Our Monetary System Is Responsible For The Growing Inequality

Mike Maloney described in his latest video how people “feel” that things are not right in our economic system. Jim Rickards explains how a depression feels; it is just like … today. There is no growth and things around you point to the fact that growth is not coming neither. Zerohedge publishes non-stop evidence of a deteroriating economic situation, and emphasizes the deteriorating employment situation. The growing inequality is a key returning topic.

PositiveMoney, dedicated to expose the destructive power of the current monetary system, explains how the inequality gap has increased continuously over the last thirty years. According to a recent research from one of their contributors, it appears that several factors contribute to the growth of inequality, but at the heart is the operation of the banking system. To resolve inequality, it is mandatory to change the way money is created. 

In this article, we highlight the drawbacks of our monetary system, show a visualization of the mechanics, and provide the conclusion of PositiveMoney’s latest research note. The research paper itself is at the bottom of this article.

The current monetary system has several drawbacks: (source)

  • The entire money supply is effectively ‘on loan’ from the banks. This means that interest must be paid on most of the money in the economy. I’ve crunched the numbers on government surveys (covering over 3,000 households which interviewed more than 5,000 people aged 16 and over), and found that this interest transfers income and wealth from the bottom 90% of the population to the very top 10%. By allowing our money to be created by banks as debt, we’ve created a system that guarantees that inequality will get worse.
  • Money created by banks pushes up house prices. But it’s the wealthiest who benefit most from these rising prices. For those on lower incomes, or younger people who haven’t bought their first house, rising house prices push up the cost of living, leaving them with less disposable income and a lower standard of living. So rising house prices, fuelled by money created by banks, makes the gap between the richest and the rest of us even bigger.
  • A similar thing happens in the stock market. Money created by banks can fuel stock market bubbles, but because the wealthiest 5% of households own 40% of the assets in the financial markets, this benefits the very richest, and has limited benefit for everybody else. The gap gets even bigger.

transfer_income_wealth_by_money_system_october_2013

Research paper from PositiveMoney concludes:

What this paper makes clear is how the operation of the current banking and financial system encourages the perversion of the behavioural traits of aspiration and emulation (which can otherwise be socially beneficial) into greed and envy, and a socially destructive distancing of the majority from an increasingly wealthy and powerful elite. As Levy and Temin argue, the rise in extreme income inequality coincided with a wave of deregulation and “nancial innovation marking a shift in official attitudes from a concern for social responsibility and moderation to a championing of individualistic acquisition.

Speaking at a conference at the Philadelphia Fed in April 2013, Professor Jeffrey Sachs, co-founder and Chief Strategist of Millennium Promise Alliance, told participants:

“I meet a lot of these people on Wall Street on a regular basis right now. I’m going to put it very bluntly. I regard the moral environment as pathological. And I’m talking about the human interactions that I have. I’ve not seen anything like this, not felt it so palpably. “ese people are out to make billions of dollars and [believe that] nothing should stop them from that. “ey have no responsibility to pay taxes. “ey have no responsibility to their clients. “ey have no responsibility to people, counterparties in transactions. “ey are tough, greedy, aggressive, and feel absolutely out of control, you know, in a quite literal sense. And they have gamed the system to a remarkable extent, and they have a docile president, a docile White House, and a docile regulatory system that absolutely can’t find its voice. It’s terrified of these companies.

I have waited for four years, five years now, to see one figure on Wall Street speak in a moral language, and I’ve not seen it once. And that is shocking to me. And if they won’t, I’ve waited for a judge, for our president, for somebody, and it hasn’t happened. And by the way it’s not going to happen anytime soon it seems.”

This highlights the combined importance of the exercise of moral authority and of the detailed design at the operating level of the institutions of finance in combating the kind of socially disruptive economic behaviour considered here.

However, while it is moral authority which moderates aspirations and expectations and devises sanctions to encourage constructive and discourage destructive behaviour, it is institutional design which ensures that sanctions, when applied, act as intended rather than perversely. From the design perspective, we have seen that asset price inflation, leverage and debt are the key operational factors that encourage the emergence and persistence of extreme income inequality.

Leverage and debt are not peculiar to the “nancial system as currently constituted. Credit has been a central feature of human society since earliest history and with the credit of others, anyone can reap rewards (and risk losses) in excess of their own resources. What is peculiar to the current banking system is the creation of money through debt. Banks don’t lend money in the sense of removing it from the possession of one to place it in the possession of another. They create liabilities against themselves which serve as money. The central role of rising asset prices in creating both the climate and the funding for extreme remuneration suggests that the money-creating consequences of bank lending is a driving factor in the generation of extreme income inequality.

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