How Central Banks Cause Income Inequality - Mises.org

The gap between the rich and poor continues to grow. The wealthiest 1 percent held 8 percent of the economic pie in 1975 but now hold over 20 percent. This
is a striking change from the 1950s and 1960s when their share of all incomes was slightly over 10 percent. A study by Emmanuel Saez found that between 2009 and 2012 the real incomes of the
top 1 percent jumped 31.4 percent. The richest 10 percent now receive 50.5 percent of all incomes, the largest share since data was first recorded in 1917.
The wealthiest are becoming disproportionally wealthier at an ever increasing rate.

Most of the literature on income inequalities is written by professors from the sociology
departments of universities. They have identified factors such as technology, the reduced role of labor unions, the decline in the real value of the
minimum wage, and, everyone’s favorite scapegoat, the growing importance of China.

Those factors may have played a role, but there are really two overriding factors that are the real cause of income differentials. One is desirable and
justified while the other is the exact opposite.

In a capitalist economy, prices and profit play a critical role in ensuring resources are allocated where they are most needed and used to produce goods
and services that best meets society’s needs. When Apple took the risk of producing the iPad, many commentators expected it to flop. Its success brought
profits while at the same time sent a signal to all other producers that society wanted more of this product. The profits were a reward for the risks
taken. It is the profit motive that has given us a multitude of new products and an ever-increasing standard of living. Yet, profits and income
inequalities go hand in hand. We cannot have one without the other, and if we try to eliminate one, we will eliminate, or significantly reduce, the other.
Income inequalities are an integral outcome of the profit-and-loss characteristic of capitalism; they cannot be divorced.

Prime Minister Margaret Thatcher understood this inseparability well. She once said it is better to have large income inequalities and have everyone near
the top of the ladder, than have little income differences and have everyone closer to the bottom of the ladder.

Yet, the middle class has been sinking toward poverty: that is not climbing the ladder. Over the period between 1979 and 2007, incomes for the middle 60
percent increased less than 40 percent while inflation was 186 percent. According to the Saez study, the remaining 99 percent saw their real incomes
increase a mere .4 percent between 2009 and 2012. However, this does not come close to recovering the loss of 11.6 percent suffered between 2007 and 2009, the
largest two-year decline since the Great Depression. When adjusted for inflation, low-wage workers are actually making less now than they did 50 years ago.

This brings us to the second undesirable and unjustified source of income inequalities, i.e., the creation of money out of thin air, or legal
counterfeiting, by central banks. It should be no surprise the growing gap in income inequalities has coincided with the adoption of fiat currencies
worldwide. Every dollar the central bank creates benefits the early recipients of the money—the government and the banking sector — at the expense of the
late recipients of the money, the wage earners, and the poor. Since the creation of a fiat currency system in 1971, the dollar has lost 82 percent of its
value while the banking sector has gone from 4 percent of GDP to well over 10 percent today.

The central bank does not create anything real; neither resources nor goods and services. When it creates money it causes the price of transactions to
increase. The original quantity theory of money clearly related money to the price of anything money can buy, including assets. When the central bank
creates money, traders, hedge funds and banks — being first in line — benefit from the increased variability and upward trend in asset prices. Also, future
contracts and other derivative products on exchange rates or interest rates were unnecessary prior to 1971, since hedging activity was mostly unnecessary.
The central bank is responsible for this added risk, variability, and surge in asset prices unjustified by fundamentals.

The banking sector has been able to significantly increase its profits or claims on goods and services. However, more claims held by one sector, which
essentially does not create anything of real value, means less claims on real goods and services for everyone else. This is why counterfeiting is illegal.
Hence, the central bank has been playing a central role as a “reverse Robin Hood” by increasing the economic pie going to the rich and by slowly sinking
the middle class toward poverty.

Janet Yellen recently said “I am hopeful that … inflation will move back toward our longer-run goal of 2 percent,” demonstrating her commitment to an
institutionalized policy of theft and wealth redistribution. The European central bank is no better. Its LTRO strategy was to give longer term loans to banks on
dodgy collateral to buy government bonds which they promptly turned around and deposited with the central bank for more cheap loans for more government
bonds. This has nothing to do with liquidity and everything to do with boosting bank profits. Yet, every euro the central bank creates is a tax on everyone
that uses the euro. It is a tax on cash balances. It is taking from the working man to give to the rich European bankers. This is clearly a back door
monetization of the debt with the banking sector acting as a middle man and taking a nice juicy cut. The same logic applies to the redistribution created
by paying interest on reserves to U.S. banks.

Concerned with income inequalities, President Obama and democrats have suggested even higher taxes on the rich and boosting the minimum wage. They are
wrongly focusing on the results instead of the causes of income inequalities. If they succeed, they will be throwing the baby out with the bathwater. If
they are serious about reducing income inequalities, they should focus on its main cause, the central bank.

In 1923, Germany returned to its pre-war currency and the gold standard with essentially no gold. It did it by pledging never to print again. We should do
the same.

David Stockman's Contra Corner is the only place where mainstream delusions and cant about the Warfare State, the Bailout State, Bubble Finance and Beltway Banditry are ripped, refuted and rebuked. Subscribe now to receive David Stockman’s latest posts by email each day as well as his model portfolio, Lee Adler’s Daily Data Dive and David’s personally curated insights and analysis from leading contrarian thinkers.

Get Access