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Guest Post: How Cheap Credit Fuels Income/Wealth Inequality

Tyler Durden's picture




 

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Cheap credit is a great boon to the wealthy and a path to debt-serfdom for everyone else.

The ever-widening chasm between the wealthy and the "rest of us" has generated any number of explanations for this deeply troubling phenomenon. We can start with capitalism, which is based on competition for innovations, processes, markets, labor and capital. The more successful participants will naturally garner more profit and premium, leaving less for those who don't control assets and skills that carry high premiums in the marketplace.

But this fundamental source of inequality doesn't explain why wealth and income inequality was considerably lower in previous eras of economic expansion.

Many observers rightly point to the capture of federal regulatory bodies by corporations and the transition from an industrial economy with plentiful low-skill, high-wage jobs to a post-industrial knowledge-based service economy as causes.

These are undoubtedly causal factors, but what most analysts either miss or dare not mention because it threatens their own privileged spot at the feeding trough is financialization, the process of financially commoditizing every asset to the benefit of the financial sector and the state (government), which also benefits from skyrocketing financial profits, bubbles and rising asset values (love those higher property taxes, baby!).

Financialization is most readily manifested in the FIRE sectors: finance, insurance, real estate.

You can see the results of financialization in financial profits, which soared in the era of securitization, shadow banking, asset bubbles and loosened or ignored regulation:

Here's how cheap, abundant credit--supposedly the key engine of growth, according to the Federal Reserve--massively increases wealth inequality: the wealthy have much greater access to credit than the non-wealthy, and they use this vastly greater credit to buy productive assets that generate income streams that increase their income and wealth.

As their income and wealth increase, their debt loads decline.

Compare the superficially well-off upper-middle class family with two incomes and a truly wealthy family. The upper-middle class family may have an income well in excess of $100,000, but it used its access to credit to buy non-productive assets such as a sprawling house with granite countertops, two luxury vehicles, etc.

Even the horrendously costly college education for the family's kids is ultimately non-productive, since the students didn't learn how to successfully navigate the digital-software-fabrication-robotics-automation (DFSRA) emerging economy.

The wealthy family bought a 24-unit apartment building with its credit. That property spins off positive cash flow every month, and that income stream supports a high asset valuation which serves to increase the creditworthiness of the family.

Productive assets that churn out steady rentier income streams can be pyramided into ever greater access to credit that is also cheaper than the credit offered to middle-class households.

Student loans have rates of 6% to 9%, for example, while the wealthy family can buy productive assets at 3% or 4%. The high earned-income household has access to cheap auto loans, but since the vehicles lose value the moment they're driven off the lot, this low rate is an illusory benefit.

The family home is supposed to be a store of wealth, but the financialization of housing and changing demographics have mooted that traditional assumption; the home may rise in yet another bubble or crash in another bubble bust. It is no longer a safe store of value, it is a debt-based gamble that is very easy to lose.

Credit has rendered even the upper-income middle class family debt-serfs, while credit has greatly increased the opportunities for the wealthy to buy rentier income streams. Credit used to purchase unproductive consumption creates debt-serfdom; credit used to buy rentier assets adds to wealth and income. Unfortunately the average household does not have access to the credit required to buy productive assets; only the wealthy possess that perquisite.

And so the rich get richer and everyone else gets poorer.

 

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Thu, 05/30/2013 - 14:55 | 3611183 Hohum
Hohum's picture

Market changes redistribute claims on wealth.  QE is the greatest upward redistribution of income/wealth in US History.  And the, ahem, Socialist Barack Obama is president!  It's a weird world, but not really.

Thu, 05/30/2013 - 15:13 | 3611221 Ahmeexnal
Ahmeexnal's picture

Meanwhile, Brazil is on the verge of hyperinflation:

http://www.reuters.com/article/2013/05/30/brazil-economy-rates-idUSL2N0E...

"BRASILIA, May 29 (Reuters) - Brazil's central bank raised its benchmark interest rate on Wednesday to 8 percent from 7.5 percent, stepping up the pace of a tightening cycle to battle high inflation as Latin America's largest economy struggles with slow growth."

And as expected, Obullshit tries to divest growing dissent by taking out the "I'm being threatened, stand by me (or against me!)" card:

http://www.reuters.com/article/2013/05/30/us-usa-obama-letter-idUSBRE94T...

Is this the excuse he needs in order to declare countrywide martial law and assume dictatorial powers?

Thu, 05/30/2013 - 16:31 | 3611451 francis_sawyer
francis_sawyer's picture

"How Cheap Credit Fuels Income/Wealth Inequality"

~~~

Gee... Ya Think?...

Hand over a printing press to a bunch of cheesepopes and tell them they can counterfeit as much money as they want for themselves...

What could possibly go wrong?

Thu, 05/30/2013 - 16:18 | 3611417 sgt_doom
sgt_doom's picture

Obama a socialist?  Is your parentage on the evolutionary scale someplace?

He just replaced one crooked jackhole Bush neocon (Robert Mueller III) with another (James Comey, that dood who went after Martha Stewart and Barry Bonds, was with the largest hedge fund, and at HSBC Holdings when they were involved in trillions of dollars of money laundering for the drug cartels). . . get serious.

Speaking of serious, just read my comment at this related site article:

http://www.nomiprins.com/thoughts/2013/5/28/making-a-million-an-hour-means-never-having-to-say-youre-sor.html

 

 

Thu, 05/30/2013 - 15:00 | 3611194 azzhatter
azzhatter's picture

I don't want to borrow no fucking money, I want to loan it to a bank for a decent return. Fuck you Bernanke

Thu, 05/30/2013 - 15:05 | 3611199 Mercury
Mercury's picture

The upper-middle class family may have an income well in excess of $100,000, but it used its access to credit to buy non-productive assets such as a sprawling house with granite countertops, two luxury vehicles, etc...

The wealthy family bought a 24-unit apartment building with its credit. That property spins off positive cash flow every month, and that income stream supports a high asset valuation which serves to increase the creditworthiness of the family.

 

Well, the upper-middle class family in this example is a bunch of fuck-wits. There's your problem right there.


They could have bought one or two rental units instead and they could have further leveraged the whole cheap credit thing by putting it in junior’s name so he could take advantage of some low-income or first time buyer subsidy.

Thu, 05/30/2013 - 15:35 | 3611293 11b40
11b40's picture

You are correct, of course.  

However, that does not change the fact that most people do not have the education, the confidence, the time, etc., to do this.....and the deck gets stacked more in favor of the 'financially sophisticated' every year.  As the numbers indicate, it is getting harder to get a foothold at all if you are in the middle tier, and almost impossible if in the lower.

Only the blind can't see how this country is being looted from the inside out.  Far too many things are legal that should be criminal, and too many other things are criminal that should be legal.

Thu, 05/30/2013 - 22:00 | 3612409 DadzMad
DadzMad's picture

Fuck that.  You're as stupid as you want to be.  I'm just a "dumb" electrician, but generations of my humble family have lived like the "rich" and I've been taught the same.  You buy things that pay off, not a fuckin' new Harley, or snowmobile, etc...........

Sun, 06/02/2013 - 19:20 | 3618980 11b40
11b40's picture

Hopefully, our kids will learn from you.  Personal stories, however, do not negate the reality of the masses.  I also postulate that things have changed so much in the past decade or so, that even those who try hard, play by the rules, and invest predently still get reamed and washed out.  Are you a union electrician?  Own your onw contracting company?  Just curious.  Regardless, you have a great skill.  Good on ya.

Sun, 06/02/2013 - 19:21 | 3618982 11b40
11b40's picture

Hopefully, our kids will learn from you.  Personal stories, however, do not negate the reality of the masses.  I also postulate that things have changed so much in the past decade or so, that even those who try hard, play by the rules, and invest predently still get reamed and washed out.  Are you a union electrician?  Own your onw contracting company?  Just curious.  Regardless, you have a great skill.  Good on ya.

Thu, 05/30/2013 - 15:02 | 3611202 buzzsaw99
buzzsaw99's picture

This is only true when the billionaire's and banker's losses are taken up by the fed and fed gub while they get to keep all the profits from hideous gubbermint spending. Let those maggots take some man sized losses without the fed backstopping everything and it all works out fine. What we have is fascism 101 bitchez.

Thu, 05/30/2013 - 15:04 | 3611209 Spastica Rex
Spastica Rex's picture

Looks more like the 20% vs the 80%.

Thu, 05/30/2013 - 15:06 | 3611214 ebworthen
ebworthen's picture

Great charts and observations.

When do we start building the guillotines?

Thu, 05/30/2013 - 16:48 | 3611505 ILLILLILLI
ILLILLILLI's picture

Let me help you with that...

 

http://boisdejustice.com/Home/Home.html

Thu, 05/30/2013 - 15:08 | 3611218 darteaus
darteaus's picture

"The rich get richer and the poor get poorer."

This is just not true.

Rich get poor.  Here's evidence about the heirs of America's first millionaire: http://www.huffingtonpost.com/2013/04/26/astor-family-rokeby-estate_n_3159403.html.

Poor get rich.  Here's evidence about the 26 year-old high school dropout now worth $200M: http://www.forbes.com/sites/ryanmac/2013/05/22/after-yahoo-deal-tumblr-founder-david-karp-is-worth-just-under-200-million/.

There exists "significant income mobility": http://www.aei-ideas.org/2011/10/tracking-the-same-households-over-time-shows-significant-income-mobility/

Thu, 05/30/2013 - 15:13 | 3611235 Spastica Rex
Spastica Rex's picture

Thank God.

Or is this bad?

Shit.

Thu, 05/30/2013 - 15:25 | 3611265 Canucklehead
Canucklehead's picture

Those are good points.  The other thing to understand is not all cultures have similar value systems.

Below is a link to the UN's data on mean years of schooling

http://hdrstats.undp.org/en/indicators/103006.html

You can't make good decisions when you can't think constructively.  There will be a natural increase in the divergence between the top and bottom because the top will absorb all that education has to offer.  The bottom will simply try to get by in as traditional way as possible.

Thu, 05/30/2013 - 15:58 | 3611369 pelerine
pelerine's picture

Those first two links go to anecdotes, not data.

Thu, 05/30/2013 - 19:00 | 3611878 darteaus
darteaus's picture

Anecdotal evidence that disproves the myth of the absoslute statement: "The rich get richer and the poor get poorer".

Thu, 05/30/2013 - 16:23 | 3611436 sgt_doom
sgt_doom's picture

You are talking about the rare exceptions, nimrod, America has the worst socioeconomic mobility of ALL the OECD countries, dipshit!

Bill Gates net worth dropped when he started his Gates Foundation (when he moved his wealth over there for sheltering, hidden asset and tax avoidance, etc.), just as all the super-rich hide their money in foundations, trusts, offshore finance centers (commonly referred to as tax havens), and unregistered trusts, for starters!

Read Nicholas Shaxson's Treasure Islands, William Brittain-Catlin's Offshore and also Ferdinand Lundberg's The Rich and the Super-Rich.

 

Thu, 05/30/2013 - 19:05 | 3611892 darteaus
darteaus's picture

Ah, so you agree there are exceptions, and America has socioeconomic mobility.

Logically, then, you now agree that the statement, "The rich get richer and the poor get poorer" has been disproved.

Do you kiss your mother with that mouth?  Read Essential Manners for Men.

Thu, 05/30/2013 - 15:10 | 3611226 wcvarones
Thu, 05/30/2013 - 15:21 | 3611251 Darth Raider
Darth Raider's picture

Hyper inflation will sort ot out

those with nothing have nothing to lose

the income streams will be worthless when a big m costs 1,000,000  dollars

the reset is comming

i have to  say it ' buy physical' (and rice n ammo)

Thu, 05/30/2013 - 19:19 | 3611932 Diogenes
Diogenes's picture

Those who own property, gold, art works, businesses etc will come through hyperinflation all right. Those who own paper promises will get wiped out. Those who are clever, the shysters, the middlemen, the pimps will get rich.

The poor won't even know what the hell happened.

Thu, 05/30/2013 - 15:21 | 3611253 They trynna cat...
They trynna catch me ridin dirty's picture

We needed more stuff like this a few months ago when all the liberal HuffPo idiots were sending around that bogus "Wealth Inequality" video (i.e., call for more government) on Facebook.

Thu, 05/30/2013 - 15:37 | 3611306 Goggles Pisano
Goggles Pisano's picture

Socialism is a lot easier to run when most of the money is in a fewer peoples hands. It will be a shame for all of us in the middle class who are tapped out when we have to take in our parents. But the good news is our children will wind up killing us for all the debt we left them. Which makes the future more palatable.

Thu, 05/30/2013 - 16:20 | 3611424 Bob Sacamano
Bob Sacamano's picture

Understand the issue, but some people getting richer does not make others poorer (classic zero sum game world view).  If we must discuss poverty only on a relative basis, we just need to follow BHO redistribution agenda -- it is the only real solution to unequal outcomes..... 

Thu, 05/30/2013 - 16:23 | 3611437 docj
docj's picture

Looks to me that rather than blaming this on everyone's favorate whipping horse (Ronnie Raygun's 1980's) this all got started and rolling during the early 1970's.

Now what was it again that happened around that time? Like maybe late-summer 1971? That might have had something to do with that?

Thu, 05/30/2013 - 16:30 | 3611449 OpTwoMistic
OpTwoMistic's picture

Started in 1965 with Lyndon Johnson. The first Carter and his great society.

Raided SS and passed a sur-tax on workers including military.

Thu, 05/30/2013 - 16:49 | 3611507 pragmatic hobo
pragmatic hobo's picture

actually the whole thing started way back when china created first example of paper money.

Thu, 05/30/2013 - 19:21 | 3611941 Diogenes
Diogenes's picture

It's all Nixon's fault. Everything wrong with the world is Nixon's fault. Up until he got elected everything was peachy.

Thu, 05/30/2013 - 16:46 | 3611497 pragmatic hobo
pragmatic hobo's picture

you also can participate in the free money binge ... just charter a bank.

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