Special Guest Post from Steven Menking: Understanding Economic Inequality

The cry of inequality and unfairness rings loud in our culture today. Grievances are posed. Emotions are stirred. Factions are defined. Division is cemented. Our world seems to be obsessed with the bifurcation between the haves and have-nots. Regardless of our worldviews, we are confronted with sobering statistics about the growing wealth and income disparities in recent decades. As the middle class continues to erode, prevailing sentiment searches for a solution. Let’s take a look at a couple proposals and then delve into the source of this inequality.

Tax the Rich

The general notion of increasing taxes on the wealthiest households maintains consistent popular support due to its political viability. Interestingly enough, some of those who would fall into that camp have come out in favor of this idea. While en vogue, policies enacted along these lines will not be effective. First, the individuals and corporation at the top of the economic food chain have sufficient resources to hire professionals adept at reducing tax burdens and as such the revenue windfall would be limited. Second, a good deal of the owners of small businesses that collectively account for the vast majority of jobs in our country would be negatively affected by the tax but unable to compensate with a similar armada of tax consultants, accountants, and lawyer. The economy, particularly job creation, would suffer as a result. Third, even assuming everything works properly, it would be naive to presume that a tax windfall in the hands of the federal government would actually be used to concretely mitigate the inequality.

Give to the Poor

Whether via subsidies, direct transfer payments, social safety nets, specific benefits, or other avenues, we must acknowledge at this point that the federal government is not a responsible custodian of funds and has proven time and time again that it will enrich itself at the expense of the general population. The endless cycle of over-promising and under-delivering continues unabated. Any effort to direct spending in a way that reduces inequality will either see reduced effectiveness or be outright counterproductive. All it takes to understand this is to ask a simple question: where does the money come from? Increased taxes? See above. Cutting other spending? Yeah right. Currency printing? This last option appears to be the one favored by PhD economists and technocrats responsible for global institutions. Ever heard of helicopter money? Check it out. Deliberately destroying the value of our currency is no solution for inequality. Venezuela should be sufficient to demonstrate this principle.

The True Source of Inequality

Until we understand that the current monetary system itself naturally breeds inequality we will only be able to propose policies and solutions with little to no effectiveness in the best case and outright negative outcomes in the worst case. How does this work? The mechanism is rather simple. The Federal Reserve, the central bank of the United States, creates currency (US Federal Reserve Notes aka “the dollar” is fiat currency with no intrinsic value. It is debt, not money). This currency then makes its way into the general economy by way of the balance sheets of the largest banks. Hypothetically, this creation of credit increases the supply of dollars in circulation via the banks loaning out the dollars to individuals and firms. However, in reality what happens is that by having direct access to these new funds, the banks can then put them to work before prices go up to reflect the reduced purchasing power of the dollar that results from additional dollars being printed.

Let’s say you live in an isolated community and there are one million dollars floating around in the local economy and there is no external interaction. Now let’s imagine that you discover ten million dollars. Not bad, right? At least not for you. You take your newfound currency and begin buying things. As a result of this additional demand, prices increase (think of an auction). You get the first bite of the apple by being able to purchase goods and services with new currency before the price inflation that results. Everyone else, even the individuals and firms who received your currency in exchange for goods and services, has to deal with higher prices and less purchasing power.

It is our monetary system itself that steadily and continuously creates equality through this mechanism as well as the hidden tax of inflation. Until the global financial system is reset in an equitable manner, we will continue to face the not just the inequality that has grown until it staggers the imagination but also the political and social distress that results from it.

This is not an accident or a conspiracy theory; it is a simple description of organized, institutionalized theft that has persisted for over a century without sufficient knowledgeable outcry to generate a change for the better. We are all being robbed every day. Let’s wake up, inform ourselves, and present genuine solutions.

Steven Menking is the Founder of the Amateur Society, which can be found here.

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