Want To Reduce Income/Wealth Inequality? Abolish The Engine Of Inequality - The Federal Reserve

Tyler Durden's picture

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

The Federal Reserve is the primary obstacle to reducing income/wealth inequality. Those who support the Fed are supporting a neofeudal arrangement that widens the income/wealth gap by its very existence.

The issue of income/wealth inequality is finally moving into the mainstream: which is to say, politicos of every ideological stripe now feel obliged to bleat platitudes and express cardboard "concern" for the plight of the non-millionaires with whom they personally have little contact.

I have addressed the complex causes of rising income/wealth inequality for years.Indeed, my book Why Things Are Falling Apart and What We Can Do About It is largely about this very issue.

Here is a selection of the dozens of entries I have written about rising income/wealth inequality.

Income Inequality in the U.S. (August 22, 2008)
Made in U.S.A.: Wealth Inequality (July 15, 2011)
Let's Pretend Financialization Hasn't Killed the Economy (March 8, 2012)
Income Disparity and Education (September 26, 2013)
Is America's Social Contract Broken? (July 17, 2013)
Rising Inequality and Poverty: Can They Be Fixed? (August 15, 2013)
How Cheap Credit Fuels Income/Wealth Inequality (May 30, 2013)
Why Is Debt the Source of Income Inequality and Serfdom? It's the Interest, Baby(November 27, 2013)

While many key drivers of declining income are structural and not "fixable" with conventional policies (globalization of labor and the "end of work" replacement of human labor by robots, automation and software, to name the two most important ones), the financial policies that create wealth/income inequality are made right here in the U.S.A. by the Federal Reserve.

We should start addressing wealth/income inequality by eliminating the primary source of wealth/income inequality in the U.S.: the Federal Reserve.

The Fed generates wealth/income inequality in three basic ways:

1. Zero-interest rates (ZIRP) and limitless liquidity creates cheap credit that enables the super-wealthy to buy rentier income streams that increase their wealth.

The closer one is to this gargantuan flood of "free money for cronies," the wealthier one can become by borrowing from the Fed for near-zero and buying assets that yield returns well above zero. If your speculative bet goes bad, the Fed will bail you out.

2. Zero-interest rates (ZIRP) and limitless liquidity feeds financialization, broadly speaking, the commoditization of debt and debt instruments. The process of commoditizing (securitizing) every loan or debt greatly increases the income and wealth of the financial sector and the state (government), which reaps higher taxes from skyrocketing financial profits, bubbles and rising asset values (love those higher property taxes, baby!).

There is no persuasive evidence that cheap credit enables legitimate wealth creation, while there is abundant evidence that cheap credit fuels speculation, credit bubbles and a variety of financier schemes and scams that create temporary phantom wealth for crony capitalists and impoverishes everyone who wasn't in on the scam.

The housing bubble was not just a credit bubble; it was a credit bubble enabled by the securitization/financialization of the primary household asset, the home.Those closest to the Fed-enabled flow of credit reaped the gains of this financialization (or were subsequently bailed out by the Fed after the bubble burst), while the households that believed the Fed's shuck-and-jive ("There is no bubble") suffered losses when the bubble popped.

This chart of income inequality depicts the correlation between the Fed's easy-money credit expansion and the extraordinary increase in income inequality.Please note the causal relation between income and wealth; though it is certainly possible to squander one's entire income, those households with large incomes tend to acquire financial wealth. Those with access to cheap credit are able to buy income-producing assets that add to their wealth.

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.

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.

The Fed's Solution to Income Stagnation: Make Everyone a Speculator (January 24, 2014)

As a direct result of Fed policy, the rich get richer and everyone else gets poorer.

3. But that isn't the end of the destructive consequences of Fed policy: the Federal Reserve has also created a neofeudal society in which debt enslaves the masses and enriches the financial Elites.

Put another way, not all wealth is created equally. Compare Steve Jobs, who became a billionaire by developing and selling "insanely great" mass-market technologies that people willingly buy because it enhances their lives, with a crony-capitalist who reaps billions in profits from risky carry trades funded by the Fed's free-money-for-cronies policy or by selling phantom assets (mortgages, for example) to the Fed at a price far above market value.

Clearly, there is a distinction between those two fortunes: one created value, employment for thousands of people, and tremendous technological leverage for millions of ordinary people. The other enriched a handful of financiers. This financial wealth could not be conjured into existence and skimmed by Elites without the Federal Reserve.

This Fed-enabled financial wealth destroys democracy and free markets when it buys the machinery of governance. To the best of my knowledge, Jobs spent little of his time or wealth lobbying Big Government for favors, special laws eliminating competitors with regulatory hurdles, etc.

Compare that to the millions spent by the "too big to fail" banking industry to buy Congressional approval of their cartel's grip on the nation's throat: Buying Off Washington To Kill Financial "Reform".

Much of the debate about wealth inequality focuses on whether the super-wealthy are "paying their fair share" of the nation's taxes. If we refer to the point above, we see that as long as the super-wealthy can buy the machinery of governance, then they will never allow themselves to be taxed like regular tax donkeys.

Unfortunately, only the top 1/10th of 1% can "afford" this kind of Fed-funded "democracy." As of 2007, the bottom 80% of American households held a mere 7% of these financial assets, while the top 1% held 42.7%, the top 5% holds 72% and the top 10% held fully 83%.

The income of the top 5% soared during Fed-enabled credit bubbles:

Since all these distortions originate from the Fed, the only solution is to abolish the Fed. Those who have absorbed the ceaseless propaganda believe that an economy needs a central bank to create money and manage interest rates.

This is simply wrong. The U.S. Treasury (a branch of government actually described by the Constitution, unlike the Fed) could print money just as it borrows money. Should a liquidity crisis squeeze rates higher, the Treasury has the means to create liquidity and make it available to the legitimate financial system.

All the Fed's regulatory powers were power-grabbed from legitimate government agencies defined by the Constitution.

The Federal Reserve is the primary engine of income/wealth inequality in the U.S. Eliminate "free money for cronies," bailouts of the "too big to fail" banks that own the Fed, manipulation of markets, the purchase of impaired private assets at high prices, and all the other tools of financialization the Fed wields to enforce its grip on the nation's throat--in other words, abolish the Fed--and the neofeudal structure that feeds inequality will vanish along with the feudal lords that enforced it.

We don't need to "fix" things as much as remove the obstacles that are blocking the way forward. The Federal Reserve is the primary obstacle to reducing income/wealth inequality. Those who support the Fed are supporting a neofeudal arrangement that widens the income/wealth gap by its very existence.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
WarriorClass's picture

First, kill all the banksters.  

Then, the lawyers.

economics9698's picture

Anyone ever notice that all the professions where the tribe members work are all fixed or have heavy government involvement?

Banking the Federal Reserve, lawyer and the law, medicine $1.1 trillion and growing of governed money.


It almost as if 2% of the very wealthy get every law passed to help them whenever they want.  All the jobs with high pay and very little physical work.

suteibu's picture

With all due respect...

Well, duh.

toady's picture

It's all perfectly legal.

Papasmurf's picture

It's all perfectly disgusting.

Bearwagon's picture

See my comment 4374805 below.

Stuck on Zero's picture

It's called feudalism.  Trade guilds are granted monopolies by the royalty in exchange for tribute.


RaceToTheBottom's picture

Nope, they have to be killed at the same time.  Two sides of the same coin.

SilverDOG's picture

NOW NOW NOW NOW !!!!!!!!!!!!!!!!!!!!!!!!!


Andrew Jackson did as such and garnered every American with gainfull deflation, our friend.

Flakmeister's picture

Do you really think that the US of 1830's bears any resemblance to current version?

reader2010's picture

Whether or not you control any means of production determines the income equality. In other words, whether you're a slave or an owner of means of production determines everything. 

maskone909's picture

Abolish? How about demolish!

suteibu's picture

Nice sermon.  Heard it all before. 

new game's picture

Charles, with all due respect, this wish/think stuff is getting old. we need some good old violence to get real change. dude the system is controlled top to bottom. you know it too, so get to intellectual honesty and call out for a movement of confrontation. ron paul tried this already and it got where?

sleigher's picture

Until people are ready to give up cable TV and Starbucks, Ron Paul and everyone else is just blowing hot air.  I like Ron Paul and the things he says, but no one is giving up their quality of life, even though they are slaves.  There are some who will, but for real change, it is gonna have to get a lot worse than this.

N2OJoe's picture

But but but TPTB constantly tell us that that nonviolence is the only way to break their stranglehold.

Do you mean to say that they... LIED to us?

I'm Shocked, I tell you! Shocked!

Crash Overide's picture

It keeps coming until the day it stops... and that is up to all of us.

Every system has it's breaking point, waves, cycles, nature will correct.


Intelligence_Insulter's picture

Yea, let's just make everybody poor.  Income inequality is natural,  there are winners and losers.



Dr. Engali's picture

"Yeah, let's just make everybody poor"

The fed is doing a fine job of that on it's own.

Bearwagon's picture

Of course income inequality is natural, at least to the winners. But this is not just about income - it's also about wealth, and there is a fine difference ....

RaceToTheBottom's picture

A country of laws.....

A meritocracy.....

LOL, I got a bridge to sell you,

Muppetfood, that is what is being peddled.

Dr. Engali's picture

A good article Charles. Welcome to the club of fed haters. Unfortunately neither of the two official choices of political parties we 'elect to represent us' neither has backbone nor the desire to eliminated the fed. After all they know who butters their bread. There is only one of two ways that the fed will ever end. It will either destroy itself, which right now it seems damned set on doing, or it will end in violence.

SAT 800's picture

T he Fed is not the primary instrument of inequality. You don't understand the subject properly. The central core of the inequality problem is the lack of the rule of law; the systematic and systemic turning away from the rule of law over, oh let's say, the last forty years. As elements in this program we see the criminal congress creatures sell out their country for their payoffs, by completely de-regulating the "financial industry"; and the government institutions, such as the SEC putting the word out; that "don't worry we're not going to investigate or prosecute anything". Ancient rome didn't even have a Fed. Reserve, but they had exactly the same situation during their fall and dissolution. The wealthy Senators, the military, and the military contractors, fleecing the republic for their own gains. Always, with a veneer of patriotic propaganda, of course.

SheepDog-One's picture

The human species is actually devolving on the road to extinction.

economics9698's picture

"the systematic and systemic turning away from the rule of law over, oh let's say, the last forty years."

August 15, 1971 or so?

Flakmeister's picture

So for shits and giggles, let's pretend that you are Nixon.

This is the choice you are faced with:

Stop convertability of dollars into gold or face US gold reserves vanishing within 6 years to pay for oil imports.

Look at the import curve here:


Pay attention to figure 1 here:


 I suppose that you could have kept the US on the gold standard however at the price of depression as oil consumption would be brought in line with domestic production. So what are you going to tell the American people?

economics9698's picture

If you are on a real gold standard as gold flows out imports become more expensive for the, in this case the USA, and imports cheaper for, in this case oil exporting countries.  

The USA would have to cut back on imports and increase exports.  

And what is wrong with that picture?

Seems like a fair system to me. 

Flakmeister's picture

Telling the American people that they can't have whatever they want has been a losing political strategy... Staying on the gold standard would have resulted in a 50% decrease in econmy...

The US would also had to have given up its hegemony at the time... 

Sorry the game doesn;t work like that, never has and never will...

BTW, another way of stating the problem was that the the flow of oil dwarfed the stock of gold. Given the world reliance on oil and the distribution of production, an international gold standard cannot work. Do the math..

X_mloclaM's picture


That'd be the right way, mark up oil, consume less, stay solvent, stay to the rule of law, limiting means for crony inequality, staying #1, rather than where we are today.


Falk = krugs itd be so muhch wurse

X_mloclaM's picture

revauling gold wuld add reserves, that would have kept price inflation down, funded more earl, and allowed for a return to market pricing. by 1980 and we wouldn'ta needed Volker's reserves vaccuum, but could rather let the free market set the price of money -- no, this was all about going fiat, globally, first in the eu region, then more broadly, so we COULD leave the sanctity of gold, where consumers, the meek, and the Earth prospers, to a world where labor is taxed at the rate of the mon sys owners

They got em purdy good already with the dollar penetration with this go of it, the harvest cycle will be a nice one, yes, but nothing relative to a digital system reaching even more subscribers

Flakmeister's picture

So you don't have an issue telling current oil exporters what the price of their oil in gold should be.... At gun point if need be?

The price of oil in gold has long pretty steady history, before and after Nixon reneged on Breton Woods.... You did know that, didn't you?

PGR88's picture

I agree that Nixon had no choice - the important decisions about oil prices, gold, the Vietnam war, funding LBJ's "great society" were made with easy money 10 years prior.

Its like a smoker diabetic having to amputate fingers and toes.  at that point, its unavoidable.  Their disease was brought about by decisions made decades before.

The FED is the same.  We allowed it to bail-out its crony-capitalist TBTF banks.  We gave politicians the opportunity to run $1 trillion deficits to fund crony-capitalist "progressive" government.   We allowed a mechanism to create zero-interest rates for 6 years.     And we are paying the price in 1000 aspects of society.  I don't expect it to get better immediately either.  The disease must run its course.

economics9698's picture

Pay now or pay latter, well it's latter and we have a pretty big payment due.

Flakmeister's picture

Check the data: At the time, deficits were around 2-3% of GDP...

You forget that rate of change in US oil consumption was  a moon shot and production was peaking.. No long term plan, the economic game plan had to be changed when the wall was hit. The only guy who predicted it was Hubbert....

Combine that with the influence of DeGaulle and the French who decided to take the gold based on historical precedents...  

LibertarianMenace's picture

"the economic game plan had to be changed when the wall was hit."

Trouble is, some game plans suck more than others-and while Nixon arguably made the simplest choice, in hindsight the expedient alternative he picked has been a complete failure. The quantiity of gold specie is limited, but at any given time this is also the case for the proven reserves of petroleum. The people who were selling petroleum and at the same time demanding payment in gold specie would have done well to consider this. Too bad Nixon didn't/wouldn't(?).

Regardless, the job of an honest monetary system is to reconcile the comparative value between the two.

The solution should have been to eliminate legal tender restrictions and return to issuing competitive notes backed by specie; in this case any specie metal will do. Historically this has been successfully demonstrated mostly by gold, but silver and copper have also served this purpose.

Privately issued notes backed by specie that must also compete daily for public demand against their betters would have priced gold at a premiuim and discounted oil until the demand for each good reached an equilibrium. Money's supposed to be an abstraction layer that forms naturally between different economic goods. Monetary history has demonstrated that government sanctioned fiat metallic standards aren't needed to perform this function. 

The economics are easy, apparently the politics aren't. In economic terms, Nixon remains a complete bag of shit, a craven, gutless wonder that as a slave to pragmatism could think only in terms of expediency. We're still paying for his failure of imagination.


X_mloclaM's picture

spot on, and this Charles L. Hornblaster guy has the congress running the presses like a greenbacker Dimon acolyte -- can we just get freedom? The free production of money, no legal tender -- let em pick whatever they want for tax collection, and we'll do the FX if wetaded enough to save in BTC

Flakmeister's picture

So Nixon should have thrown American hegemony out the window...

BTW, you need oil to make gold so to speak... The goods that you buy with your gold originate with the use of oil. It is the oil that truly has the value, oil allows you to project power... 

In other words you have it bass-ackwards... 

X_mloclaM's picture

thats cuz the price was wrong, bitch  (for oil, and our deficits got us into the gold outflow situ in the first place)

toady's picture

It's all perfectly legal.

Bearwagon's picture

"Legal" just means that the outright injustice is enforced through a "law".

novictim's picture

I want MOAR of you. SAT 800!

NoDebt's picture

I'm afraid we've crossed the Rubicon on this issue.  Nice forensic analysis, but no action will be taken to wind this back.

Ranger4564's picture

Yeah! There was so much more income / wealth equality before 1913.  


csmith's picture

"...before 1913."


Let's take it back even further...to when we all lived in the dirt. We were ALL equal then. "Equality" is not the point; growth is. You can have one or the other, but not both.