How Central Banks Cause Income Inequality

Tyler Durden's picture

Submitted by Frank Hollenbeck via the Ludwig von Mises Institute,

The gap between the rich and poor continues to grow. The wealthiest 1 percent held 8 percent of the economic pie in 1975 but now hold over 20 percent. This is a striking change from the 1950s and 1960s when their share of all incomes was slightly over 10 percent. A study by Emmanuel Saez found that between 2009 and 2012 the real incomes of the top 1 percent jumped 31.4 percent. The richest 10 percent now receive 50.5 percent of all incomes, the largest share since data was first recorded in 1917. The wealthiest are becoming disproportionally wealthier at an ever increasing rate.


Most of the literature on income inequalities is written by professors from the sociology departments of universities. They have identified factors such as technology, the reduced role of labor unions, the decline in the real value of the minimum wage, and, everyone’s favorite scapegoat, the growing importance of China.

Those factors may have played a role, but there are really two overriding factors that are the real cause of income differentials. One is desirable and justified while the other is the exact opposite.



In a capitalist economy, prices and profit play a critical role in ensuring resources are allocated where they are most needed and used to produce goods and services that best meets society’s needs. When Apple took the risk of producing the iPad, many commentators expected it to flop. Its success brought profits while at the same time sent a signal to all other producers that society wanted more of this product. The profits were a reward for the risks taken. It is the profit motive that has given us a multitude of new products and an ever-increasing standard of living. Yet, profits and income inequalities go hand in hand. We cannot have one without the other, and if we try to eliminate one, we will eliminate, or significantly reduce, the other. Income inequalities are an integral outcome of the profit-and-loss characteristic of capitalism; they cannot be divorced.

Prime Minister Margaret Thatcher understood this inseparability well. She once said it is better to have large income inequalities and have everyone near the top of the ladder, than have little income differences and have everyone closer to the bottom of the ladder.

Yet, the middle class has been sinking toward poverty: that is not climbing the ladder. Over the period between 1979 and 2007, incomes for the middle 60 percent increased less than 40 percent while inflation was 186 percent. According to the Saez study, the remaining 99 percent saw their real incomes increase a mere .4 percent between 2009 and 2012. However, this does not come close to recovering the loss of 11.6 percent suffered between 2007 and 2009, the largest two-year decline since the Great Depression. When adjusted for inflation, low-wage workers are actually making less now than they did 50 years ago.


This brings us to the second undesirable and unjustified source of income inequalities, i.e., the creation of money out of thin air, or legal counterfeiting, by central banks. It should be no surprise the growing gap in income inequalities has coincided with the adoption of fiat currencies worldwide. Every dollar the central bank creates benefits the early recipients of the money—the government and the banking sector — at the expense of the late recipients of the money, the wage earners, and the poor. Since the creation of a fiat currency system in 1971, the dollar has lost 82 percent of its value while the banking sector has gone from 4 percent of GDP to well over 10 percent today.

The central bank does not create anything real; neither resources nor goods and services. When it creates money it causes the price of transactions to increase. The original quantity theory of money clearly related money to the price of anything money can buy, including assets. When the central bank creates money, traders, hedge funds and banks — being first in line — benefit from the increased variability and upward trend in asset prices. Also, future contracts and other derivative products on exchange rates or interest rates were unnecessary prior to 1971, since hedging activity was mostly unnecessary. The central bank is responsible for this added risk, variability, and surge in asset prices unjustified by fundamentals.

The banking sector has been able to significantly increase its profits or claims on goods and services. However, more claims held by one sector, which essentially does not create anything of real value, means less claims on real goods and services for everyone else. This is why counterfeiting is illegal. Hence, the central bank has been playing a central role as a “reverse Robin Hood” by increasing the economic pie going to the rich and by slowly sinking the middle class toward poverty.

Janet Yellen recently said “I am hopeful that … inflation will move back toward our longer-run goal of 2 percent, demonstrating her commitment to an institutionalized policy of theft and wealth redistribution.” The European central bank is no better. Its LTRO strategy was to give longer term loans to banks on dodgy collateral to buy government bonds which they promptly turned around and deposited with the central bank for more cheap loans for more government bonds. This has nothing to do with liquidity and everything to do with boosting bank profits. Yet, every euro the central bank creates is a tax on everyone that uses the euro. It is a tax on cash balances. It is taking from the working man to give to the rich European bankers. This is clearly a back door monetization of the debt with the banking sector acting as a middle man and taking a nice juicy cut. The same logic applies to the redistribution created by paying interest on reserves to U.S. banks.

Concerned with income inequalities, President Obama and democrats have suggested even higher taxes on the rich and boosting the minimum wage. They are wrongly focusing on the results instead of the causes of income inequalities. If they succeed, they will be throwing the baby out with the bathwater. If they are serious about reducing income inequalities, they should focus on its main cause, the central bank.

In 1923, Germany returned to its pre-war currency and the gold standard with essentially no gold. It did it by pledging never to print again. We should do the same.

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National Blessing's picture

The problem?  They all belong to the same country club.  So what we have is an international circle jerk.  Friends helping friends.  Bastards.

A Nanny Moose's picture

No. The problem lies with those responsible for education. Because of the edewkashun system, sophistry passes for logic, and any concept which cannot be conveyed in 145 characters or less, exceed the attention span of the average college student.

Anusocracy's picture

Government was never meant to be a benefit to the masses.

The only way it could do that is to cease to exist.

A Nanny Moose's picture

Yes. When do we get started?

Boris Alatovkrap's picture

Boris is gather family together every year for making of delicious meat pie. Pie is huge, almost is 50cm diameter measurement round. In-law family is bring vegetable, cousin Ivan butcher is bring it meat, second cousin Natasha is bring it turnip and potato, and Boris is provide for very large industrial cooking oven. Every one is cut and prepare vegetable, roll out dough. Pie is huge and everyone is have more plenty spare.

Neighborhood is smell pie while is baking and ask for slice for trying.

One year, pie is in oven and Boris is think maybe can make little extra ruble sell excess pie. How is can do to be fair? So Boris is take number of family member as divisor, make same number of share and print "redemption certificate". Everyone (except fat lazy nephew - long story for other time) is work hard and is have equal share entitlement.

Boris, as owner of very large industrial oven, is authority to issue and administrate share certificate. When pie is done, everyone is claim share and joyous indulgence of delicious meat pie... or can sell share.

But before is done for cooking, Boris is excitable for business prospect and is print extra redemption certificate. Boris is thinking, "there is much pie, maybe slice piece tiny smaller, more pie is can sell to hungry neighbor". What for hell, so Boris is print 2X share and sell to hungry neighbor.

Okay, okay, this is not real story, but you are imagining if one party is control issuance of redemption note (in case of central bank, "currency"), then when is double issuance, then share ownership is dilute for 1/2 but major holder (or bank) is now hold more and each of small share holder is reduce share. This is how central bank action is increase disparity between rich and poor. There is no additional delicious meat pie, just same as before, but everyone is have less for enjoyment except for bank which possess larger portion of smaller size piece.

Inflation is evil design of money changer.

ThirdWorldDude's picture

"Unlimited power is apt to corrupt the minds of those who possess it."  -  William Pitt

QQQBall's picture

Boris, I like meat & trunips... can I buy a share on credit?

jerry_theking_lawler's picture should run for political office....oh wait, you are too smart for that.

A Nanny Moose's picture

This is simply fraud/theft. Theives dealt with appropriately, until government comes along and offers and opportunity for moral relativism, backed by guns, nukes, and drones. Government is legalized theft. Period

DoChenRollingBearing's picture

Yen, ol buddy ol pal, I think the SET of reasons are so complicated that each of us can realistically only look after themselves and their loved ones.

-- Speaking out (like here at ZH) does help open some minds.

-- Proper education would also help (less sociology majors for example, more required calculus and foreign language classes for example).  A proper education would include financial literacy, and much of that using real money or other ways of demonstrating to our young 'uns how the world works.


But there are so many factors that just being able to convince a few at a time (very few I have convinced) that desperate times call for desperate measures.

They don't want to hear it.  It is up to us, the aware, to be able to take care of those we love who did not listen.  And that is only if we really love them or someone is some kind of saint or something (the Bearing is no saint).

Yen Cross's picture

 ""Latin America" wears you well Don. Hey, curiosity and all? How's the BTC for xau thing working out.

 Trying to be incognito, so the 3rd person BTC-zilla doesn't awaken. Crikey that's ugly!

prains's picture

it's all in the title






The money supply is controlled "centrally" whom??.....for what reason do so few control so much...hmmmm

the smell of cheesepoperi is thick in the air....

Yen Cross's picture

 @ prains Your comment made my day!


DoChenRollingBearing's picture

His name was francis_sawyer.

His invention was "cheesepopes".

Yen Cross's picture

 His name was "Highly Intelligent"individual. 

prains's picture

he is missed and wrongly exiled, cheespoops 1 francis 0


but not yet a shut out

yn crx's picture

 I'm posting from linux .  I love Ying Yang.

Moon Pie's picture

Understatement of the century:

"Growth based on high leverage typically proves to be illusory" - Simon Johnson.  "The Temptation of Central Bankers"

Frickin simple.  Its so simple...I don't want to say anything else. 

Fuckstick bastards.

Jim in MN's picture

My dear YC, allow me to assist you in destroying Tyler's article.  Corruption is an INDEPENDENT FACTOR above and beyond either forces of change (technology, globalization) and the fiat money system.  Corruption can and does trump the other factors and make them far, far worse threats.  Corruption is the dominant threat, and any analysis that overlooks or obfuscates this fact is either foolish or counterproductive...or both.

So I will repost this as weekend depth of winter reading.  Composed in a fit of clarity at the kitchen table one 4:00 AM, it was one family man's strong response concerning 'What Must Be Done'.  I hope someone can use these ideas as a practical addition to a plan of action.  Note that the Bernanke and Geithner names can be swapped out now.  But, still, think about DISRUPTING THE NEXUS OF CORRUPTION as the highest, noblest and most survival-critical need of our time.

Web linked at

4:00 AM October 6, 2011

Kitchen Table, USA






              1. Benjaman Bernanke to be removed as Chairman immediately

              2. New York Federal Reserve Bank and all New York City offices of the Federal Reserve system wil be closed for at least 3 years

              3. Salaries will be reduced and capped at $150,000/year, adjusted for official inflation

              4. Staffing count to be reduced to 1980 levels

              5. Interest rate manipulation to be prohibited for at least five years

              6. Balance sheet manipulation to be prohibited for at least five years

              7. Financial asset purchases prohibited for at least five years


              1. Timothy Geithner to be removed as Secretary immediately

              2. All New York City offices of the Department will be closed for at least 3 years

              3. Salaries will be reduced and capped at $150,000/year, adjusted for official inflation

              4. Staffing count to be reduced to 1980 levels

              5. Market manipulation/intervention to be prohibited for at least five years

              7. Financial asset purchases prohibited for at least five years




              1. Lifetime ban on government employment for TARP recipient employees and corporate officers, specifically including Goldman Sachs and JP Morgan Chase

              2. Ten year ban on government work for consulting firms, law firms, and individual consultants and lawyers who have accepted cash from these entities

              3. All contacts by any method with federal agencies and employees prohibited for at least five years, with civil and criminal penalties for violation


              1. No financial institution with assets of more then $10 billion will receive federal assistance or any 'arm's-length' bailouts

              2. TARP recipients are prohibited from purchasing other TARP recipient corporate units, or merging with other TARP recipients

              3. No foreign interest shall be allowed to acquire any portion of TARP recipients in the US or abroad




              1. Immediately implement mark-to-market accounting rules which were improperly suspended, allowing six months for implementation.

              2. Companies must reserve against impaired assets under mark-to-market rules

              3. Any health or life insurance company with more than $100 million in assets must report on their holdings and risk factors, specifically including exposure to real estate, mortgage-backed securities, derivatives, and other exotic financial instruments.  These reports will be to state insurance commissions and the federal government, and will also be made available to the public on the Internet.


              1. All private and public pension funds must disclose their funding status and establish a plan to fully fund accounts under the assumption that net real returns across all asset classes remain at zero for at least ten years

Yen Cross's picture

  Good Lord Jim! You've been busy! { I Like it}

A Nanny Moose's picture

Demand all you want. Nothing happens to change government, until we teach ourselve to live without coercion, at which point we will rid ourselves of government.


Yen Cross's picture

 Apparently  Mrs.Miffed( the leader) has pulled her other halfs drawers down?

Radical Marijuana's picture

Hah, A Nanny Moose!

Civilization without coercion is like physics without force. Impossible ideals make the opposite happen in the real world! That reactionary revolutionaries like you, Nanny Moose, seriously propose absolutely impossible "solutions," that could never exist in the real world, is one of the main reasons why the real problems continue to automatically get worse faster.

Metaphorically speaking, the runaway problem is that the Vicious Wolves, and their Domesticated Dogs, control the vast majority of Zombie Sheeple, while the Black Sheeple who do not like that situation propose their bullshit "solutions" that everyone should become better Sheeple, while the only possible realistic resolutions that might make things better is if everyone became better Wolves.

disabledvet's picture

the problem is the zero bound rate on savings in my view.
I still don't understand how that is even possible actually.

I think all of this is about to change however.
As that dollar surges so to will interest paid on deposits.

Risk is in fact a number...and that number is not something that opens on Monday at 930AM and closes that same day at 400PM...up through Friday with the same holding true for each day in between.

"Economics" just doesn't work that way. Nor does an "economy."
The irony is that it will be huge production surge...a "deflation" as it were...that will cause these cash rates to reset.

The war will be put on "auto pilot"..and so will pretty much everything else.

All Risk No Reward's picture

The problem is that a debt based monetary system is a fraud to its very core.

The financially "illuminated" know this, the "unilluminated" do not and their countries get bankrupted to the "illuminated" criminals who enjoy "taking candy from a baby," as it were.

When money is issued INTO SOCIETY (not through society, which is the misdirection used by the ALL the economics departments... they ALWAYS assume more money is avilable and NEVER address the incipient issuance of the money into society) as a debt bearing instrument the money flow goes like this...

If the PRIVATE INTERNATIONAL BANKING CARTEL lends $20 to society/government, society/government owes $21 to the PRIVATE INTERNATIONAL BANKING CARTEL due to double entry bookkeeping adjustments that add $1 interest liability to society/government's balance sheet and $1 interest asset to the PRIVATE INTERNATIONAL BANKING CARTEL'S balance sheet.

Read that over until the following becomes crystal clear:  Society/government possesses $20 but owes $21 to the PRIVATE INTERNATIONAL BANKING CARTEL that owns the ONLY DOLLAR AVAILABLE TO PAY OFF THE DEBT.

WHO is sovereign and WHO is a financially subjugated vassal of the PRIVATE INTERNATIONAL BANKING CARTEL?

Just like losses, you can't make this up on volume as every $20 issued into society HAS THE EXACT SAME CHARACTERISTIC!!!!!!!

The Bankster's monetary wealth is society/gopvernment's INEXTINGUISHABLE DEBT **BY ARBITRARY DEFINITION**.


"The issue which has swept down the centuries and which will have to be fought sooner or later is the people versus the banks."
Lord Acton

“When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes. Money has no motherland; financiers are without patriotism and without decency; their sole object is gain.”
Napoleon Bonaparte

“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning. The one aim of these financiers is world control by the creation of inextinguishable debt.” Henry Ford

"If all the bank loans were paid, no one could have a bank deposit, and there would not be a dollar of coin or currency in circulation. This is a staggering thought. We are completely dependent on the commercial banks. Someone has to borrow every dollar we have in circulation, cash, or credit. If the banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless situation is almost incredible -- but there it is."
Robert Hemphill. Credit Manager, Federal Reserve Bank of Atlanta
In the foreword to a book by Irving Fisher, entitled 100% Money (1935)

"The youth who can solve the money question will do more for the world than all the professional soldiers of history."
Henry Ford, Sr.

"Think for yourselves and let others enjoy the privilege to do so, too."
-- Voltaire

Everything else is rearranging chairs on the Financial Titanic.

If you want it in graphical form, here ya go...

Debt Money Tyranny

Until this specific topic is brought up in nearly every threa don ZeroHedge, for the topic applies to nearly every ZeroHedge thread, we will make little progress.

This is the defining issue of our time and it is the most sophisticated Art of War Trojan Horse implementation in human history.

Oh regional Indian's picture

Spot on ARNR, it's perpetual serfdom to what sounds a lot like compound interest. 


Eeyores Enigma's picture

I'll make it even more simple for ya'all.

No Money = You Die

Got that? Good.

Those who control money have the power of GOD, the power over life and death and if you think this is simple rhetoric you are a muppet, a sheeple, or whatever.

And yes you are in that queue too so don't kid yourself.

Most of you just perceive this reality as an excuse to do WHATEVER it takes to tap into the money flow and this is the root of all evil. It's not the love of money, It's the love of staying alive which means you must do WHATEVER it takes to tap into the flow of money. I am not just talking about EARNING money, thats mostly for rubes and is totally inadequate. 

I am talking about becoming one of the "illuminated" who understand all of what I have written above and then undertake the task of doing WHATEVER it takes to tap into the flow of money.

Have a NICE day!

X_mloclaM's picture

This is the defining issue of our time and it is the most sophisticated Art of War Trojan Horse implementation in human history.


Yen Cross's picture

 I appologize for destroying your article Tyler.  I'm just not an MUPPET!

lasvegaspersona's picture

In 1923 Germany was ass deep in hyperinflation which did not kill the Reichsmark until Nov 1924. After that the Rentenmark was born only to also die within a year or so. So what is the author referring to in 1923?

Caveman93's picture

Nature finds will this it just won't be very pretty when it occurs. 

MedicalQuack's picture

This is intersting...Facebook hiring economists...does this give you a hint too on their end of the deal and getting to be closer friends with Barclays

Here's the job requirements to be an economist at Facebook..yikes..they have to do some coding..I have not run across one economist that can script in Python or Ruby yet..this sounds more like qualifcations to be a quant..Facebook gets money out of thin air too:) Watch out when economists are out there in full force.


  • Ph.D. in Economics or a relevant field
  • Extensive experience solving analytical problems using quantitative approaches
  • Comfort manipulating and analyzing complex, high-volume, high-dimensionality data from varying sources
  • A strong passion for empirical research and for answering hard questions with data
  • Ability to communicate complex quantitative analysis in a clear, precise, and actionable manner
  • Expert knowledge of an analysis tool such as R, Matlab, or Stata
  • Preferred Qualifications
  • Experience with online data: mining the social web, scraping websites, pulling data from APIs, etc.
  • Comfortable on the command line and with unix core tools
  • Fluency with at least one scripting language such as Python or Ruby Familiarity with relational databases and SQL
  • Experience working with large data sets or distributed computing tools (Map/Reduce, Hadoop, Hive, etc.)

itstippy's picture

Facebook is seeking their own version of the National Association of Realtors' Chief Economist Lawrence Yun.  A person or persons with credibility who can spin data to show value in what Facebook has to offer, whether there's real value there or not.

No matter who Facebook hires or how talented a team of data analysts they assemble, the conclusion will always be, "There's never been a better time to buy Facebook".

The Bureau of Labor Statistics plays the same role for the Federal government.  Here's their official bullshit mission, from their website:

"The BLS is an independent national statistical agency that collects, processes, analyzes, and disseminates essential statistical data to the American public, the U.S. Congress, other Federal agencies, State and local governments, business, and labor."


QQQBall's picture

The Little People are too far from the spigot.

cynicalskeptic's picture

This sums it up - short and simple.

In our current system when capital is injected into the system - when money is 'created' by government - those who receive those funds first profit the most.  Tarp funds get 'invested' and make MORE money for the recipeients - Banks and Wall Street.  They take this 'cheap/free' capital and leverage it buying stocks, commodities, etc.  BUT at the same tiem this additional capital entering the economic system DOES cause inflation (though at present enormous effort goes into hiding or minimizing this effect.   So while big banks are making money by buying hard assets and reselling them (just why does JP Morganown tankers full of oil and why does GoldmanSachs own warehouses full of aluminum?) at ever increasing prices, the average consumer is hit with higher and higher costs.  More and more wealth is transferred to the wealthiest - those close to the 'spigot' of cheap money flowing from government.   Those farthest away are hit with the full costs of this policy.

If the spigot of government money went straight to the people things would be vastly different.  Imagine if TARP funds were used to rewrite every problematic mortgage at lower rates and longer terms to allow homeowners to stay in their houses. After all, many banks simply too k those TARP funds and reinvested them in things like Australian bonds at 5%.  But if that money went to refund mortgages, lower interest rates on consumer credit and student loans..... the banks would have been 'saved' - since all that mortgage backed paper would still be making payments instead of in default, but no.............the banks wouldn't be making anywheres near as much

motorollin's picture

Fuck you Bernanke!

shutdown's picture

The best remedy for such an obscene level of socially disruptive income and wealth disparity is a good old-fashioned dose of Marxism-Leninism. Really.

A Nanny Moose's picture

The solution to coercive despotic oligarchs is handing moar power to the despotic oligarchy? Interesting.

Caviar Emptor's picture

Look central bankers are in control because they're better at math. Evryone knows that!

Yen Cross's picture

  Set an example/ It's not about money my friends.

  Every morning we wake up to start a new day. { Am I wrong} 

  What's the first thing we think of, upon awakening?  I've got to piss, comes to mind. (am I wrong?)

  Ok, so we've pissed/defecated< ect> What happens next? Family!    How will jenny and jr. get home from extracurricular activities?

   Who Cares?  Turn off the TVs 'and  be parents. The same ideas'apply to your work environments!  JFC! Stand up and lead!

   XenoFrog is an perfect example of leadership!  The woman has conviction and taken her hits, but never quit!  I respect her ! She's put forth an idea that many read and agree with! I commend  her tenacity!

Atomizer's picture

 Yep, turning off the TV for the last six months has been great. The internet is far better in getting unbiased information. It was hard at first, just did it..


Yen Cross's picture

 30 seconds of CNBS is like drinking an cup full of "Polonium 210"" for me. The Russians/ Nigerians are already hijacking my fonts.

A Nanny Moose's picture

30 seconds of CNBS drives me to drink. This is why I cut the cord.

Yen Cross's picture

 I watch CNBS on my "rotten days" for 30 seconds to see how the B.S. is being spun. I especially enjoy Mr. qqq dipshit Miffed by my side.