Why We're Doomed - Our Economy's Toxic Inequality

Authored by Charles Hugh Smith via OfTwoMinds blog,

Anyone who thinks our toxic financial system is stable is delusional.

Why are we doomed? Those consuming over-amped "news" feeds may be tempted to answer the culture wars, nuclear war with North Korea or the Trump Presidency.

The one guaranteed source of doom is our broken financial system, which is visible in this chart of income inequality from the New York Times: Our Broken Economy, in One Simple Chart.

While the essay's title is our broken economy, the source of this toxic concentration of income, wealth and power in the top 1/10th of 1% is more specifically our broken financial system.

What few observers understand is rapidly accelerating inequality is the only possible output of a fully financialized economy. Various do-gooders on the left and right propose schemes to cap this extraordinary rise in the concentration of income, wealth and power, for example, increasing taxes on the super-rich and lowering taxes on the working poor and middle class, but these are band-aids applied to a metastasizing tumor: financialization, which commoditizes labor, goods, services and financial instruments and funnels the income and wealth to the very apex of the wealth-power pyramid.

Take a moment to ponder what this chart is telling us about our financial system and economy. 35+ years ago, lower income households enjoyed the highest rates of income growth; the higher the income, the lower the rate of income growth.

This trend hasn't just reversed; virtually all the income gains are now concentrated in the top 1/100th of 1%, which has pulled away from the top 1%, the top 5% and the top 10%, as well as from the bottom 90%.

The fundamental driver of this profoundly destabilizing dynamic is the disconnect of finance from the real-world economy.

The roots of this disconnect are debt: when we borrow from future earnings and energy production to fund consumption today, we are using finance to ramp up our consumption of real-world goods and services.

In small doses, this use of finance to increase consumption of real-world goods and services is beneficial: economies with access to credit can rapidly boost expansion in ways that economies with little credit cannot.

But the process of financialization is not benign. Financialization turns evertything into a commodity that can be traded and leveraged as a financial entity that is no longer firmly connected to the real world.

The process of financialization requires expertise in the financial game, and it places a premium on immense flows of capital and opaque processes: for example, the bundling of debt such as mortgages or student loans into instruments that can be sold and traded.

These instruments can then become the foundation of an entirely new layer of instruments that can be sold and traded. This pyramiding of debt-based "assets" spreads risk throughout the economy while aggregating the gains into the hands of the very few with access to the capital and expertise needed to pass the risk and assets off onto others while keeping the gains.

Profit flows to what's scarce, and in a financialized economy, goods and services have become commodities, i.e. they are rarely scarce, because somewhere in the global economy new supplies can be brought online.

What's scarce in a financialized economy is specialized knowledge of financial games such as tax avoidance, arbitrage, packaging collateralized debt obligations and so on.

Though the billionaires who have actually launched real-world businesses get the media attention--Bill Gates, Jeff Bezos, Steve Jobs, et al.--relatively few of the top 1/10th of 1% actually created a real-world business; most are owners of capital with annual incomes of $10 million to $100 million that are finance-generated.

This is only possible in a financialized economy in which finance has become increasingly detached from the real-world economy.

Those with the capital and skills to reap billions in profits from servicing and packaging student loan debt have no interest in whether the education being purchased with the loans has any utility to the indebted students, as their profits flow not from the real world but from the debt itself.

This is how we've ended up with an economy characterized by profound dysfunction in the real world of higher education, healthcare, etc., and immense fortunes being earned by a few at the top of the pyramid from the financialized games that have little to no connection to the real-world economy.

Anyone who thinks our toxic financial system is stable is delusional. If history is any guide (and recall that Human Nature hasn't changed in the 5,000 uears of recorded history), this sort of accelerating income/wealth/ power inequality is profoundly destabilizing--economically, politically and socially.

All the domestic headline crises--culture wars, opioid epidemic, etc.--are not causes of discord: they are symptoms of the inevitable consequences of a toxic financial system that has broken our economy, our system of governance and our society.

Comments

tmosley Wed, 08/16/2017 - 09:37 Permalink

Its the money, stupid.When you have honest money, everyone gets rich. When you have dishonest money, a small group rapidly rises to the top and becomes ULTRA rich.

Mercury FreeShitter Wed, 08/16/2017 - 09:56 Permalink

What few observers understand is rapidly accelerating inequality is the only possible output of a fully financialized economy--------------------------------------------------------------------------------------------------Few observers understand that if we keep importing impoverished, third-world peasants, the gap between them and anyone who made $1 more this year vs. last year will continue to get wider.In other words, when the left side of the scale is pegged near zero and never moves, any improvement in anyone else's wealth picture increases the inequality between low and high.  That's true whether there is "financialized" economy or not.Also, when the labor force participation rate is at multi-decade lows, that includes a lot of people who are perfectly cool with not building wealth.

In reply to by FreeShitter

Occident Mortal Mercury Wed, 08/16/2017 - 10:08 Permalink

The chart is bullshit and looks like it was created by the work experience kid at a newspaper or some other such mathematically challenged moron.

Why are there multiple data points between the 98th, 99th and 100th percentile on the recent 2014 data series?

Kudos to the editor for failing to spot such glaring errors. Sigh. At least it wasn't published in a prestigious national paper. Sigh.

FFS. The chart is utterly fictitious bullshit, the data series are not even consistent. I can see the chart data is corrupt without even knowing what the chart is trying to illustrate. Sigh.

In reply to by Mercury

bverheg Occident Mortal Wed, 08/16/2017 - 11:12 Permalink

Why would it not be possible to have multiple points? If you have the primary data, you are able to construct points for the 98.1, 98.2, etc. percentiles.If you have a curve fitted through the primary data, you are able to do the same. Nothing wrong with the chart. If the data are correct, I don't know, but that holds for most charts published online. Unless you can show that incorrect data were used, we should trust it.

In reply to by Occident Mortal

LyLo FreeShitter Wed, 08/16/2017 - 09:59 Permalink

I have a buddy that knows literally nothing about investing, currency, commodities, etc.  I doubt he could even tell you what the rule of 72 is, let alone how to apply it.  I tried to get him to explain crypto-currency to me (somehow, whenever anyone "knowledgable" explains it, it sounds more like an investment vehicle than a currency...) but he has no idea what the blockchain is nor how it applies.  He works for the state of KY and thinks he'll get a pension, has no idea why anyone would worry about SSI, and in general is the least financially literate person you'd hope to meet.He's now making quite a pretty penny on Bitcoin.  And every penny he's made, he puts right back in.  He's almost making as much off BC as he was off the stock market back in 2000.No point to this story.  None at all. 

In reply to by FreeShitter

tmosley LyLo Wed, 08/16/2017 - 10:19 Permalink

How is he "putting money back in"? Bitcoin doesn't produce a dividend, unless you count things like Stellar distributions and forks like BCC. Otherwise, it really just sits there. It goes up in value, sure, but there is nothing to reinvest.And yes, some idiots just get lucky. I got lucky on my first gold investments circa 2004. Didn't really understand it, but had plenty of money, so I bought a good bit, and tripled my investment. Sold it and took profits, again without understanding it. If I had held on a few more years, I could have bought a very nice house with the proceeds. I could even have justified holding it until today, like the oldbugs who brag about buying gold way back when. Glad I'm not stuck in THAT trap.

In reply to by LyLo

The Cooler King (not verified) tmosley Wed, 08/16/2017 - 09:59 Permalink

I have an interesting question for you. Pretend this is like that movie 'Brewsters Millions' where Richard Pryor has to spend $30,000,000 in thirty days in order to inherit $300,000,000. And he has to to it in a 'legit' way, you know, keep all receipts, etc. But I'll actually make it easier. Let's say that somebody bought 12 bitcoins when it was at $4 ($48), and, using the price quotes from this past weekend, saw that his/her balance on those coins was close to $50,000. So let's play 'Brewster's $50k' & pretend that all you had to do was spend $50k, in one day, using only bitcoin, and get the receipts for that so you could inherit the $300,000,000. How would you accomplish that? What would you buy? And furthermore, lets' say you were successful, and got the $300,000,000. What would you then buy with that? I imagine more bitcoins, but if not, explain to me why not.

In reply to by tmosley

tmosley The Cooler King (not verified) Wed, 08/16/2017 - 10:11 Permalink

purse.io, buy anything on Amazon, at a discount. You can also use dollars to buy things on Amazon through purse.io for others in exchange for bitcoin. If you HAVE to spend it directly, just buy gold or silver through any of the several retailers that offer it for bitcoin. If that isn't good enough because they don't keep the coins, then buy anything on overstock.com. They keep three quarters of the bitcoin they receive (and thus stock in overstock is exploding as it is an indirect investment in bitcoin).If I had that much money, I would be buying patents for certain technologies that I know intimately, having developed them, build manufacturing facilities and bring the products to market. A fraction of that would go into crypto as savings.

In reply to by The Cooler King (not verified)

The Cooler King (not verified) tmosley Wed, 08/16/2017 - 10:28 Permalink

Interesting answers. On this one. If you HAVE to spend it directly, just buy gold or silver through any of the several retailers that offer it for bitcoin. In the 'Brewsters Millions' scenario, that would not have counted because part of the 'deal' was that he couldn't make any purchases that were considered monetary instruments, stocks, bonds, bullion, etc.  (although he was allowed to buy things like 'art' at art or antique auctions to a limited extent). Brewster, however could purchase cars & such but only to a limited extent. (He couldn't go out and buy mansions, or real estate). IOW ~ the real focus of the operation was to demonstrate exactly how hard it was to spend $1 million a day, (and that was CASH). Essentially here, based on your reply, you'd have to spend $50k on AMAZON through this purse.io thing. I don't know much about that & I won't ask you to explain, but here's what I came up with in a quick search. https://www.reddit.com/r/Bitcoin/comments/4duiai/why_i_am_no_longer_usi…

In reply to by tmosley

The Cooler King (not verified) tmosley Wed, 08/16/2017 - 10:50 Permalink

Sadly, or 'fortunately', I have so much furniture already I need to get rid of it. My basement is stuffed with things that would probably actually fetch a nice price on E-Bay (Ethan Allen style pieces that are very classical indeed). If I were ever to suddenly 'kick', the estate handlers would have a field day with. But I'm too busy to even go thru the E-Bay hassle (& I really don't need the money). I guess what I'm driving at is more towards things that 'most people' would really find handy. For example: In my case, a 2018 FORD VELOCIRAPTOR might be interesting, and, let's say that you could put a down payment on one (in bitcoin), and make monthly payments at zero or low interest, with bitcoin. That would be interesting. Or maybe a POLARIS, or a SEA DOO, or AMMO, or whatever. Now, 'most people' may not want that kind of vehicle, or have the garage facilities for boats or recreational vehicles, but anyway, things of that nature. Takeout food is not on my list of priorities.

In reply to by tmosley

LawsofPhysics Wed, 08/16/2017 - 09:42 Permalink

Very disingenuous post.  Don't overthink this.  When money creation is NOT connnected to anything REAL, like COLLATERAL, RISK, or VALUE, then your money is THE fucking problem..."Give me control of a nation's money supply and I care not who makes its laws" - M. Rothschild.See the problem yet fuckers?"Full Faith and Credit" Remind me, what is the federal funds rate again?  Why can't ALL business/corporations/people have access to money AT THE SAME INTEREST RATE?tick tock motherfuckers.

rmopf2010 LawsofPhysics Wed, 08/16/2017 - 09:54 Permalink

 even worst! it's already happening "If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered."Thomas Jeffersontick tock :)

In reply to by LawsofPhysics

vegas Wed, 08/16/2017 - 09:42 Permalink

1) When you quote the NYT, I'm not interested, and 2) who was Preezy during most of this "financialization"? Oh right, President Empty Suit. Amazing he gets a free ride of responsibility from the mess, but what do you expect when he retired and then gave a $400K speech. I guess it's all just a coincidence ... probably nothing. WTF. www.traderzoogold.blogspot.com

El Hosel Wed, 08/16/2017 - 09:41 Permalink

Yeah, but, it is real good for "The Market"..... No matter how bad it gets for the little people we can still rig the "The Market", right?

small axe Wed, 08/16/2017 - 09:44 Permalink

The Fed has orchestrated theft on a scale that is almost unimaginable. They have turned this country back into a feudal aristocracy of oligarchs.

Putrid_Scum small axe Wed, 08/16/2017 - 09:54 Permalink

The Fed will get the blame, but they had no choice.The System Framework had internal contradictions which could only be treated, not solved.Our System has been collapsing since 1914, wth a brief respite mid-century, and now the collapse is in its final phase.It'll be called The Reset, and will be followed by wars almost everywhere.I wonder how bad the pain will be.www.beforethecollapse.com/2017/05/23/the-reset/

In reply to by small axe

falak pema Putrid_Scum Wed, 08/16/2017 - 11:50 Permalink

the system has expanded since 1971 based on debt, until the Saud credit side was deemed collateral belonging to the SYSTEM; aka Dear Henry's subtle shuttle diplomacy and Nixon-Saud deal.So further down that timeline, the Bandar-Bush oil complex fed both the debt machine of $ world and the Jihad complex as twin faces of petrodollar and NWO to the moon for both US oligarchy and Sauds.A system with a two headed God : Janus.Now the two heads are torn assunder, since 2008 $ collapse and consequent Saud encirclement from Putin/iran and US's distancing ; and the $ is floating on thin air made by the FED; more so as the Duck reverses globalism of past NWO; breaking the China factory and US consumer linkage !WHen that occurs we will be in the final swirl to god knows where!

In reply to by Putrid_Scum

HuskerGirl Wed, 08/16/2017 - 09:50 Permalink

So what's the solution?  More socialization through "free" healthcare and "free" college will further consolidate power in the hands of the eco/political elite and further create a politburo in control of more of the economy.  "free" trade further commoditizes US labor.  It seems all of the solutions being sought by both the masses and the elite will exacerbate this problem, not fix it.So what's the fix? 

HuskerGirl unplugged Wed, 08/16/2017 - 10:04 Permalink

Do you really see bloodshed as a fix?  How can it do anything but be a bloody "cultural revolution" like we saw in Russian and China that left the masses under a more oppressive socialist system?And, if it came to that, the members of the politburo determining what's "fair" for all of us will be the same rich, political elite that caused the problem today and who would be happy with that outcome.The blood that will be shed won't be theirs, after all.  

In reply to by unplugged