A Sure-Fire Cure For Inequality? Crash & Depression

Tyler Durden's picture

Authored by Paul Singer, excerpted from Elliott Management's latest letter to investors,

"[when inflation strikes] ...the normal yardsticks of risk, return and profit may be thrown into the garbage can. These measures may be replaced by a scramble by citizens and investors to preserve value on a foundation of shifting sand, together with societal unrest that may make the current politically-useful “inequality” riffs, blaming the “1%” and attacking those “millionaires and billionaires” who refuse to “pay their fair share,” look like mere warm-ups for real class warfare.


Inequality has become a political theme. Some are using it as a stepping stone to political power, stating that inequality is unfair, getting worse and in need of redress. It is worthwhile to point out the facts.

In most of the world, inequality in fact is declining. More precisely, economic growth and the march of technology, medicine, agriculture, mass education, energy and transportation have in recent decades enabled hundreds of millions of people to make the journey from subsistence poverty to a middle-class standard of living. For billions of people around the world, that journey, and the benefits that people get from a mass rise in living standards stemming from freedom, technological progress and economic growth, are life-transforming, and are inestimably more important than the difference between the living standards of the wealthiest cohort and those experienced by the majority of people. Of course, in many places around the world, corrupt (or incompetent) rulers and oligarchs keep people mired in poverty and oppression. But in those places, it is tyranny and corruption, not “inequality,” which is the problem and the source of the need for “social change.”

Inequality as a political theme is primarily a focus of developed countries. Let us examine its shape and causes. Inequality is exacerbated when asset prices rise. When people save money, buy investable assets and those assets rise in price, inequality is exacerbated because those people have higher income (by definition) than people who do not have enough income to save and invest. The period from the end of World War II to the present has been characterized by growth, prosperity, no world wars or depressions, and rising asset prices. Savers and asset owners receive dividends and capital gains in addition to their ordinary income. Prosperity and bull markets exacerbate inequality. Crashes and depressions reduce it.

Tax policy also has a role, at least in America. In the 1980s, there were tax law changes in America which had the effect of transferring a significant portion of income from the corporate tax returns of privately-held businesses to the individual tax returns of their owners. To the extent that this tax policy represented merely a shift of the same income from corporations to individuals, it created an exaggerated picture of rising inequality.

The march of technology also has played a role. Technological change has created a new class of global entrepreneurs, as well as generally increased the earnings capacity of technologists. The economic value (and consequent wage ranges) of undereducated workers is in the process of declining compared with tech-savvy and highly-educated people. The changes to the income distribution caused by these forces are not small or incremental. Rather, they have demonstrated the ability to capture, destroy or reshape entire industries overnight in today’s world. The people (many of them highly trained) who build and invest in these disruptive businesses can become very wealthy, sometimes very quickly. But the masses who are disrupted by such increasingly rapid changes suffer if policymakers do not create responsive education and job-training paths for them to keep up and change jobs and careers. Technology will continue to be disruptive and exacerbate inequality (while reducing costs and increasing efficiency and effectiveness), but governmental policies could mitigate a good deal of the pain to employees in obsolete or “outsourced” industries and help people adapt to the world of the future. Such policies are currently inadequate, and most policymakers find it more politically useful to rail against “the rich” than to create policies that help the bulk of the people compete and prosper.

So who are “the rich?” In our December 2012 quarterly report, we did an analysis of the Forbes 400. By studying the origins of all on the list, we found that 256 of the 400 were self-made. Of those, 46 grew up in either poverty or the lower-middle class). Another 146 were raised in a middle-class home, without special advantages or circumstances. We recommend going back to read the piece we wrote on this topic, but the point was powerful and is worthy of repeating: America is not a place of static concentrations of wealth. Mobility, growth, freedom and innovation are alive and well in America, and they are the reasons that this country has been the greatest engine of mass prosperity the world has ever seen.

We see the current focus on inequality as primarily an ideological and political theme aimed at justifying higher taxes on the rich, which amounts to the confiscation of wealth and more votes for the politicians shouting these populist riffs, none of whom has proposed any actionable ideas about how to narrow the gap other than by redistributing wealth. We do not think that beating down the income or assets of rich people is going to help middle class or poor people become more competitive or prosperous.

Furthermore, we believe that by railing against the rich and decrying inequality, politicians are attempting to divert attention from their unrelentingly poor policies. Making unaffordable promises and engaging in truly vast expansions of government programs have transmogrified into post-financial crisis solutions to restore ordinary people’s income and positive expectations.

The most important thing we can convey about inequality as a current political theme is that it is sharply exacerbated by the current mix of governmental policies in the developed world, particularly in America. If policies were oriented toward unlocking America’s considerable growth potential (policies described elsewhere in this report), then the rise of asset markets would be balanced alongside considerable improvement in the economic conditions of the vast middle class. But that is not the case in America, where growth-suppressive policies exist alongside extreme monetary ease. The consequence of this combination is that asset prices have risen sharply (exacerbating inequality), with only modest second-order benefits for economic activity, while the middle class has suffered from poor overall economic growth and job prospects combined with significant increases in basic cost-of-living items. This terrible combination is at the root of today’s perception of growing inequality, but the policymakers who are causing this set of circumstances are the ones railing (for political gain) against inequality.

Bad business all around.

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Cattender's picture

thank goodness we're No where  NEAR a Depression!

ZerOhead's picture

At this point I'll just be happy if our fucktard leaders can find a way to avoid total global systemic collapse and WWIII (AKA the war to end all life...)

Pure Evil's picture

The war to end all life.........would that be nuclear war or biological warfare via Ebola?

ZerOhead's picture

Yes and yes. And any other bright ideas they can come up with....

knukles's picture

Your Cloward-Piven Tax Dollars at Work ... rest is distraction until it happens then its terminal

What a joyous outlook, Knuks!

Occident Mortal's picture

The reason for inequality in the capitalist system is down to the tax code.

Corporations pay tax on profit (what they have left after they spent all their money)

Individuals pay tax on their top line earnings (before they spent any money)

Imagine if individuals paid tax only on the money they didn't spend (which is how corporations pay tax).

That's fundamentally why capital outperforms labour. The two are fundamentally taxed at two very different points.

TheRedScourge's picture

The reason for inequality is that people are not equal. They do not have equal wants, needs, or values. Some millionaires want to become billionaires, others are fine to lounge all day sipping mai tais. Same with some middle and lower class folks. Some people prefer to do work that is emotionally rewarding rather than financially rewarding, and some people prefer not lifting a finger and living on EBT and Section 8, and some are simply incapable of generating more value than they currently do in today's economy for whatever reason.


You can tweak and prod inequality a bit by way of policy or tax rates, usually destroying a lot more wealth in the process than the amount you'll succeed in reallocating, but you will NEVER eliminate inequality, nor should you want to. Unless perhaps you implement full communism, kill all the people on the planet, brainwash all people on the planet to change their values, or some combination thereof.

Occident Mortal's picture

Yeah so it's clear you didn't read my post.

Of course things will not be perfectly equal, but the reason why there are billionaires is the one I describe.

Billionaires are not hundreds of thousands of times superior to other people. They might be at best 3 times as smart or 3 times as hard working, maybe at best 10 or 20 times more productive than average.

Labour is taxed at the revenue level (the top line).

Capital is taxed at the profit level (the bottom line).

Imagine if Walmart or Exxon were taxed on gross revenue like individuals are. They wouldn't exist and there would be no billionaire equity owners. The capitalist class is a product of a bizarre quirk in the tax code that is simply accepted as normal.

Income tax is bullshit. Capital doesn't pay tax on income only labour does.

In a recession corporations get a free pass from the IRS. Workers shoulder the slack.

acetinker's picture

I got an idea!  Let's tax the corporations out of existence so everyone can live carefree (no jobs) and subsist on the teat of the nanny state.  You must have a degree in economics, eh?

dark_matter's picture

The problem is most Americans have nothing left after expenses and would pay no tax at all. How could our government keep us safe and provide for the needy with that?

SunRise's picture

Since dollars are basically just the storage of your labor, another way to ask this question is How would our government steal our labor (via taxation) with no income left over?  Hmmm, isn't the use of another person's labor without that person's permission slavery?

The Alarmist's picture

Face it:  That 900 year experiment with increasing personal liberty and prosperity that allowed the common man to bid out his scarce human capital since the black plague last swept through Europe was a huge mistake that our overlords never meant to allow.  Serfdom is our natural state, and they are finally putting the genie back in the bottle.  

Back your plough, schiavo.

kurt's picture

Speaking of Ebola

Did you witness the repeated drip feed over the last 3 months about releases "accidental" of the Apocalyptic Horse? This is all a campaign to condition your mind for what they are doing anyway. Now they've brought back the entire Ebola filled corpse of an American. Which lab is preparing the vials for distribution into the populace? My guess is Bayer as they've had a long history since Hitler days. Thanks Oligarch NGO's. PS we will catch you and it won't be fun.

Dead Man Walking's picture

don't worry, high radiation levels kill the ebola virus.

The Alarmist's picture

Dr. Strangelove, or Learning to live with the B*mb.  That desk will surely save you, if only you can remember to duck and cover.

knukles's picture

I did notice the very same musings and meanderings.
And now the corpse.
And as you mentioned, Germany, Bayer.... Guess who suggested the corpse come home to America.  Germany was a big proponent.
And we all know that bio weapons can be genetically tailored ...
Oh my....

All these coincidences that just keep piling up.... and each one of them winds up not to be such a coincidence somewhere down the road....

junction's picture

This is the same Paul Singer who forced Argentina into defaulting on its government bonds, in large part thanks to the total incompetence of District Judge Thomas Griesa.  Having completely botched up this matter by kowtowing to Singer's vulture fund, Griesa has screwed other big bond holders who were getting paid 33% of what they were due on the installment plan. 

Now Argentina figures, if it is to be blacklisted from the world's credit markets because of this case, then Argentina has no reason to pay off those other bond holders.  If anyone complains, Argentina can say, "tell it to the judge."  Those other bond holders were due to get about $530 million as the latest installment payment until Griesa blocked the transfer.  Next thing you know, Argentina will withdraw that money from the bank it is parked in now, in New York City, and ship the money back to Buenos Aires.

If that happens, Griesa becomes the court jester of the federal judiciary and Paul Singer will have something else to write about.


"Negotiations between Argentina and its creditors should be resumed urgently, US judge Thomas Griesa has said.

Investors holding Argentine bonds and lawyers for the government attended a hearing in New York for the first time since Argentina defied an order to pay.

"Nothing that has happened this week has removed the necessity of working out a settlement," the judge said.

The bond-holders, which Argentina calls "vulture funds," are demanding a full payout of $1.3bn (£766m).

The bonds were bought by hedge funds NML and Aurelius Capital Management for a fraction of their face value in the aftermath of Argentina's economic collapse in 2001.

The South American nation defaulted on its debts at the time.

It has since renegotiated its debts with 92% of the creditors who agreed to settle for one-third of they were originally owed.

However, the hedge funds bought up a large chunk of the remaining distressed debt at low prices, and demand to be paid the full face value of their holding.

On Wednesday Argentina refused to pay."

The Alarmist's picture

So what.  Within a year another round of suckers ... er, investors, will be told their interests rank superior to these guys and they will be led down the golden path to the next default, because that's the way these folks roll.

Coke and Hookers's picture

What's with posting this Elliott Management stuff anyway? It's like reading a paper on the perils of parasitism authored by a tapeworm.

junction's picture

Singer's musings are more like the disjointed ramblings of a brain damaged cokehead who doesn't realize how many people he angered with his Argentina vulture fund lawsuit.  Stay away from heights, Mr. Singer.

LetThemEatRand's picture

"It's like reading a paper on the perils of parasitism authored by a tapeworm."

I am so stealing that.  Brilliant.

QQQBall's picture

Que paso con mi pais Pablo?

autofixer's picture

El gringo ha llengado.

LetThemEatRand's picture

"Furthermore, we believe that by railing against the rich and decrying inequality, politicians are attempting to divert attention from their unrelentingly poor policies...."

First, he's right that when politicians speak about it, it is an attempt to divert attention.   Second, few people here or those I know rail against the rich because they rich.  It is how many of them became rich that we complain about.   Third, nowhere in this article does the author acknowledge that government policies are specifically designed to make a small percentage richer, because those people control who is put up for the false Red Team/Blue Team elections.  If you don't talk about that, you are also attempting to divert attention.

BurningFuld's picture

Hey, I gave it a +1


out of 5.

WTFUD's picture

Tar, feather and string up the policymakers then cook up their offspring in a gumbo.

dark_matter's picture

Disgusting. Who would want to eat their offspring?

Rainman's picture

The middle class is dwinding but it's still there. It simply takes a million net worth to be a member.

kurt's picture

At least you didn't bring out the old saw about the rich being job creators, because they aren't.


blindman's picture

government by and for the rich must
be paid for by the working, the savers and
must be broad
based. the rich spend enough buying off
the political parties, candidates, accountants
and judges to sustain their graft riches.
that sums it up. no?

QEternity's picture

But there are rich people and I want things!

Milestones's picture

don't back off BsAs, stick to your guns. There are going to be a bundle of countries coming to join you--including the USA. Singer, go pound sand with your ninny article. Pathetic courts in lock step with the bigs.                  Milestones

AchtungAffen's picture

Paul Singer talking about inequality being highly exaggerated... Hypocrisy anyone?

The Alarmist's picture

Not at all ... it may be delusional, but it is an honestly held belief, and in some legal systems it is enough to have all but the most egregious crimes excused for lack of mens rea.

22winmag's picture

Pull the charging handle to the rear...

The Alarmist's picture

and flip the spoon.  No one gets out alive.

Tegrat's picture

There must be a lot of a-holes on ZH. I don't give a rats ass on who makes more/less than me. However anyone who wants to take what I or anyone  has and redistribute to those they think are deservinig, need a warning shot to the base of the skull. For those who dont have, wealth is like the sunshine. You can sit around bitching about people who have or go get some yourself.


Tears to the money envious a-hols here. Trade for penile envy.

AchtungAffen's picture

Spoken like a true slave. Damn, I wish I could buy you!

RaceToTheBottom's picture

Since when is a warning shot to the head?  YOu got your brain in your penis or something?

theyjustcantstop's picture

when some politicians, and many corp.'s say the flat tax would be the best for all, throw the millions of pages of tax-code in the dumpster, now that scotus says corp's are people, this should make the % of tax on income a lot easier to come up with.



honestann's picture

The situation is actually rather simple.  To illustrate, imagine a world in which individuals cannot get loans.  For any reason.  Period.  Assume we return to the time when [to first order] the only justification for a loan was to expand a profitable business that had substantially more demand than it could supply with current factory and machinery (operating close to 24/7/365).

People would save to buy homes.  People would save to buy cars.  People would save to buy furniture.  People would save (or work) to attend college.  And so forth.

In such an environment, prices paid for homes would be about 1/10 their current level, prices paid for cars would be about 1/8 to 1/3 their current level, prices paid for college would be about 1/30 to 1/10 their current level, etc.  These fractions take into account the savings inherent in not paying interest on loans, plus all other identifiable factors.

In such an environment, people would have no mortgage payments, no car payments, no college payments, no furniture payments, no credit card payments, etc.  Without all the artificial, jiggered, manipulated forces, many people would also have paid for their own solar-panels and/or wind-turbines, their own water wells, and so forth.

In short, in such an environment, the daily, weekly, monthly, yearly cost of living would be vastly lower than today.  And where would all that extra income go when not consumed by mortgage payments, car payments, college payments, furniture payments, credit card payments, etc?

Answer:  Into starting a new business, becoming their own bosses, and in later years buying luxuries they could never afford in a world where so much income is consumed by endless grossly overpriced goods and interest payments.

In other words, the economy would BOOM.  Not just boom, but super boom (compared to what the world sees today).  And these economic booms would not be false booms (spending that's just borrowing and debt).  These would be real, true, organic, self-sustaining booms that need never end, because at root they are ever-increasing efficiency and productivity... and direction of wealth into the most efficient endeavors, not the least efficient endeavors (feeding the predatory governments, financial industries and oligarchs).

And what makes "endless debt" occur?  Obvious:  legislated FIAT.

And what does fiat do?  It lets a small pack of predators create their fiat, fake, fraud, fiction, fantasy, fractional-reserve debt bits out of thin air, without production, without savings, without any basis at all... to manipulate and enslave the masses.  Period, end of story.


Nothing else will work.

gonetogalt's picture

I didn't know females were this intelligent. Where were you when I was wife shopping? Post of the day, thanks.

Ohne Deckung's picture

Oh the inequality.

What about the appetite to win the allround competition to be better than your next.

The freedom caunting the shots.

The difference between a winner and a loser, can it be expressed in terms of inequality.

All are striving for the dam' inequality in the version of beeing more equal.

Tell the people there were higher returns if you do not win the competition in place which in each action creats the said unwanted.

Apply yourself as a priest.