repeat itself, but it often rhymes.

Tue, 07/19/2011 - 23:35 | 1472837 trav7777
trav7777's picture

WTF stupid shit are you talking about?

Violent crime rates are FALLING, dude.  Not rising.

Inner cities everywhere are being gentrified, which is a great thing.

Tue, 07/19/2011 - 17:54 | 1472059 Escapeclaws
Escapeclaws's picture

The US is too big. That is the main problem. It needs to be broken up into smaller regions. I'm wondering when people will start to take the idea of secession seriously. I bet we will see more discussion of this as things descend into chaos.

Tue, 07/19/2011 - 19:43 | 1472334 smore
smore's picture

How's 10 regions and no discussion?  It's already been decided.  No, you weren't consulted.

http://www.youtube.com/watch?v=D7I8NtX4CEU

 

Tue, 07/19/2011 - 18:13 | 1472116 sun tzu
sun tzu's picture

150 years after Lincoln 

650,000 men died for no reason

The south should have been allowed to secede because it will happen anyway. Imagine trying to draft 5 million of today's youths in California and New york to prevent the south from seceding today. Good luck

Tue, 07/19/2011 - 17:35 | 1472005 Conax
Conax's picture

They waited until those born in a free country got older, sicker, tired and discouraged.

The dumbed-down-spoiled-rotten-easy-money-materialistic youth, for the most part, don't see a problem in the gulag here.

Pretty crafty, those bastards. There will be no heroic uprising.

A few old coots will flip out, be demonized and shamed, then it's over.

What's on TV?

Wed, 07/20/2011 - 00:33 | 1472911 RockyRacoon
RockyRacoon's picture

I could give you that analysis, but after the first few elites are offed they will be some nervous sonsabitches.   That alone is worth the price of admission.

Tue, 07/19/2011 - 17:41 | 1472032 dexter_morgan
dexter_morgan's picture

DWTS and Idol!!!

Tue, 07/19/2011 - 17:08 | 1471887 Jorgen
Jorgen's picture

"And while I am not calling for violence, I wonder if this is like South Africa at the end of the Apartheid era, where those in power had to hand over the reins to the majority to prevent violence."

George, with all due respect, the South African analogy is a bad one.The violence in South Africa has dramatically increased since the communist ANC came to power in 1994. It affects all races there http://goo.gl/nHMVs but especially whites http://goo.gl/dQQnz on a per capita basis.

Wed, 07/20/2011 - 00:02 | 1472875 FeralSerf
FeralSerf's picture

Culturally South Africa is very different from North America.  They've been programmed differently and they act differently.

Tue, 07/19/2011 - 18:11 | 1472107 sun tzu
sun tzu's picture

South Africa has the most rapes per capita in the world and has a murder rate 7 times higher than the US. It looks like handing over power didn't prevent violence. 

Tue, 07/19/2011 - 23:34 | 1472835 trav7777
trav7777's picture

South Africa had a higher murder rate than Iraq during the war

Tue, 07/19/2011 - 16:50 | 1471816 max2205
max2205's picture

I call bullshit.... If it didnt happen in 2009, it never will

Tue, 07/19/2011 - 16:44 | 1471793 Cman5000
Cman5000's picture

Even Jesse Ventura said the game is over the American people won't do a damn thing about it... Anything can happen but we sit on here and rant and that's about it .I will vote for Ron Paul and independents and do what i can to not take part in their system it's a sad state of affairs in these United States ...

Tue, 07/19/2011 - 17:06 | 1471872 oldmanagain
oldmanagain's picture

Don't you realize that Ron Paul is NOT on your side.

Tue, 07/19/2011 - 19:27 | 1472297 smore
smore's picture

OK, that wins the prize for the stupidest comment I've seen on this site.  Have you heard of the Constitution, Old Man?

Tue, 07/19/2011 - 19:29 | 1472309 JW n FL
JW n FL's picture

They are ALL Guilty of Treasonous Long Term Behavior! either but being part of or ignoring and keeping quiet! either or!

Tue, 07/19/2011 - 19:33 | 1472317 smore
smore's picture

America is proving that it doesn't deserve Ron Paul. F*cking sad.

Tue, 07/19/2011 - 18:08 | 1472099 sun tzu
sun tzu's picture

You're absolutely correct. 0bama, Geithner, and Bernanke are one our side. 

Tue, 07/19/2011 - 16:30 | 1471713 Diogenes
Diogenes's picture

There arent going to be any riots. America is sinking to the level of a shithole 3d world dictatorship and nobody is going to stop it.

They have taken your jobs, your homes, your tax money,they are bankrupting the government to give themselves free billions, they have hijacked the stock and bond markets, now they are ripping off Grannys pension.

They have gutted the constitution, laugh at the laws, they grope your wives and daughters in airports.

They send your sons to fight in illegal wars.

Nobody does a dam thing but sit around and crab about it. And of course, buy silver gold canned goods and ammo.

If America has not broken out in protests and riots now it is not going to.

 

Tue, 07/19/2011 - 16:24 | 1471704 Cman5000
Cman5000's picture

Until people are starving to death or standing in lines for food and fuel.This will never happen in the United States people are not pissed off enough yet.Yeah,people are waking up up but not enough people  are still to comfortable ...

Tue, 07/19/2011 - 17:03 | 1471861 oldmanagain
oldmanagain's picture

The other problem is that many groups, like the tea party, are funded by the very ones they should be opposing.  Many of the anti social groups are funded by those who care less about gays, etc.  They now own the Supreme Court. 

You can see with the budget ceiling diversion, where only 21% support it, it is difficult to defeat.  

Tue, 07/19/2011 - 18:07 | 1472095 sun tzu
sun tzu's picture

Yeah the deficits and national debt are just a diversion. There will be absolutely no negative consequences to running $1.5 trillion annual deficits for the next 20 years and being $45 trillion in debt by 2030 

Tue, 07/19/2011 - 21:57 | 1471666 wang
wang's picture

ZH rocks

Tue, 07/19/2011 - 16:10 | 1471655 Sudden Debt
Sudden Debt's picture

2 weeks ago, I was in New York and when I was in New Jersey I visited a Mexican Church.

At first it was pretty beautifull to see because it's more interactive then church services in Europe.

But then they started talking politics...

About the inequality between Mexicans and Americans. How they are terrorising them and how they should stand up against the Americans.

It started with a few jokes but after 5 minutes it was dead serious.

We left in the middle of the service because my wife didn't feel that secure anymore and to be frankly, I didn't either.

I talked about this with another Mexican I met in the hotel and he explained me that Mexicans, Latino's are getting organised these days and want political power. In New Jersey he said there where 90% Latino's with a lot of unemployment.

So if you're looking social unrest: LOOK INTO THOSE COMMUNITIES!

This is just like our European Muslim problem.

 

Tue, 07/19/2011 - 22:33 | 1472727 CH1
CH1's picture

I call bullshit.

Tue, 07/19/2011 - 16:25 | 1471707 wang
wang's picture

I'm not sure I would refer to either latinos or muslims as "a problem" and perhaps that was not what you intended to express.  The demograhics in America is changing with latinos slowly but surely getting organized into a cohesive political force.  Consider Obama's views on immigration/undocumented aliens. 

Watch Marco Rubio the FL cuban born republian senator.  My guess is that as the Rebublican ticket for 2012 has yet to produce an exicting candidate that this guy will be conscripted into the race either as a Veep or even Pres candidate.  He has the Charisma of Obama and the politics of Palin (well maybe not Palin) and will not only capture the latino vote but middle america and even some dare I say progressives.  

 

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