Introduction
Carl Gustav Jacob Jacobi
(December 10, 1804 – February 18, 1851), considered to be the most inspiring
teacher of his time and one of the greatest mathematicians of his generation,
said: “Invert, always invert”.
Jacobi believed that the solution of many hard problems can be clarified by
re-expressing them in inverse form.
Following this approach let’s examine how to increase inequality of
income and wealth. There are three main
areas:
- Wealth
distribution
- Borrowing
and Lending
- Income
distribution
Let’s also consider potential threats to increased inequality.
Executive Summary
Trends in wealth distribution and expanded opportunities for borrowing
and lending will drive increasing inequality.
Idealists and campaign groups may be threats, but provided these remain
disorganised and unstructured they will not reverse the trend. Social networking software developing into a widely
accepted decision making mechanism is a concern. This could lead to fair and reasonable decision
making and given wealth accumulation typically requires an element of
unfairness and unreasonableness this is a problem. Many mechanisms, including legislation can be
put in place to slow adoption but ultimately it fairness and reason seem likely
to prevail and the trend will reverse. The end of credit expansion will
probably happen before the end of 2017 and will seriously disrupt wealth
distribution with impacts that are difficult to predict.
Wealth distribution
In the absence of debt, peak inequality arises with one person owning
all the wealth on the planet. This is difficult to achieve and the present
distribution is far further along this path than we, or any classical
microeconomic theory, imagined was possible and the concentration is
increasing.
It would be difficult to generate widespread support for further actions
to concentrate wealth. One might argue
that very rich individuals are best at managing wealth and so should be given
more of it. However we think this argument is theoretically flimsy as the other
99% of the planet have almost zero wealth to manage and consequently their
ability to manage it is unknown.
Practically it seems almost impossible to make the man on the street
understand the potential benefits of making the very rich even richer and there
is a real risk of a counterproductive backlash if this was attempted.
Borrowing and Lending
Peak inequality is not restricted to getting the majority of people’s
wealth whittled down to zero. The established finance industry allows extensive
borrowing and lending. This enables many individuals to have negative net
wealth for much of their lifetime. As one man’s paper liability is another’s
asset a fully developed banking system helps to maximise inequality.
There appear to be many promising opportunities for progress here. Two main areas to build on are education and
housing.
Educational
Lending
In North
America and other developed areas student loans are available. This allows many of the more able citizens
get saddled with debts as young adults.
It only requires some surplus income after studying to service the debt.
The US has
ruled that discharging this debt in bankruptcy is inconvenient for lenders and
is not allowed. Instead the process is
to penalise anyone who struggles to repay and this helps ensure many debts last
for years. Education costs have also
risen rapidly and many graduates emerge with a significant liability. It is
extremely hard for parents to deny opportunity to their kids and so they can
often be persuaded to guarantee debts or contribute to the costs and this has
helped to allow costs to skyrocket. Some excellent analysis on student loans is
available at http://market-ticker.org/akcs-www?post=228449 .
However most people won’t read this so it’s not a major concern.
Educational
lending can expand to other further education activities and lending in less developed
countries can increase provided suitable protection for lenders is established.
It is disappointing,
from an inequality point of view, that children typically enjoy many years of
education without getting into debt. While
appealing to allow them to borrow, without granting other rights to contract,
generating widespread support for this is difficult. It is very tricky to enforce repayment of
obligations taken out prior to them reaching the age of responsibility.
The most
promising option for child lending seems to be through campaigning to push down
that age. Perhaps 14 is a level that can
be reached with a bit of lobbying. Obviously,
the sooner children get into debt the more years they could be contributing to
the interest flow from the poor to the rich which is so helpful to the way of
life of the elite.
Most banks
and financial institutions would probably be in favour of this move. There would probably be some costs in terms
of political contributions to get the legislation passed but it seems a logical
extension of the overdevelopment of further education. We could probably get politicians to back it
on the basis of providing children with better educational facilities and it
could be combined with further public borrowing to help develop the system.
There are
additional opportunities to maximise inequality. Most countries do a fairly
good job of ensuring students enjoy a period of unemployment after their
studies but potentially this could become mandatory to ensure students forget
as much as possible of what they have learned before getting the chance to put
it to use. The myth that it doesn’t
matter what you study must be perpetuated and courses should continue to focus
on the interests of academics rather than the requirements for a more
successful planet.
There
isn’t a whole lot more action needed to move this along. Encouraging gap years after studying and
continuing to promote the social desirability of borrowing should be enough to ensure
the vast majority of youth emerge from their education with a solid wall of
liabilities which they can pay interest on for most of the rest of their life.
More might
be done to make initial post-educational jobs a commodity to be bought with a
modest loan. This would help with topping
up liabilities at the end of studies and could restrict movement of labour for
a period afterwards until the supporting loan is paid off. Not quite slavery, but a tied employee can
certainly be underpaid for a while.
Housing
Housing provides another opportunity
to get people into debt. Unlike education
housing loans are well secured on the related property. This creates an incentive for both the lender
and the building industry to ensure innovation and cost reduction in building
are kept to a bare minimum. A situation
where new housing becomes significantly cheaper than the existing housing stock
is undesirable as it impacts the security of existing loans.
Nobody, other than the customer,
benefits from affordable housing as this impacts the lender’s security and risks
a situation where people were able to buy houses with less borrowing. Consequently a high level of building
regulation must remain and new techniques and materials should generally be
found to contravene these regulations.
Planning restrictions must remain
strict to make it difficult to build houses.
However some building on flood plains and other areas prone to natural
disasters eg bush-fires should be encouraged.
This can result in insurance claims which given that very rich people own
the insurance companies is a cost. However
this is not as bad as it appears as they never pay out the full replacement
cost of what’s destroyed and in practice many claims can be avoided or mitigated
on technicalities. Premiums are hiked
after a claim and there is no obligation to provide cover in future. This diminishes the wealth of flood affected
homeowners.
Income
Distribution
Good progress has been made on
income distribution recently and the future looks promising. When compared to chief executives, the
salaries of typical workers are much smaller executives than 20 years ago.
This is explained as a result of
the labour market working well and some people seem to believe this. In a situation where there is excess labour,
there are real possibilities to increase board level and non-executive pay as
just compensation for keeping overall costs and employee wages low.
Combining this with stock options
and bonuses supports inequality. Bankers’
bonuses remain an issue. Somehow the public struggle to understand the rewards
that are required to incentivise bankers to bankrupt their employers and exploit
the customer. However with so many living
in debt the bankers have a huge amount of power. Simply backing off on new lending means many
loans will fail and ordinary people will start to struggle. This fear combined with buying influence with
politicians has helped allow much of the pillaging that takes place under the
banner of financial services to continue after the initial crisis.
Secured property lending also allows
banks to take ownership of properties when they cause a downturn in lending. Once a good level of wealth has been
confiscated banks can start to lend and grow again. This is obviously much
easier once prices bottom. The boom and
bust cycle is extremely helpful must be encouraged to concentrate wealth. It creates some musical chairs among the
banking leadership but severance payments are good and there is no real concern.
In summary recent decades have
been good and mechanisms are in place to extend inequality in future. Abraham Lincoln’s Gettysburg goal has been
redefined as Government of the debtors, by the creditors, for the creditors and
it is unlikely to perish from the earth anytime soon.
Threats
While the above outlook is encouraging
taking increasing inequality for granted is complacent. The following threats will be considered:
1
Democracy
2
Secularism
3
Civil disobedience
4
Social Networking
5
End of credit expansion
Democracy
Initially, democracy was a real
concern among the elite. However these concerns were unfounded. Democracy promotes the idea of the will of
the people but in practice controls over the press and high operating costs for
political parties ensure credible candidates are well linked to the elite. Periodically proclaimed socialists emerge and
appear to be in charge. This is concerning,
but only superficially, as they make rumblings about re-distribution of wealth
and a fairer society. However most
politicians don’t really mean what they say and there is much talk and little
action.
The fairly recent example of Tony
Blair’s election in the UK is typical of how this can work out. The main redistribution of wealth he achieved
was from the rest of the world to him. In
return, using his leadership as a token to join the elite he found himself
rather less inclined to legislate against them.
Instead, Tony, like most politicians, was keen on borrowing and this
allowed him and the rich to gain wealth while the public liabilities grew. Blair was also clever or lucky enough to bung
the baton of leadership into Brown’s bottom before the banks blew up. However let’s not be too sorry for Gordon cleaning
up the mess. A recent Forbes report
suggests a residue of $15 Million dollars was left over for him after he left
office and the baton passed out of his orifice and back to its more
conventional home among the former pupils of Eton.
Secularism
Secularism is probably a bigger
threat than democracy. For centuries the
poor majority have been told of big rewards and perhaps retribution in the
afterlife. This has made them more
accepting of struggle and exploitation.
Atheism could make the majority more challenging to manage. Funding of
religious leaders is also less worthwhile if their influence diminishes. Science is a real problem as it keeps
explaining how things actually work without divine intervention and consequently
God’s attributed abilities continue to decline.
However the Romans and the Soviets have both demonstrated that religion
is not critical to holding power. The ‘bread
and circus’ approach should continue to apply and provided basic needs are met
then the risk of rebellion is low.
Civil disobedience
If ‘bread and circus’ theory
holds then so long as the majority are fed and entertained the risk of civil
disobedience is low. Issues arise if the
quality of food or entertainment deteriorates or prices rise noticeably ahead
of wages. The incumbent political
leadership generally deal very harshly with disturbance and this helps promote
an atmosphere of fear among the majority of the population if any uprising
gains ground. This goes without saying
as a requirement for the funding provided to political parties. Indeed protests can help politicians to
demonstrate how powerful and masterful they are by getting their servants to
deal harshly with protestors. There are
also techniques to infiltrate crowds and manage the reporting to discredit,
downscale and tarnish the credibility of protests. While not ideal these can continue to be used
and denied when necessary.
Social Networking
While current social networking tools
spread publicity and rapidly update the public on events they primarily help by
distracting and pre-occupying the majority.
This activity is not a major threat and anything which avoids the
majority thinking about current issues such as inequality must be encouraged. If social networking evolved into a group
decision-making platform this would be concerning. While it may appear this is similar to democracy
there are some key differences:
1
Decision making is continuous rather than a
managed vote every four or five years
2
Participation costs are low
3 Decision making could be shared and the people
making the decisions might not be known in advance and this makes influencing
their thinking and their wallets exponentially harder
4 It could lead to real decentralisation and
distribution of decision making
5 It might lead to fair and reasonable decisions
that lack focus on concentrating wealth and rewarding the elite
However few people make the
effort to think and many apparently prefer being told what to do. Consequently such
a solution would take time to gain traction.
It may also be possible to buy out the developers, a bit like political
leaders, and provide a contribution for them not to publicise their ideas. While actions can be taken to delay this, ultimately
it looks like there may need to be funding to support politicians and
compensate them for enacting the necessary legislation to outlaw this
development. A situation where the
majority are empowered to make decisions in the best interests of society and
based on consensus is unacceptable. That
could seriously impact the distribution of wealth in the future.
The end of ever expanding credit
When housing credit stopped expanding
in the US in 2007 there were repercussions. The elite, through their agents,
moved into a confiscation phase of the game.
Since then global governments have worked hard to get credit expansion
going again and the question arises if this were to stop again what would the
consequences be? There is some good
back-drop to the debate here (
http://globaleconomicanalysis.blogspot.co.uk/2014/03/pettis-proposes-savings-glut-and-income.html
) debating the issues with consumption, saving and investment. However neither Mish nor Michael seem to
explain how effective Government borrowing remains in allowing individuals to
save and the economy as a whole to consume at the same time. The so called Keynesian multiplier effect
with borrowing appears to be a win-win situation for everyone.
The workers get jobs, the rich
get to invest risk free and the Government takes credit for a bigger programme
of work than taxation alone could allow.
It appears to be as close as humanity has ever got to the perpetual
motion machine. Certainly this game can
go on for a very long time and there doesn’t seem to be much not to like.
However, nothing grows for ever
and the end of the debt super-cycle remains a real risk to all holders of
wealth. All wealth is either directly
linked to paper promises from counterparties or anchored to prices and incomes
based on norms established during a period when Government borrowing has
distorted free market rates. Anchoring
of values and distortion of prices has taken effect and given this period now
covers virtually everyone’s adult life it is very difficult to recognise and
accept these conditions are NOT normal and will ultimately prove unsustainable.
Make no mistake the end of the
debt cycle is a mathematical certainty as debt cannot expand faster than income
in perpetuity. It ends when too much of
that debt ceases to be serviced and rolled over and at that point things
quickly get rather ugly and a great deal of wealth will have to be written down
and entitlements and promises renegotiated. While the rich will arrange for the burden to
be proportionately higher for the middle and lower classes they will also be
affected. The questions that arises are
when this will happen and what could trigger it off?
As so much borrowing is now
either by the state or guaranteed by the state it seems certain that crisis
will now start at a national level.
Japan, China, the Eurozone and the US seem the most likely sources of
trouble, with Government debt, property bubbles, peripheral debts and student
loans seeming plausible causes for each area.
However the inter-connectedness of the world and the cross exposure of
banks makes it likely that any one of these crisis could trigger all the rest
and the happy drift of the very rich to get even richer will be over. We predict the faeces finds the ventilator fairly
soon and as an absolute deadline we expect debt expansion gives way to further debt
monetization by the end of 2017 at the very latest.
Fortunately, despite all the
creativeness of financial futures and derivatives and the many claims on the
future that have been written there is still no way to actually consume next
year’s harvest before it has grown and technological progress genuinely does
mean humanity is theoretically more capable with each passing year. However
renegotiation of entitlements will prove a shock and distraction from progress
and prospect theory means many people will choose to under-produce as they
adjust to the new normal. If
renegotiation is done equitably and openly then it is likely to reduce the
concentration of wealth – however if force and authoritarianiasm prevail then
wealth may further concentrate. However their portfolios will probably need to
diversify from gold and silver to lead and brass if they want to live long
enough to enjoy it.