Why the gap between rich and poor is so wide - fiat money

Sep 23, 2011, 01:29

Merryn Somerset Webb

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Wondering just why the gap between rich and poor has grown so much in the last few decades?

I've written about it here several times before, but here's another take on it – Dominic Frisby's. The words below are his and so is the YouTube link. It is worth reading and watching, but I do warn you that it won't exactly cheer you up.

The gap between rich and poor is the widest it's ever been in history. And it keeps on getting wider.

Plato is purported to have said (but I can't actually find the quote) that , ideally, the person at the top of an organisation should earn six times more than the person at the bottom. J.P. Morgan said it should be 20 times.

Barclays is currently advertising for a cashier in one of its West Midlands branches, salary £12,665. If I multiply that by 500 times I still don't get to the £6.5m bonus (on top of £250,000) that Bob Diamond, the Barclays boss, was recently awarded.

Bob Diamond and whoever gets the West Midlands job have almost become different animals. It doesn't take an anthropologist to tell you that a society has become extremely distorted when you have gulf like that between top and bottom.

I can remember hearing people complaining about this on TV 30 years ago when I was a child. But the gap just keeps getting wider. All attempts by government to deal with this through taxation or legislation have failed. There are calls for more, but I'm wondering if we've reached 'peak regulation'.

The fact is it's a simple, inevitable, direct consequence of our modern fiat system of money. This fiat system, in which governments and banks have the power to create money, benefits those closest to the issuance of money - those who get it first - at the expense of those furthest away - those who get it last.

And this short video, beautifully animated by Pola Gruszka, shows how the whole process works. Have a watch - it's only three minutes long - and by all means discuss some of the issues raised in the comments section below.

The system of money, as regular readers will know, is one of my big bugbears. I'd like to see it changed. We need 'independent money'.

A shorter version of the video appears in the soon-to-be released Renegade Economist film, The Four Horsemen, on which I helped out as a writer.

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  • 1. FC

    (23 September 2011, 02:49PM)  Complain about this comment

    Every day I wake up with a chip on my shoulder about exactly this. No matter how compelling the short-term intellectual and economic arguments are for more QE (e.g. see Nouriel Roubini), continuing to punish the productive and the prudent towards the bottom of the pyramid does not strike me as a recipe for sustainable growth.

  • 2. Roberto Birquet

    (23 September 2011, 02:55PM)  Complain about this comment

    Surely the fetish of the past 30 years: the race to the bottom for ordinary worlers (as you must compete with the cheaper Asian worker, however ridiculous is the notion that your Pret a Manger shop job would go to China); and the race to the top for hiring "top talent", however much of that is illusion.

    But yes, it is a cabal at the top, who are fixing the system for their own ends. Are people finally wakibng up to this?

  • 3. Colin Smith

    (23 September 2011, 03:15PM)  Complain about this comment

    Spot on.

    It took me several years of research (as a layman) to understand how the system works, starting from simply trying to understand why there was inflation in London, but not in Scotland at the time. Nice to see it summarized in 3 minutes.

    Also interesting to note that fractional reserve banking is several centuries if not millennia old, so we're unlikely to see it go away any time soon. I would also be sceptical of the ability to pry the money creation power out of the hands of politicians.

  • 4. Dr Bob

    (23 September 2011, 04:58PM)  Complain about this comment

    This video is ridiculous. Its message reminds me of the paranoid idiocy spawned by internet forums.

    Speculative bubbles were around long before the Gold Standard, during the Gold Standard and after the Gold Standard. They have nothing to do with Fiat money.

    Historically, inequality has been higher and lower than it is now whatever the monetary system. Again it has nothing to do with Fiat money.

    That the banks create the money supply is neither good nor bad. Bank profits are a mechanism to redistribute wealth. So what? One of the chief functions of government is to legislate against inequality.

    Why not stop mixing with paranoid depressives and write to your MP instead if you are concerned about inequality?

  • 5. Edward J. Dodson

    (23 September 2011, 05:43PM)  Complain about this comment

    There is a significant factual mistake in this video (a factual mistake shared by many critics of the system of money creation). Commercial banks do not themselves create money out of thin air by making loans. They must have the cooperation of the central bank, which has the legal authority (in the United States and most other countries) to add to the money supply by the simple act of printing more currency (i.e., notes) or crediting the electronic equivalent to banks as loans or to the government treasury in exchange for government bonds. Over the longer term these powers of credit/money creation exacerbate the built-in cyclical nature of property market driven economies. (to be continued ...)

  • 6. Edward J. Dodson

    (23 September 2011, 05:44PM)  Complain about this comment

    As Adam Smith would have readily observed (but too few modern economists seem able to see) property markets are made inherently dysfunctional because of the failure of governments to socialize (i.e., capture via taxation) the "rents" associated with land while imposing destructive taxation on earned income flows and assets such as buildings, equipment and machinery. Adding even more dead weight loss to the market function, governments impose tariffs and quotas and sales taxes on commerce. Put it altogether and every 20 years we crash. This crash has been particularly hard because the land market was heavily fueled by cheap and imprudently provided credit.

  • 7. Critic Al Rick

    (23 September 2011, 05:58PM)  Complain about this comment

    I am unconvinced.

    I believe both the increasing gap between rich & poor and the creation & manipulation of fiat money to share the same root - corruption.

    In a Democracy the Govt should be all-powerful and be acting in the best long-term interests of the majority. However, Govts whilst 'feathering their own nests' have allowed/created virtual monopolies and psuedo cartels with, via the likes of deregulation, ever increasing powers. With 'honour amongst thieves' and no real competition there's no control over the remuneration the upper echelons of these corrupt organisations can award themselves; and don't they know it, now?

    Some have more power than Govts; indeed, they control Govts.

    This can't be a sustainable state of affairs. I foresee big trouble looming.

    And I can't see writing to your MP doing any good whatsoever. We are living in a virtual Coorporatocracy.

  • 8. Ellen

    (23 September 2011, 06:35PM)  Complain about this comment

    I have been looking up appropriate quotes on the subject and came up with the following:
    “It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”
    Henry Ford


    “Bankers own the earth; take it away from them but leave them with the power to create credit; and, with a flick of a pen, they will create enough money to buy it back again... If you want to be slaves of bankers and pay the cost of your own slavery, then let the bankers control money and control credit.”
    Sir Josiah Stamp, Director, Bank of England, 1940.


    “I believe that banking institutions are more dangerous to our liberties than standing armies. Already they have raised up a moneyed aristocracy that has set the Government at defiance. The issuing power should be taken from the banks and restored to the people to whom it properly belongs.”
    - Thomas Jefferson

  • 9. JAW

    (23 September 2011, 11:27PM)  Complain about this comment

    Merryn

    Plato in 'The Republic', a book which deals with the philosophical principles of the ideal State, advocates that the rulers of the State, 'the Guardians', receive no payment whatsoever.

    Plato suggests the Guardian-Rulers should live fairly austere lives. Their material needs are provided: food, clothing, shelter etc but little else. They do the job as a duty. If paid, it would only attract the wrong types, ie those who are enchanted by personal wealth and pleasure. The Guardians possess no private property. They oversee the creation of wealth for others, 'nothing in excess', but not for themselves. A truly platonic concept.

    Plato probably realized that currently human nature is incapable of creating the ideal State, due to lack of knowledge of the necessary principles. Plato once tried to establish the ideal State in Syracuse, Sicily, but the angered tyrant-ruler sold him as a slave. A friend rescued him by buying him and freeing him. He never tried again.

  • 10. P Lee

    (24 September 2011, 08:39AM)  Complain about this comment

    I think the huge wage gap is a product of too many humans. When I left school and worked in a bank the wages were reasonable for a young person and the bosses did not get such huge wages.

    In 2011 what do we have - a massive increase in the UK's population due to immigration but not a massive increase in the number of jobs, hence the depression of wages. There are huge numbers of people who have never worked and a large number of people unemployed.

    So employers are able to pay low wages for scarce jobs.

    I have no children, but I dread to think what opportunities are going to be available for all those people currently in university coming out with huge loans.

  • 11. Mary

    (24 September 2011, 10:41AM)  Complain about this comment

    P. Lee has a very interesting perspective, which I suspect has a
    lot of truth. The building trade has been very hurt by Poles and
    others undercutting them. Most of the Olympic work did not
    go to East Enders even IF THEY POSSESSED THE SKILLS. I am the
    Mother of 2 teenage boys. Fortunately the eldest will not be affected
    by the tripling of the fees. And whey can people from other EU
    states get their education in Scotland for nothing, but the rest of
    the UK pay through the nose?
    There is an e- petition
    "Cost benefit analysis of EU membership.
    google e-petitions HM Government. It would be good to know
    what we are paying for and not getting.

  • 12. Michael

    (24 September 2011, 08:22PM)  Complain about this comment

    Hi, this generates lots of interesting comments, interesting reading here. I might like to add it s probably down to each individual's "success"-literate. Just like everyone can write English, but well literate person aware of English Grammar thus becoming better at writing English. Similarly, with Success.

    The information is found at Napoleon Hill's Law of Success and Think and Grow Rich books which were written in late 1928 in USA. (free pdf are available on internet) For instance, in Law Of Success "Habit of Saving" is omitted, borrowing more money than saved are used by too many people, then it could be a problem for those who are success-illiterate.

    I have wondered why this information was not taught in schools, if it was taught, who is going to sweep the street if we all possess high "success"-literate.

  • 13. Michael

    (24 September 2011, 08:22PM)  Complain about this comment

    Hi, this generates lots of interesting comments, interesting reading here. I might like to add it s probably down to each individual's "success"-literate. Just like everyone can write English, but well literate person aware of English Grammar thus becoming better at writing English. Similarly, with Success.

    The information is found at Napoleon Hill's Law of Success and Think and Grow Rich books which were written in late 1928 in USA. (free pdf are available on internet) For instance, in Law Of Success "Habit of Saving" is omitted, borrowing more money than saved are used by too many people, then it could be a problem for those who are success-illiterate.

    I have wondered why this information was not taught in schools, if it was taught, who is going to sweep the street if we all possess high "success"-literate.

  • 14. Rachel

    (24 September 2011, 08:37PM)  Complain about this comment

    This 3 min video is too simplified, throughout history it has always been the rich got richer as they do the deals too line their own pockets and then eventually the money filters down, they play In their own circles (or as it's called now networking) they are not thinking of the person further on down the line. These are the days of human rights and how you treat others but in the financial world there dosen't seem too be any regulations or rules. it's the people who can't afford it that are paying for other peoples mistakes

  • 15. Freedom

    (25 September 2011, 10:38AM)  Complain about this comment

    The time has come to strip these rich opportunists of their wealth and give it to the poor. Just go into their houses and demand that they share. Above all get rid of the Swiss
    banks that hide their money that was illegally stolen.

  • 16. Roberto Birquet

    (25 September 2011, 04:56PM)  Complain about this comment

    Michael
    I might like to add it s probably down to each individual's "success"-literate. Just like everyone can write English, but well literate person aware of English Grammar thus becoming better at writing English. Similarly, with Success.
    ------------------
    You should know that English stopped being so influenced by German in 1066, and you should write grammar and success with lower case g and s.

  • 17. James Dunley

    (25 September 2011, 07:31PM)  Complain about this comment

    @P. Lee: So why haven't the wages at the top depressed?
    @Mary: I'm not too unhappy about the Olympic budget not swelling even more!
    The UK does not have the ability to become "independent" from global effects, like it perhaps arguably could, say in the 1950's. We are relatively commodity poor - energy, food, metals. Asia/US can outprice us internationally.
    Because of higher wages, there would far less investment here, fewer jobs, weaker industry. Wages would collapse, not just depress.

    We are all enjoying the benefits of lower costs in different aspects of our lives. Do not forget to appreciate the benefits. We would be well behind today, if things had cost more on the way here. Hospitals, doctors, schools would have cost far more. So we have more to enjoy, and only because of that is there more to lose, for us and the next generation.
    The EU membership questions and the opportunities for grads are valid questions.

  • 18. James Dunley

    (25 September 2011, 07:31PM)  Complain about this comment

    @Dr Bob: Previous monetary systems have seen change in wealth redistribution only through external intervention. At this time, the fiat money regime of 1971 is seeing a continuous trend of a widening wealth gap. An intervention seems necessary, but unforthcoming, as the party that should be interested - the Government - is for the first time benefiting. After all, it was designed for the US Govt to make money, and balance accounts for the Vietnam War.

    Whatever the arguments are, fiat money is not a sustainable or equitable system by design. There is a problem. At the very least a line needs to be drawn somewhere, even if the system has some possibly tangential benefit.

  • 19. Critic Al Rick

    (25 September 2011, 09:28PM)  Complain about this comment

    Further to my comments @ 7. and IMO:

    Fiat money is the result of corruption of a monetary system; a tool for govts to effectively pillage from Savers. Currently, inasmuch as the economy is concerned, Banksters are effectively Govts.

    The Banksters got themselves into a huge Mess and are bailing themselves out with money borrowed by, well, us. Now we are part of the huge Mess. The Banksters, as effective Govts, are debasing fiat currencies via stoking-up inflation; the intention being to erode the relative value of debt; primarily their remaining potential debt. And don't think they're staving-off a HP crash for anyone's benefit but their own.

    They award the UK Investment Banking Industry c. £14bn/annum. This is not a lot compared to the wealth they intend pillaging from Savers via manipulation of fiat. They don't have to manipulate fiat to pay for the bonuses - they have a 'cartel' for that.

    cont ...


  • 20. Critic Al Rick

    (25 September 2011, 09:29PM)  Complain about this comment

    ... cont (IMO)

    Their 'cartel' would not run to extricating £100bns/yr from all and sundry without provoking the latter to Revolution. Better to divide and rule.

    But its not just Banksters with psuedo cartels. If you'd ever run a truly competitive business you'd know that it's a cut throat existence and that relatively exorbitant salaries, etc are just not possible.

    Have you ever wondered how professionals can charge so much; their fees have gone up by leaps and bounds, probably in tandem with increasing HPs since 1995. And upper Public Servants have been on the bandwaggon; look at how much my equivalent in 'a psuedo cartel or virtual monopoly' is getting.

    And they're still doing it; they kid themselves that the economy will recover. I see why Bill Bonner calls them Zombies.

    No, the Banksters don't have to manipulate fiat to feed their obsession. Those in work at the other side of the widening gap are at the mercy of true competition.

  • 21. Dr Bob

    (26 September 2011, 08:57AM)  Complain about this comment

    @James Dunley. Hi James. Just again to be clear: The monetary system has nothing to do with inequality. Nothing. Inequality is a by-product of capitalism. It can be mitigated by wealth redistribution via taxation or other legislation. There are many reasons why inequality has risen since the 1960s; The removal of Union power, automation, the alignment of liberal and capitalist policies (eg the entry of women into the workforce) etc etc. All have led to a stagnation in real wages. This pressure on wages is just one of the reasons also as to why we will not see high inflation in the future and why the Gold Bubble will pop.

    Fiat money is sustainable. The pound for example has been around for hundreds of years. Is a pound today worth the same as one hundreds of years ago? Absolutely not! Inflation slowly erodes purchasing power. Sometimes this is done slowly eg via a 2% inflation target and sometimes quickly eg via Decimalisation.

  • 22. Dr Bob

    (26 September 2011, 08:58AM)  Complain about this comment

    (Cont) Is this a bad thing? No! The system encourages people to borrow capital to start businesses. This mechanism allows intelligent yet poor people to create wealth. Of course idiots can borrow too! The slow devaluation of the currency is what covers their mistakes and allows the innovation to continue.

    It really is quite beautiful. There's nothing wrong with the "system". We've just had a good old fashioned asset mania (in property). Nothing more or less. Granted it was superimposed on Government largesse, demographic changes, increased global competition etc etc, but there is nothing terminal about it. The global economy continues to grow and the birds continue to sing outside. Go buy some equities quick (especially Emerging Market/Japanese) before everyone else catches on. Buy and Hold doesn’t work right? Has there ever been a bigger consensus?!

  • 23. new to this game

    (26 September 2011, 09:50AM)  Complain about this comment

    What happens when it costs more to make the cheap goods overseas (as there inflation rates are higher than the UK) more to transport them (as energy costs increase) and the pound devalues against their currencies. Also is individual personal debt much greater now and takes a lot longer to pay back? (and are there more defaults now as a consequence?). Aren't those on the lower rungs duty bound to stay in the game to create employment for others in this group?

  • 24. Supermarine Blues

    (26 September 2011, 03:14PM)  Complain about this comment

    Dr. Bob makes a worthwhile point; the fiat system has been around for a long time and is far better at providing capital that, for example, the so-called islamic system.

    It's become a bit too fashionable to knock it becuse it's having one of its impressive cyclical blow-ups at present.

    There has ALWAYS been massive wealth inequality; look at the disgusting lives of the landed gentry of yore, compared to their vassals. One might better argue that the 1945-71 period was something of an anomaly, due to the post-war labour shortages and rampant worldwide socialism; people realise that in the 1960s, they really did never have it so good.

    Unfortunately, the corollary of such socialism trying to sustain the emancipation to date, is increased zombieism and that the blow-up will be so much worse.

    Elites traditionally lose their heads, post blow-ups. It could be the way some of the wealth gets re-distributed this time around too.

  • 25. Beta Adjusted

    (27 September 2011, 03:56PM)  Complain about this comment

    OK, I have not watched the vid ... I will, but later!

    But just to mention a very interesting book that I read called 'The case against the Fed' by Murray Rothbard, published by the Von Mises institute I believe (the Austrian-economics movement), which discusses the history of fractional-reserve banking, and the repeated establishment and disbanding of central banks in the US in the 19th century in order to reward different interest groups. Ultimately hard-money lost out to industrial interests ... and fiat-money may have been a pivotal role in the North winning the civil war against the confedoerates. In Fiat currency's favour, at least we have not paid the Chinese in a real currency! however dishonourable that is ...

  • 26. Carpe Jugulum

    (27 September 2011, 04:40PM)  Complain about this comment

    Ok, Dr Bob I have lots of questions for you as I don't think you've offered a lot of proof for some quite large statements.

    Firstly could you give me some nice examples of bubbles that were not created due to fiat currencies, this shouldn't be a hard one but I'd just like to see how you equate these situations with what we have now and how current wealth creation is not the cause of inequality.

    Secondly justify the statement: "Inequality is a by-product of capitalism." Please prove we have free market capitalism, you know unfettered privately owned trade and industry. I struggle here, as the vid demonstrates government intervention is rife in all areas of society and the markets so how is this really capitalism? Even tax is an interference, and yet you think you can attribute our predicament with a system I am not convinced we have.

  • 27. Carpe Jugulum

    (27 September 2011, 04:41PM)  Complain about this comment

    Finally: do you not think that money printing has not created inflation? You seem to attribute current inflation to "asset mania" yet housing prices are falling daily and inflation is still very much on the rise.

    I find it difficult to agree with anything you say but I'll stick to these things first.

  • 28. Carpe Jugulum

    (27 September 2011, 04:42PM)  Complain about this comment

    lol double negative in that last one, you know what I mean ;)

  • 29. Kerome

    (28 September 2011, 06:35PM)  Complain about this comment

    interesting video, some good comments.

    My take: the system may not be responsible for inequality, I think it is more likely that population size has something to do with it... It stands to reason that as the base of the pyramid gets wider, the tip is higher and the difference in remuneration larger.

    Nevertheless, the fiat money system is fundamentally broken by the need to keep expanding the money supply. On the one hand you have to do so while population is expanding - to do otherwise would decrease the money-in-circulation per head, which would cause massive price distortions. On the other hand, the point of disadvantaging savers and investors is well made. Neither interest rates nor tax systems seem well designed to keep these things in balance.

    But that is part of the theory of fiat money. The bubbles reference seems tenuous, that problem is driven by excessive asset valuations underpinning loans. The real root is a lack of moral hazard in that area.

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