Winners And Losers: The New Economy

Econophile's picture

This article originally appeared in the Daily Capitalist.

There was a wonderful article in the Wall Street Journal this weekend on the ultra (über, hyper, 1%) rich. The article ("The Wild Ride of the 1%") discusses the volatility of wealth of the top 1% income earners in America. The author, Robert Frank, reveals that these people's income and wealth have become much more unstable than the wealthy class of the past. He makes an important point about today's economy. I urge you to read the article. If you are not a subscriber, you may find it here.

First look at some of the article's data highlights:

The super-high earners have the biggest crashes. The number of Americans making $1 million or more fell 40% between 2007 and 2009, to 236,883, while their combined incomes fell by nearly 50%—far greater than the less than 2% drop in total incomes of those making $50,000 or less, according to Internal Revenue Service figures.


As of 2009, the richest 20% of Americans showed the largest decline in mean wealth of any other group.


Only 27% of America's 400 top earners have made the list more than one year since 1994, one study shows.


Suddenly, in 1982, the wealthiest broke away from the rest of the economy and formed their own virtual country. Their incomes began soaring higher during good times. The top 1% of earners more than doubled their share of national income, to 20% as of 2008. Looking at another measure, the richest 1% increased their share of wealth from just over 20% to more than 33%.


Between 1947 and 1982, the beta of the top 1% was a modest 0.72, meaning that their incomes moved relatively in line with the rest of America. Between 1982 and 2007, their beta soared more than three-fold. ["Beta" is an investment term that tries to measure market risk of a stock in terms of volatility.]


Interviews with more than 100 people with net worths (or former net worths) of $10 million or more, and a wave of new studies on the rich, suggest a different cause: the "financialization" of wealth. Simply put, more wealth today is tied to the stock market than to broader economic growth. A larger share of today's rich make their fortunes from stock-based pay, shares in publicly traded companies, selling a business or working in finance.

The household debt of the top 1% surged more than three-fold between 1989 and 2007, to $600 billion, and grew faster than their net worth.


As the wealthy gain a greater share of wealth and income, they account for a growing share of spending, taxes and investments. The top 5% of earners now account for 37% of consumer outlays, according to Moody's Analytics. The top 1% of earners pay 38% of federal income taxes. The richest 1% of Americans own more than half of the country's individually held stocks, according to the Federal Reserve.


Luxury is now the most volatile segment of the consumer economy. 


The spending volatility of the top 10% of earners is now more than 10 times the spending volatility of the bottom 80%, according to one study.

The article illustrates two important concepts of Austrian theory economics:

  • The impact of the boom-bust business cycle (Mises); and
  • The dynamics of creative destruction (Schumpeter).

The result of these two forces is that we are increasingly being turned into a society of winners and losers as the economy becomes less robust, more volatile, and less dynamic. This has important investment consequences and lessons for the protection of wealth.

The Boom and Bust

 The article's author, Robert Frank, sees wealth volatility as a cause of economic instability. In fact it is a result of Federal Reserve policies that create these boom-bust cycles and destroy real capital.

 Back in 2009, Bill Gross of PIMCO made the observation (in a very depressing post):

We were getting richer by making things [in the two decades after 1956], not paper. Beginning in the 1980s, however, the cult of the markets, which included the development of financial derivatives and the increasing use of leverage, began to dominate. ...


The U.S. and most other G-7 economies have been significantly and artificially influenced by asset price appreciation for decades. Stock and home prices went up – then consumers liquefied and spent the capital gains either by borrowing against them or selling outright. Growth, in other words, was influenced on the upside by leverage, securitization, and the belief that wealth creation was a function of asset appreciation as opposed to the production of goods and services. American and other similarly addicted global citizens long ago learned to focus on markets as opposed to the economic foundation behind them.

For once I would agree with Mr. Gross. His blind spot is that he doesn't understand why all this happened. He justifies the Fed's and Treasury's interventions to prop up asset prices, regardless of the negative consequences of ZIRP, etc. That's why he has made our Crony Capitalist of the Month list.

Perhaps Mr. Gross should look at money supply. It is not a coincidence that monetary growth since the 1980s has been rather exponential—this chart measures the Fed's broadest measure of money stock:

What Mr. Gross and Mr. Frank and many others don't see is that it is the creation of fiat money that destroys wealth and misdirects the investment of capital into less productive assets.  That is, monetary inflation destroys capital (wealth). The reason why the production of goods and services do not bear higher yields than financial assets is that the production of goods and services suffers from a lack of real capital. Remember that real capital comes only from the saved profits of production and from the savings of workers from wages earned in production.

You obviously cannot print wealth, but if you try that fiat money distorts the entire economy by directing investment to things which appear to appreciate but what is really happening is that the dollar is depreciating. As a result, fiat money and real capital are invested in financial assets because they appear to have greater yields than returns from the production of goods. Prices rise (price inflation) and it creates the inevitable boom which always busts. The fall out is that we are stuck with things people don't want (in the present re/depression it is housing). And we fall for it every time.

This has led to the phenomenon that Messrs. Frank and Gross describe: the financialization of the economy. 

Creative Destruction

If you look at the Forbes 400 richest Americans you will see that the industry that has the most rich people is "investments" (96 people, or 24%). The next category is technology which has 48 people. So investments have generated twice as many billionaires as America's powerful and dynamic technology sector. By the way, manufacturing has only 17 people on the list.

The result of these boom-bust business cycles is not only the financialization of the economy, but a change in the attitude of investors about how money is made. My thesis is that (i) investors go where the money is and (ii) people believe that making money is easy. Wall Street is an example of (i) and Main Street is an example of (ii). 

I've discussed the easy money syndrome before: people see other people making money as a result of the boom phase of the cycle and jump in. It looks easy when your neighbor just refinanced their home and bought a new truck and trailer with a boat on it. If they were left out in the last cycle, they will get into the next one. This, as we have seen, replaced a society of savers with a society of spenders. They were fooled by the cycle and ended up bust or holding on to houses that are underwater. We know how that impacted the economy (Crash, Bust, Depression).

It is (ii) that results in the One Percenters and instability of their wealth. It's not an earth shaking conclusion: investors always go where the money is. But in this case the Fed has caused them to go to the wrong place and when the bust inevitably happens many a fortune is lost, as the above statistics reveal.  

This is the Schumpeterian aspect of capitalism but it is not a result of dynamic, competitive capitalism. Businesses are not wiped because someone invented a better product, but rather fortunes are lost through speculation, which is another way of saying betting.

Look at investor John Paulson. He is No. 17 on the Forbes 400 list at $15.5 billion (the only investors ahead of him are Buffet and Soros). In 2006 he wasn't on the list (he was worth only a measly $300 million in early 2007). How did he get so rich? His fund bet heavily against subprime debt and he personally scored $3.5 billion in 2007. Investors flocked to his funds and in 2008 he was up another 20% betting mostly against subprime. In 2009 he started buying gold and his personal wealth went up 50%. In 2010 he doubled his wealth again (his take-home pay was $4.9 billion, a record for the hedge fund industry). This year his fund is down 30% but his personal wealth is up 25% because of his own investments in gold.

But let's be clear about the foundation of Mr. Paulson's wealth: he bets. Granted he made mostly smart bets and he is to be congratulated for that but he is no Warren Buffet (my criticism of him aside, Buffet is a great investor). But others made the same bets and turned around and lost it all (see my article on Peloton Partners-also see Nassim Taleb's comment there). 

Financial speculation has always existed throughout history, and usually for the same reasons (fiat money), but financial speculation is now a fixture of our economy as a result of the relentless boom-bust policies of the Federal Reserve. And we now see that these cycles are causing greater economic dislocation each time they occur. This is the valid point of Mr. Frank's article: the new speculative wealth is less stable than early industrial fortunes because it isn't real and when that fact is discovered (bust) it can go away. And it ripples through the economy. Recall his point:

The top 5% of earners now account for 37% of consumer outlays, according to Moody's Analytics. The top 1% of earners pay 38% of federal income taxes. The richest 1% of Americans own more than half of the country's individually held stocks, according to the Federal Reserve.

This is what we have been calling the bifurcated economy, an economy that benefits the wealthiest among us, but hasn't "trickled down" to most of us because real capital isn't being invested in things that would benefit us for the long term.

As long as the Fed pursues these policies which continue to destroy real capital we will be plagued by booms and busts and our economy will be more volatile and less productive. Instead of wealth being distributed widely throughout the economy as capitalism has done historically, we are now becoming an economy of winners and losers.


 *Mr. Frank is coming out with a book on this topic, The High-Beta Rich: How the Manic Wealthy Will Take Us to the Next Boom, Bubble, and Bust, to be published Nov. 1 by Crown Business.

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whoisjohngalt11's picture

Good article, thanks ...

midtowng's picture

While I mostly agree with this article, I wonder why no one ever seems to take the next logical step and ask "how does this fit in with globalization?"

We have large numbers of money being made in finance, but very little being made in manufacturing.

Do you think this might have something to do with jobs being shipped overseas by the millions? That this might have something to do with free trade agreements with 3rd world countries that have no labor laws (and outlaw labor unions) and no environmental laws? Do you think this might have something to do with the huge wealth imbalances in the country today?

Watauga's picture

If you don''t want labor and environmental laws, either boot out the Statists in this country or move to another country.  Jobs are "shipped" overseas when it becomes profitable to do so.  The obvious solution, then, to save American jobs, is to reduce the costs of labor here (since, if we believe in the sovereignty of other nations, we cannot change laws elsewhere).  This is done by paying less to workers (of course, everyone will now bitch about how unfair that is) or reducing in some other way the costs for our products (reduced regulation, lower corporate taxes, higher tariffs. . .). 

What would you like to have?  A cleaner, safer, well-paid labor environment in America and consequent loss of jobs, or would you prefer to move to China and try to make a go of it there?  Barring some sort of shift to totalitarianism, the jobs are going to move where profit can be made.

midtowng's picture

Having labor and environmental laws does NOT make this a totalitarian country. Nor does it necessarily mean that there is no choice to make us poorer.

America become the wealthiest nation on Earth behind the highest tariffs in the world. Now we have no tariffs and our wealth is vanishing along with our manufacturing.

Coincidence? I don't think so.

michigan independant's picture

At work the so called educated are stone faced now. I convey this as the vertical nosed people. You see them also, the ones who cannot see there shoes when they walk. The ones who push others under the bus as we say are spewing venom about agitators are causing this crisis on the net, there just pricks anyway. The rest, bleeting sheep. Before the crisis I was able to get two Guys to move funds to secure there retirement basically intact. Upper management has made changes on many facets. There not all idiots above.

Watauga's picture

Sometimes I feel like I am reading the sniveling drivel of a bunch of teenagers when I read ZH.  Much of it is honest and analytical, but then I encounter a discussion like the one, above.  Stop the stinking whining, people.  Obviously, each of us makes choices based on our circumstances.  Some turn out great, while others result in failure.  Regardless, our choices are our responsibility.  Don't blame a trust-fund baby.  Don't blame the "uber-rich."  Don't blame "the 1%."  To blame someone else is just a demonstration of your own weakness.  Instead, analyze what you can do to participate in wealth-building, then train and work to meet the goals necessary to achieve the level of wealth YOU CHOOSE to achieve.  Millionaires galore were made during the Great Depression.  Figure out how to do it, and you can make as much money as you want.  In the meantime, stop whining like a little child who did not get his way. 

midtowng's picture

so you are saying that we should just ignore the massive fraud in the finance system, the criminal socializing of losses, and the systemic imbalances.

Instead we should just make the assumption that the world is fair, despite all evidence to the contrary.

PivotalTrades's picture

Think about who you voted for for the last 30 years. Were they people who believed in self responsibility or were they government is the answere democrats who foisted the sentiment that some one will take care of you.

midtowng's picture

You made the false assumption that Republicans don't also support the corrupt rule of the elite.

Watauga's picture

I wrote nothing about massive fraud and so forth.  I wrote about whining, and you respond with more whining.

midtowng's picture

Pointing out a criminal act and a criminal system is NOT whining. If someone is robbing you, asking the police to do something about it is NOT whining.

Obviously your problem is that you don't know the definition of words.

TheBillMan's picture

Dude, seriously?  What drove the current bubble into the stratosphere was financial fraud on a massive scale.  Or maybe you were too busy making money to see that.  The reason we are having this depression is because the big boys don't want to take their lumps like good little Capitalists because most of them would end up living out of a cardboard box in Central Park if all the bad debt and fraud were written off like it should be.  But that would end the champagne and caviar dinners for the kleptocrat class, and we know that they don't want that to happen.  To all those martini sipping morons who look down upon the protesters below from their penthouse suites, I hope they have firearms and lots of ammunition.  When the crowds come back in the spring next year or maybe the year after, they may not be so peaceful, and they may return with a good length of rope for the bankster necktie party.  I understand that Central Park has lots of trees, so I think I have a good idea where the party might be held.  Don't kick the little guy when he's down.  He might just bite back...hard.

Watauga's picture

First, you, like other posters, mistake me as a Wall Street supporter.  I am not.  I think a whole bunch of Wall Street monied interests, along with a whole bunch of those in high office, along with a whole bunch of Euro-scum, have effectively robbed a lot of people, me included.  I cannot stand that it has happened.  However, I think that it is our responsibility because we let it happen and I think that, in spite of it, each of us needs to stop whining about it and fix it.  So, it's not that I think there wasn't massive fraud committed by a bunch of scumbags, it's that I am sick and tired of reading all the whining about it.

Matto's picture

Watauga did you actually read the article? Did you comprehend the point being made - financial wealth creation strips the true wealth generation from the broader population?

I take your point though, im going to tell my elderly neighbours now that they should jut buck up and make some millions on the street, they've only got themselves to blame if they don't!


Watauga's picture

I said nothing about the article.  I wrote about the whining posters on this thread.  You know, posters like you.

Matto's picture

"but then I encounter a discussion like the one, above"

You were top of the tree when i was reading it.

disengenuous dickhead!

Shizzmoney's picture

What I gather from this article: some of the rich aren't really rich at all, and even THEY can lose everything that they have.

Remember, a god portion of high earners in 1933 lost their shirts as well, as the money was hoarded by those who manipulated the market, mostly big bankers like JP Morgan and the like.

That is why it is so laughable by right wingers and those financiers who blast OWS and defend this crappy crony capitalist system.  They are not immune from the Black Swan, and really most don't understand they REALLY dont have much to protect vs "wealth distributors".


Econophile's picture

This article is definitely NOT defending crony capitalism.

disabledvet's picture

JP Morgan the man was dead long before the Great Depression. Many of the "uber rich" of the day were surprised that he "didn't have more money." We have the latter's economy today not the former's.

strangeglove's picture

The cultural revolution is begining in America i can feel it

Watauga's picture

What the hell does that mean?  Cultural revolution?  You mean like Mao's?  Regardless, how can you "feel" it?

AnAnonymous's picture

Got caught.

Read that:

The author, Robert Frank, reveals that these people's income and wealth have become much more unstable than the wealthy class of the past.
Thought there were data to back that claim up.


Nothing lost though. One click was gained.

It is another imbalance pushed forth by US citizens.

The pay to see model. Some are compelled to sell products whose properties are well known to the buyer (and the seller) Like commodities.

Meanwhile, US citizens have specialized in selling products following the pay to see model. You only know the quality of the product after you've paid for it. Hence the overwhelming domination of marketing.

This article is another example of this trend. Nothing. Just anecdota on press people's cases.

Yet you've paid to see, transfering wealth to that guy who, just like the typical US citizen he is, thinks he deserves every single cent he makes by selling products whose quality is only revealed when bought.

That is the way it is in this US world order.

LawsofPhysics's picture

What a fucking laughable article.  Yeah, those poor folks, having to spend all that wealth being siphoned off the back of thoses that actually create things of real value.  Volitility?  You haven't seen anything yet.  You can not extract real wealth and capital without adding real value back to the system.  As the article points out, the vast majority of the "new rich" make their money from simply pushing fucking paper.  Any surprise that this is not sustainable?


disabledvet's picture

you are in fact empirically wrong. john paulson made his first fortune selling short the entirety of the mortgage backed security market. that creates NO in fact destroys an entire market thereby creating a massive recession. the irony that he turned around and made a SECOND fortune buying the banks he had obliterated should be lost on no one...although apparently it's lost on the banks. And of course this happening "is a surprise" in the sense that governments (although you're led by a black guy) have to submit budgets--those are PROJECTIONS about EXPECTED REVENUE. You cannot do that with any certainty if wealth destruction is the scheme and not wealth creation--hence "economy" and "economists" and Ronald Reagans famous phrase "are you better off now than you were 4 years ago." That's something you won't hear asked by the "we don't need no stinkin' budget" current occupant of Pennsylvania Ave. We're talking TRILLIONS relative to the Federal Government. If you don't have a budget you don't have a economy because you simply have no clue what's going are willfully "uninformed" the middle of the information age no less. So irrational people "throw money at the guy"...and "call it an economy." It's just a bailout scheme by a different name...on the current occupant is willing to play as well. In Chicago they call it "pay to play." They do it so well it could end up costing Chicago itself it's very existence. Go Packers!

brown_hornet's picture

You had me until the "Go Packers".  Effin cheesehead ;-)

LawsofPhysics's picture

"you are in fact empirically wrong. john paulson made his first fortune selling short the entirety of the mortgage backed security market. that creates NO value"

Exactly my point.  Check your medication, you agree with me.  Since returning from the first Iraq adventure, I have been in biotecht and agriculture for 30+ years.  I know what real products are and how to keep my employees and customers happy. Fuck these paperpushing fucknuts, they will be eating each other soon enough.

GoldBricker's picture

Misleading bullshit, a smokescreen. It concentrates on earned income. The truly rich don't have 'earned income', which is itself a concept from modern income-tax law. The truly rich mainly don't work, and keep their mugs out of the press (they learned from the French Revolution). They keep their wealth over many generations. This piece is exactly the sort of thing that these folks place to distract you.

Try this on for size:


LawsofPhysics's picture

Exactly, but fear not it is rapidly coming to an end.  As more and more will find themselves "wealthy" but unable to buy things required for survival.  Go tell a survivor of the great depression that a family of four making $50,000 per year is eligible for food stamps and see what sort of a response you get.

Collecting interest payments from a trust or from stock dividends is NOT EARNED income.  The people collecting this income are adding NO REAL VALUE to the system.


Crash the fucking system already so that compensation (in whatever form that may be) can return to people who are actually worth a shit.

Ruffcut's picture

It takes money to join the top of the ponzi club. The top have created wealth to become fake.

To people of somalia, most amerkans are rich. It is only perspective. Most of the few rich people I've met are driven, but very shallow. Chase your tail your whole life, if you wish.

malikai's picture

Great article. Good analysis. +1

Ratscam's picture

the question is not how much the other 1% has lost, since the control is only in the hands of the 0.01%. They could not care less if the SPX trades down 50% or Gold goes up 30%. Any volatility does not hurt their uberrich spending patterns. They are diversified internationally and throughout all asset classes. They will never demand change, because a change in the system would leave them without interest.
Change will come mostly from the other 99.99%

CIABS's picture

right, ratscam.  99 and 1 are just shorthand with fewer syllables.  1% is 3 million, after all.  0.01% is thirty thousand, which is still too many.  focus on three thousand, and especially on three hundred (whatever you might think of john coleman).

Tic tock's picture

What if one want's everybody o be rich? -y'know, so the whole money thing becomes less relevent

Zer0henge's picture

Anyone who doesn't want to be rich has some serious issues...

falak pema's picture

being rich is a value system issue. We all want to be rich on our own value scale. It doesn't mean we all want to be $ rich. As life teaches you in real time experience that $ rich means making compromises with your personal value system. So there are trade offs, and the optimum is something that we all define in our own inimitable ways, obviously based on our capablities and life context; thats why we ARE individuals not sheep being led to the pen. SO, life is a serious business, whatever the value system, go for it, your choice-your consequences.

LawsofPhysics's picture

true enough falak, now if only the system were set up to reward responsible choices and punish irresponsible ones.

forexskin's picture

true enough falak, now if only the system were set up to reward responsible choices and punish irresponsible ones.

ultimately it is, I think. it only happens during the brief moments when the pendulum crosses bottom in its swing, when the existing paradigm inverts.

Enceladus's picture

It is ultimately, like the laws of will get you in the end.

CIABS's picture

typical murdoch-wsj brainwash about how hard life is for the elites these days.