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Prices are About to Follow Inflation

Posted on Thursday, June 26, 2014 No comments

Thursday, June 26, 2014

The truth about inflation is about to start becoming clear.

I know, I know... the eyes roll and glaze over... here we go again...  But there are so many things either going on right now, or about to start, that are interconnected.  And we simply need to know how they are interconnected if we are going to be able to respond positively as neighbors.

Understand, I am not really concerned about whether you are registered as a Republican, Democrat or Independent.  Even though I believe labels matter, I am not even really interested in whether you would pin onto your shirt the 'liberal' or 'conservative' label if we were giving out such name tags.  I am mainly interested in engaging my neighbors in a conversation about all of the things happening today, how they interrelate, and what we can do together as neighbors about them.

'Money' and 'Price'

And as we see prices starting to rise, the first thing we have to wrap our heads around is this: Money and price are not the same thing.  When you read the story linked to above about inflation, the first thing you have to realize is the classic definition of inflation has nothing whatsoever to do with price.  Inflation is when the addition of new money into the economy, as a percentage, increases ahead of the growth of the economy, also as a percentage.  If the economy is growing at 2%, but the money supply is growing at 20%, inflation is the difference - 18%. (I am using these numbers as examples.)

When 20% more money starts chasing only 2% more production, an increase in prices follow.  But it is crucial that we understand that this increase in price is not what causes inflation; it is the other way around: inflation is what will cause the increase in price.

But we have been told for years now that inflation is low, right?  What we are really being told is that the Consumer Price Index (CPI) - which excludes the prices we notice most, like food and energy, has only been increasing by less than 2%.  That is about to change.  But it is crucial we understand two things: 1) why this CPI number has remained low to date; and 2) why it is going to start running higher.  This requires we understand the difference between money and currency.

'Money' and 'Currency'

Blink a few times right now, if only to get that glaze off of your eyes :-)

I am going to start using terms like 'money' and 'currency' a little different than the 'experts' use them.  This is because, one, I am not an 'expert'; and two, I am not writing for 'experts'.  I am writing for my neighbors.  I do this because I refuse to sign on to the notion that the faculty lounge gets to tell the rest of us what words mean.  If by using these terms in a supposedly wrong way succeeds in enabling the rest of us (as opposed to the 'experts') to start talking about our money, what it means, and where we need to go with it in the future, then any criticism I might get for this will be well worth it.

Nothing has changed the economy more dramatically than the computer.  It used to be that if we wanted to increase the money supply we had to crank up the printing press and print more dollar bills. Now all we need are a few keystrokes or mouse-clicks.  This might seem outlandish, but it is true.  The Federal Reserve has increased the money supply by simply adding to their computerized central 'bank balance' and then using that new money to buy up mortgages and government debt.  These mortgages and government 'bonds' were sold to the Federal Reserve by the major banks.  As a result, the major banks are sitting on all this new money.  But the economy has only been growing by between 1% and 2%.

The banks understand that the Fed cannot keep up this creation of new money forever.  Indeed, the Fed continues to lower the amount of new money created each month.  The banks also know this means higher interest rates at some point.  The logic is actually pretty simple.  If you have money to lend, but can only get 2.5% for that money today - and you have reason to believe that interest rate will rise - why lend it out today when you can get a higher rate for your money tomorrow?

It ends up being a game to see who can wait out the other.  The commercial banks are trying wait out the central banks.  This is why we have not seen a broad spike in the CPI yet.  This is also why the European Central Bank is now charging commercial banks 0.10% (instead of paying interest as it usually does).  The Fed only pays 0.25% (which explains why you only get 0.01% on your savings account).  The point of the game - for the central banks - is to get the commercial banks to lend out all of this excess money.

And they are starting to do just that.  If you have noticed that packages do not contain as much product as they used to you are seeing the first effects of this.  Inflation will show up in lower volume before it shows up in higher prices.  But as the news is starting to report, a broad rise in prices is just starting to show up in the Consumer Price Index.  The only way the Fed can respond to this to keep inflation from running out of control is to hike interest rates.

At that point these commercial bank reserves - which have only been zeroes on a bank statement somewhere - will end up in a company's bank account.  And they will go from there to an employee's bank account and from there to an ATM; the 'money' becomes 'currency' and starts to chase the same amount of products and services.  A significant and broad spike in prices is the inevitable result.  It will become painfully clear soon that the Federal Reserve will not be able to contain this price spike merely by increasing interest rates.

'Money' and 'Wealth'

If you haven't yawned yet, please, by all means do so now...  But please stay with me, because it hasn't always been this way.

Back when the dollar was tied to gold and silver (remember the 'silver dollar'?) the money supply was constrained by the amount of gold and sliver held by the Treasury in reserve.  What this meant was those dollar bills in your wallet were a stand-in: they represented your claim on the gold and silver held by the Treasury on your behalf

This is hugely important: Because the money supply was tied to gold and silver held in reserve on behalf of the American people, the money supply represented the wealth of the nation - meaning everyone from the banker to the cab driver.  At the start of the Civil War, though, to finance the war the U.S. took the dollar off of this gold and silver standard.  The bills in your wallets used to be "gold-backs" or "silver-backs" (meaning they were "backed" by gold and silver).  When that tie was broken to be able to print money for the war, those dollar bills got the nickname 'green-backs' - they were "backed" by nothing other than green ink.

After the war, Congress restored the tie, but only to gold.  That 'gold standard' remained until 1971.  The demise of the gold standard then put us on this inexorable path to what we now have: over 17 trillion dollars of public debt.

As I have noted in other posts, income inequality should not surprise us; when the economy is dominated by an excess of credit why would anyone be shocked to see the creditor getting excessively rich?  The people to whom you owe money will always have more of it than you.  And the more you owe, the greater this disparity will be.  But this is driven by a much more fundamental reality: Our money no longer represents the wealth of the nation.  The dollars in your wallet now represent the wealth of the banking sector.  As former Treasury Secretary Timothy Geithner's new book Stress Test makes very clear, the money supply was increased to save the major banks.  It was also increased to save the government from an increase in borrowing costs.  Usually we think of taxes as dollars from our paycheck.  But when the money supply is inflated to save the banks and prop up government borrowing, the dollars in your wallet are robbed of their purchasing power; taxes are now food from your table.

Back to the Future?

Is your head on the desk yet?  If you were a jock in school I would be tempted to let you sleep through the rest of this... Actually, no, we're neighbors and I'm really sorry but please believe me, you need to know these things... if only for the benefit of our kids' future.

Part of what makes topics like this hard to discuss is that certain names are recognizable only to those who are old enough to remember the events and circumstances from which these names came to be known.  This is true, for example, of Ronald Reagan.  Conservatives love to refer back to him.  The problem is an increasingly larger share of the population - our neighbors - are not old enough to remember him.

The same is true for Paul Volcker.  Right before losing the 1980 presidential election, President Jimmy Carter appointed him to be the Chairman of the Federal Reserve.  I am barely old enough to remember the inflation of the 70's, so his name brings back memories.  He immediately began 'hitting the brakes' on the nation's money supply by raising interest rates.  This did two things: it reduced inflation dramatically; and it recalibrated the money supply to objectively productive uses (stay tuned, I'll write about this next week in "Monetary Orientation: Financing 'Team Noklu'").  It also caused a two-year shock, of sorts, where we went into recession and unemployment spiked.  But the years that followed brought tremendous prosperity.  Unemployment dropped from double-digits to about 5%.  Prices stabilized, allowing most Americans to actually enjoy the fruits of the prosperity as the purchasing power of their dollars was protected.

But unlike Reagan, Volcker is still with us, and recently weighed in on our current economic issues.  Again, these things are really difficult to discuss when you throw terms like 'Bretton Woods' around.  Most, of course, have no idea what that means.  The simple answer is that 'Bretton Woods' is a term used to describe a system which tied currencies to a precious metal like gold.  This system was set up after World War II as part of how Europe was rebuilt after the war.  It fell apart in 1971 as a result of the combination of the Vietnam War and the Great Society (older folks will remember this as "guns and butter") and the beginning of the now 40+ year old pattern of deficit spending.

Volcker is calling for a return to something like Bretton Woods.  While he did not come out and call for a return to the 'gold standard', the fact that he is presenting "A New Bretton Woods???" as a question for debate tells us that he sees how our money supply is managed as the fundamental problem we face today.  If you have read other posts in this blog (e.g. the one on the minimum wage, and the 'toilet paper outrage') or the Chapter 5 series in my book, you will not be surprised to see me point your attention to this.  But even if this all seems well outside your interests (meaning you are getting really bored right now, sorry) please bear with me.  It really matters to other issues that might interest you.

The minimum wage, for example, is a real problem.   But it is not because the CEO is making more than the cashier, but because the dollars in which that minimum wage is paid buy less and less.  Thus the problem is not really a problem of wages, but of the money those wages are paid in.  Regardless of whether you are working a minimum wage job right now, if you are making wages of any kind, this should matter a great deal to you.  This is why we have to take the time to understand what Volcker is trying to say.

And the reason we need to listen to him is because he is old enough to remember when we didn't have deficits.  We have been playing this game with our money for a little over 40 years now, and Volcker has watched the game from the start (in some ways he was responsible for starting it).  He is pointing our attention to the fact that our modern system of money has not accomplished what he and others thought it would.

Bored Yet?

OK, OK, I am done.  Stop banging your head on the desk already.

So where does this leave us?  Why bore you to tears with all of this?  Because in a couple years we will begin paying attention as candidates run for President.  While I am not much interested in endorsing candidates, I am very curious to hear what Senator Rand Paul has to say because he comes from the 'school' which believes we need to return to 'sound money'.  That 'school' has been out of favor with economic 'experts' for quite a while - until now with Volcker's speech and articles like this and this and Steve Forbes' new book Money: How the Destruction of the Dollar Threatens the Global Economy.

If your memories of the last financial crisis are still fresh enough to worry about what the next one will do to our kids' economy, this subject merits your attention.  Please, read, and read a lot (like this from Milton Friedman).  Get as smart as you can as quick as you can about our nation's money supply.  We will likely have the opportunity to make an incredibly important decision about it in the coming years.

[Stay tuned!  Next week I'll write about what happens when the economy is flooded with all this excess money in "Monetary Orientation: Financing 'Team Noklu'"]

Ownership, Responsibility, Community & Dignity: Why Labels Matter

Posted on Thursday, June 19, 2014 No comments

Thursday, June 19, 2014

"Earn this!... Earn it!"

It is as he is dying on the battlefield that Captain John H. Miller (Tom Hanks' character) says this to Private James Ryan in "Saving Private Ryan."  The scene transforms the face of the young Private Ryan into the man he has aged to become as he stands before the graves of the men who died in the war.  He looks to his wife and says:

"Tell me I've led a good life... tell me I'm a good man."

In the larger, philosophical sense, it used to be that the word 'liberal' referred to someone who was committed to maximizing human freedom.  Liberalism (and the idea of 'liberal democracy') used to stand as an opponent of tyranny.  But I am more interested in what 'liberal' means at a much more personal level.  Because I am not a 'liberal', I guess all I can do is guess.  I suspect that much of what we see in modern liberalism was actually born among the Greatest Generation who came home from World War II.

Many among these men are very reticent to talk about their experiences.  So many others - men who they feel were better and braver than they - did not come home to tell their stories.  Those who did often feel very strongly that the memory of their buddies who did not come home demands they make something of the life fate left them to live.  The memories of their heroes demand they be good people.

I think when they came home they envisioned government as the agency to do for their neighbor the good which they could.  Their children - the Baby Boomer generation - picked up on this, as children tend to pick on their parents' political and philosophical outlooks (present company certainly included).

My father was born in 1940 (and died in 2010) and so was somewhere in between the Greatest Generation and the Baby Boomers.  He used to like to say: "The role of government is to do for the people what they cannot do for themselves, and to otherwise leave them alone."

And so understanding the difference between liberal and conservative really does not require a degree in political science or a dry dissertation on American political history.  It is the difference between government existing to do for our neighbors what we can, or to do for us what we cannot otherwise do for ourselves.

One of the principal themes of this blog is how the interplay of ownership, responsibility, community and dignity inform a conservative view of American politics.  My problem with liberalism isn't so much with my liberal neighbor - especially those who have survived war and want only to make sure they do not waste the precious gift of life.  They have a better sense than I of how precious this gift really is.  The problem is with the inevitable results of subcontracting out our responsibilities to some distant bureaucracy; the 'tragedy of the commons' overwhelms good intentions.

This 'tragedy of the commons' is a term philosophers use to describe a dynamic perhaps more easily articulated this way: when something is broken, and nobody owns it, fixing it is always somebody else's job.

Ownership starts with the sense that we are putting down roots where we live.  When the 'grass is greener' in another community, we have essentially two options: pine for the opportunity to move; or get to work greening what is ours.  While 'home ownership' usually produces this dynamic, you can put down roots as a renter just as easily as a homeowner.  And you can pine for the opportunity to move as a homeowner just as easily as a renter.

Responsibility is the natural outcome of nurturing a sense of ownership.  When a problem is discovered, and there is a sense of ownership, a sense of responsibility for solving the problem follows naturally.

Community is then discovered.  When you take whatever responsibility you can to solve a problem, you very quickly encounter others with that same sense of responsibility born of that same sense of ownership.  Before you know it, you have discovered your community.

Dignity then comes as the outcome of working together with others in the community to assume responsibility to solve problems owned in common.  This is the sense of satisfaction that comes from seeing the results of this common work.  (Please stay tuned for a post on this in October.  "Dr. Jonas Salk Elementary School" in Mira Mesa [San Diego, CA] will be dedicated on what would have been Dr. Salk's 100th birthday.  Bringing this project to completion is a story of this dynamic, but I will wait to tell that story in full when the school is dedicated.)

But back to liberals and conservatives.  My problem with liberalism is that allowing a distant bureaucracy to confiscate our sense of ownership over the inevitable problems of our life together then robs us of what would otherwise give birth to a sense of responsibility.  That having been lost, we no longer discover our community.  And then those who most need the help of others are left with the indignity of truly being on their own.

Yet if government - political society - is limited only to those things we cannot otherwise do for ourselves, a maximum amount of room - freedom, if you will - is created for civil society to tackle those "things we do better together."   Because the solutions emerge from local people who best understand the problem - and who are not subject to the inescapable budgetary imperatives of government bureaucracy - the solutions are more likely to succeed and be replicated in other communities.

But all of this depends on a commitment to community.  It is this commitment which allows us to honor the graves of our heroes by making something of this gift of life.  In some sense it might "take a village," but it certainly does not take a bureaucracy confiscating the sense of ownership otherwise nurtured by those in the village.

Conservative political philosophy offers the opportunity to be able to look at yourself in mirror and know you've led a good life, that you have made the most of the life in front of you and that others have been positively impacted by what you have to offer.  But conservative political philosophy is demanding - it demands results over good intentions.  Those results come most reliably when political society gives way to civil society and ownership is nurtured, resulting in responsibility, community and personal dignity.

The VA Is Only the Tip of the Iceberg

Posted on Friday, June 13, 2014 No comments

Friday, June 13, 2014

Sibel Edmonds, a Turkish-American, was a pretty valuable person in the days immediately after September 11th.  She speaks Turkish and other Middle Eastern languages, so the FBI hired her and granted her a Top Secret National Security Clearance to translate reams of documents seized in raids after the terrorist attacks.  As reported by CBS News, Edmonds was shocked when she was told to take her time and not translate too many documents too quickly.  And if she was "too productive," she would arrive at work to discover documents she had translated the day prior to have been deleted.  The reason?  So the department would look overworked and under-staffed and could get their budget increased.

The scandal over the Veteran's Administration, forged waiting lists to support executive bonuses, retaliation against whistle-blowers, and just the overall systemic dysfunction of the bureaucracy is only the tip of the government iceberg.  It is unlikely, though, that similar situations - with less compelling story-lines - will get much media attention.  The story-line after 9/11 of documents going untranslated so the agency could look overworked was just too compelling for the media to pass up.  The story-line of veterans dying while on secret waiting lists - and even one committing suicide - are equally compelling, as they should be.

As I wade into this topic, let me respond right up front to what I imagine some might charge - that I taking tragedy and making it 'political'.

Guilty as charged, your honor.

There is no way a failure like this, in the fifth largest federal department by spending - no less than $151B (yes, billion) in 2014 - is anything other than political.  It is also tragic.  It is deeply personal to the veterans and their families.  But to turn away from the politics of this is to turn away from both the problem and the debt we owe to our veterans.

The problem at the VA is the same as the problem in that translation unit of the FBI.  It is the same problem that compels our neighbors to the south to cross the border illegally in search of work instead of waiting in a bureaucratic line that is not moving.  When we ask the government to design, publish, receive and process applications for government benefits, we guarantee the least amount of efficiency as possible is brought to the task.  Here is why:

Let's use information technology as an example:  As a middle manager in a private sector IT shop, let's say I am given $1M and 12 months to staff up an IT project, develop the system, test and field it.  Now let's say I bring the project online in 6 months, spending only $500K of the budgeted $1M.

I am an absolute hero.

That extra $500K goes to the company's bottom line, allowing the company to declare an increase in stock dividends.  That increase in dividends makes the stock look good to investors, who bid for shares on the stock market.  Their bids increase the share price, which is then multiplied by the number of shares outstanding to establish the 'market capitalization' of the company.  That increase in market cap makes the company look like a low risk to lenders.  The company takes out a loan to kick off R&D on a new IT project, creating a whole raft of new jobs in the process.  And guess who gets to lead that new project?

Now, what happens in the public sector?  What happens if I am a middle manager in an IT shop in a government agency?  I am given the exact same budget of $1M and 12 months to deliver a project.  We pull it off in 6 months and I return $500K to the department.

I am an absolute zero!

I just caused all kinds of horrible problems for the higher-ups.  We're coming to the end of the fiscal year and now they have to scramble to figure out how to spend that extra $500K.  Because if they don't - and you can bank on this - there's another department or agency out there circling what they think is a bureaucratic carcass.  In this world you are either predator or prey, and if you have money left over in your budget there are vultures with backlogs circling overhead.  I absolutely guarantee it - that would be the last project I ever see.

But we're not talking about my beanie with a propeller or my pocket protector... we're talking about the lives of those who have fought for us, so the stakes are all the higher, are they not?

As progress is being made on reforms at the VA, we have to remember that this is not an isolated matter, it is just a much more compelling story-line than the many other instances of exactly the same problem.  The reforms proposed - especially making it easier for the VA Secretary to fire corrupt and incompetent middle managers - are a step in the right direction.  But this whole mess is an object lesson in a much more fundamental principle - small government.

Because government employees enjoy civil service protections - which are necessary to avoid the politicization of the government workforce - the larger the government becomes, the more we see the human resources version of "moral hazard."

This is a term from finance.  It is used to describe what happens when governments are too quick to bail out financial firms.  That creates the "hazard" that the firms will take too many risks, counting on the government to bail them out if they go bad.  This only increases the likelihood of having to bail out these firms.  In government employment, human resources "moral hazard" describes how, with civil service protections, government employees are not only protected from politicization, but also from their own incompetence, and in some cases, outright corruption.

This has all been awfully negative.  Let me at least try to end on a positive note.  Government service is like any other part of society.  There are really good, competent people with a strong sense of self-respect who strive each day to provide the taxpayer legitimate value for the salary they are paid.  Because of the nature of government service, though - the human resources moral hazard - they are dragged down by pigs at the trough of the public treasury - who would be better as bacon on someone's breakfast table.  (And I am trying to end on a positive note here... man, this is hard.)

If we want the genuinely committed public servants to shine and not be sullied by the pigs as the trough, the answer is pretty simple.  Smaller government with less money.  The VA does not need its budget increased.  The new Secretary needs unfettered authority to clean up the pigsty.  And with less money, there will then be genuine competition for both competency and productivity.

We have seen these kinds of scandals before.  The GSA was the most recent.  Let's be clear: this isn't about which party holds the White House or Congress.  We have in the past, and will in the future, see scandals like this again under Republican and Democratic government alike.  Neither party is immune to the weaknesses of human nature in the presence of dollars with too many zeros after them to count.  The only question is how often, how big - and now, how tragic - will these scandals be?

The larger our government becomes, the more frequent, larger and more tragic these kinds of scandals will be.  If we want to see less of this we need smaller government.

Income Inequality is About to Get Worse

Posted on Friday, June 6, 2014 No comments

Friday, June 6, 2014

The European Central Bank made history this week.  These are the kinds of stories we usually skip over because the details are so dry and boring.  But there is also a sense in which our "culture of experts" sends the message: "Don't worry about things like this; we have experts to handle it."

Be worried.  Especially when the "experts" tell you not to be.

Before diving into this, let's get to the point.  Economic growth is about two things: credit and production.  Credit is usually in a supporting role - if you want to build a better mouse trap you might take out a loan to buy the equipment for your factory.  But economic growth is usually about sales of the better mouse trap, not the loan.  But when credit becomes the main driver of growth, well, why would we be surprised to see the "creditor" getting wealthy well ahead of everyone else?

This should not be hard to grasp: The people to whom you owe money will always have more of it than you.  Income inequality is a real problem.  But as conservatives we seem to identify it with the Occupy Wall Street crowd.  This is unfortunate, because the increase in income inequality presents an outstanding opportunity for conservatives to articulate basic conservative ideas.  Income inequality is driven principally by excess debt... solve the problem of excess debt and we will also solve the problem of income inequality.

Now to the dry, boring stuff.

When you park money in the bank, in a typical savings account, you used to get a decent interest rate.  It is important to understand why this matters.  Let's say I ask you to loan me $2 so I can get a Coke from the break room.  Only I ask to be able to pay you back 10 years from now.  Before you loan me that money, first you have to think about how much that Coke will cost 10 years from now.  Let's say we both agree that the 16 oz. bottle of Coke will go from $2 today to $4 in 10 years.  The price has doubled - that's the easy part to wrap our heads around.  But what has happened to your $2?  This is harder - that $2 is 100% of the 'purchasing power' needed to buy a bottle of Coke - today.  In 10 years, because the price has doubled, your $2 will only be 50% of the purchasing power needed to buy that same Coke.  Your $2 will have lost one half of its purchasing power.

So what do you do?  You put 10% terms on your $2 loan.  Let's do the math:  10% of $2.00 is $0.20 (if you were a jock in school, that's two dimes).  Each year, for ten years, I have to pay you $0.20.  Multiply that by the 10 year term of the loan, and that is $2 of what they call 'coupon' payments in the 'bond market'.  After the 10 years is up I have to pay you back the original $2 ('redeeming' the bond 'at par' when it 'matures').  So you have received $2 from me in interest payments and then the original $2 - you now have the $4 it will cost you 10 years from now to buy that same bottle of Coke.  You have protected your purchasing power.

This is why it is so important to look at what our savings accounts are paying us in interest.  It is only then that we can really understand what the ECB did this week.

Central banks like the ECB and the Federal Reserve hold on to bank funds, paying the banks interest, exactly as the banks do for money they hold onto for us in things like savings accounts and certificates of deposit (CDs).  Only the ECB used to pay nothing.  (The Fed pays 0.25%)  This week the ECB decided for the first time ever to "pay" -0.10%.  Now if you look at that negative interest rate and say "wait a minute... doesn't that mean they're really charging 0.10%?" you are beginning to understand what is going on.  The ECB is now charging banks for holding on to their money.

Before you shrug your shoulders, think about how you would react if your bank - in addition to all of the fees they charge - decided to "pay" you a negative interest rate.  They would be charging you to save.  If it were not bad enough that price increases will erode your purchasing power (like for that 16 oz bottle of Coke), now not only would you not able to protect yourself from that loss, the negative interest rate will only make it worse.  The answer?  Pull that money out now and spend it while you know what you can get for it.

What the ECB has done here only applies to special bank accounts used by banks themselves - these negative interest rates are not coming to your savings account.  At least not quite yet.

But the point is the same.  The ECB wants the banking system to take the money they have on deposit and lend it out - creating more credit.  The banks are holding onto this money for a very simple reason.  Right now interest rates are ridiculously low.  They have to rise at some point.  Why loan out this money at 2% when you will likely be able to loan it out at 4% or more relatively soon?  Economic growth has become so dependent on debt (credit) that the ECB has to charge banks to hold onto their money in order to keep the credit spigot flowing.

So this brings us back to income inequality. Consider the chart below.  The dataset actually goes back before 1946, but I have chosen to start there to show how the end of World War II - which was a debt-driving event - resulted in a draw-down in income inequality.  It had risen as a result of the debt incurred to fight the war.  It bottoms out around 1972 and then starts rising again.  But we cannot point to the Vietnam War to explain this as that war was ending about this time.  Why does income inequality rise after the Vietnam War ends?

Because of the rise in gross public debt.  Consider this chart below.  It shows the aggregate of annual deficits.  The line stays pretty stable after the war, even though it is increasing.  Then, in the early 70's the rise in gross public debt really starts.  In my book I try to explain how this relates to how the dollar was taken off the gold standard in 1972, but that is not the point of this blog post.  The point here is to show how income inequality is driven by debt.  Again, when the growth of our economy is largely dependent on credit, we should not be surprised to see the creditor getting rich ahead of everyone else.

And, at least in Europe to start with, when banks start deploying their reserves instead of paying the ECB to hold onto them - by lending the money out - that extra money will start to chase the same amount of economic production.  The result is inevitable - a spike in prices.  With the way the world's economies are interconnected, there is no way this dynamic will not spill over into the U.S. economy.  As prices rise - especially for assets like stock (the Dow and S&P 500 are at record highs), real estate and precious metals, the people who own these things are going to get richer.  Those who do not are only going to see the purchasing power of what little money they do have erode even further.

Income inequality is about to get worse - much worse.

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