Tag Archives: Inequality

Why I Don’t Envy the Rich

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Big house class envy

If you don’t subscribe to the idea that capitalism is the only moral economic system, an idea boldly proclaimed by Christians infatuated with Ayn Rand’s philosophy, and you dare mention inequality, you will probably be accused of class envy. Or, you will be labeled a socialist. It matters not to these ideologues that you reject socialism outright.

By almost any standard of measure, I am rich when compared to the vast majority of humans who have ever lived. And so are most Americans. So, when anyone accuses me of class envy, they must be referring to an envy of those richer than I am.

But I don’t envy people who have more wealth than me because the Bible gives me many reasons not to. I will mention only a few.

Perhaps the most obvious reason is the Bible’s prohibition of covetousness (Exodus 20:17). Riches can become an idol.

Seeking riches will often wear us out so that we have little time or energy to pursue God’s will (Proverbs 23:4,5). Wisdom bids us to spend our time wisely, storing up treasure in heaven instead of storing up treasure on earth (Matthew 6:19-21).

Why would any Christian envy those richer than themselves given the potential risk described in 1 Timothy 6:9-10?

People who want to get rich fall into temptation and a trap and into many foolish and harmful desires that plunge men into ruin and destruction. For the love of money is a root of all kinds of evil. Some people, eager for money, have wandered from the faith and pierced themselves with many griefs.

I don’t envy people who are richer than me because I already am tempted to depend on wealth rather than God for my security:

The wealth of the rich is their fortified city; they imagine it an unscalable wall (Proverbs 18:11).

I don’t envy the rich because, unless I have been rich toward God, any treasure stored on earth is useless on the night my life is demanded from me (Luke 12:13-21).

I don’t envy the rich because, often, the fortunes of the rich and the poor are reversed in eternity.

Looking at his disciples, he said:

Blessed are you who are poor, for yours is the kingdom of God.
Blessed are you who hunger now, for you will be satisfied.
Blessed are you who weep now, for you will laugh.
Blessed are you when people hate you, when they exclude you and insult you
and reject your name as evil, because of the Son of Man.

Rejoice in that day and leap for joy, because great is your reward in heaven. For that is how their ancestors treated the prophets.

But woe to you who are rich, for you have already received your comfort.

Woe to you who are well fed now, for you will go hungry.
Woe to you who laugh now, for you will mourn and weep.
Woe to you when everyone speaks well of you,
for that is how their ancestors treated the false prophets. Luke 6:20-26

Jesus provides convincing evidence of the power of wealth to turn hearts away from God. The beatitudes and woes are specific genres in the Greek and Jewish worlds. Beatitudes and woes function as congratulations and condolences in the present for certain outcomes in the future.1

Though it is possible with God for a rich man to enter the kingdom of God (Matthew 19:26), Jesus clearly states that wealth becomes an obstacle for many a rich man or woman (Matthew 19:21-25).

The rich don’t merit our envy, but some rich people deserve our pity.

Did you like this article? Check out my book, The Narrow Road: Loving God In a World Devoted to Money, on Amazon.

Notes:

  1. Charles H. Talbert, Reading Luke, (New York: Crossroad, 1982), 69-70.

What Really Causes Inequality?

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Inequality sign

Few topics invoke a maddening response like income and wealth inequality does. Just as Pavlov’s dogs salivated in response not only to food but also to stimuli (like lab coats and bells) associated with food, the mere mention of inequality causes many of us to salivate at the opportunity to make our ideological opponents look stupid or immoral.

Too many of us try to prove our self-proclaimed intellectual or moral superiority by describing our political adversaries either as jealous of the rich or as greedy. Both sides accuse the other of thievery.

It seems that underneath the anger lie the assumptions that the battle is about capitalism and socialism or about justice and fairness.

There really isn’t much discussion about inequality because both sides hijack the concept to argue their ideology.

Hear No Evil

When deeply held beliefs are threatened, our tendency is to conveniently ignore the arguments of those who disagree with us. Emboldened by our ideology, we give much consideration to the real evil we see in others but dismiss as imaginary the evil they see in us. We validate our arguments by focusing only on the facts that support our case while neglecting facts that undermine our worldview. And so, with civil discourse a thing of the past, we speak evil of others.

Inequality’s Lessons

Wealth and income inequality reveal the natural outcomes of human action, both good and evil.

Inequality validates the fact that we reap what we sow.

The more we work the more we produce. The better we work the more we produce per unit of time. Over time, skilled and diligent workers will attain more wealth than unskilled and lazy workers.

Inequality results from voluntary transfers of wealth.

If you produce something that large numbers of people want to buy at a price that gives you profit, you will attain much wealth as purchasers willingly give you their money to obtain your product. Even some monopolies involve voluntary wealth transfers. For example, you may have a monopoly because you have patented an invention. This is a monopoly we accept because it rewards innovation that benefits society and involves voluntary transactions. Likewise, we accept the monopoly that NBA and MLB players have because we want to watch the best athletes. The key point is that these wealth transfers are voluntary choices made with sufficient information.

Inequality results from involuntary transfers of wealth.

The Bible clearly states that God brings judgment on those who steal by force or deception. Our government grants monopolies and rents to special interests, bails out banks, practices financial repression and champions our trade deficit—all of which result in involuntary transfers of wealth from the non-rich to the rich.

But this is where defenders of capitalism and the conservative cause sometimes go off the rails. It is not sufficient to blame unjust inequality on government intervention in the economy. We must also hold accountable those who benefit from those interventions and those who take advantage of lax government oversight of the markets to transfer wealth to themselves. We must not use the fact that voluntary (and moral) transfers of wealth are commonplace to absolve the sins of the rich and powerful.

Here’s the problem as I see it. Capitalists err when they think that immoral wealth transfers to the rich only occur because of government intervention in the markets (because of crony capitalism). So, in their minds, the rich who don’t have a direct connection with government officials are off the hook. Many capitalists have imagined a self-regulating, laissez-faire free market in which no one can get away with financial sins. Therefore government regulation, particularly in the financial markets, becomes an object of scorn instead of a protection sanctioned by God.

Socialists make an equally grave error. They incorrectly see the government not as a major cause of inequality, but as its solution. This leads to the ludicrous conclusion that wealth transfers from the rich will solve the problem of inequality their big-government policies caused in the first place.

Hiding in Plain Sight

Increasing inequality is a red flag. It warns us of impending danger. Increasing inequality, much like a dead canary on the floor of our economic mine, beckons us to heed its warning that our economy is poisoned. Sadly, we either ignore the dead canary or we misdiagnose the cause of death. Debt, theft and corruption poisoned the canary. It will poison our society if we don’t wake up. We need to call out those who have done this, irrespective of their ideology. We need to reverse course.

What Really Causes Inequality?

The Bible doesn’t hide the answer to this question, but boldly proclaims it for all to see. Sin causes inequality. Our greed and our laziness cause it. So do covetousness and theft. Oppression, indebtedness, and deception cause it. Defending transgressors with our ideology instead of defending the weak and needy they subdue cause it.

The Bible tells us how to deal with economic sin. It tells us to reject the “eat drink and be merry for tomorrow we die” attitude. It tells us to be rich toward God and acknowledge that he owns everything.

The Bible warns us to stop excusing our economic sins while vilifying others for theirs.

Will our society listen?

How Much Socialism Does It Take to Collapse An Economy?

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Empty shelves depicting economic collapse
How Much Socialism Does It Take to Collapse An Economy? Part 1

Economic and societal collapse in any nation is a tragedy. Inflation at 700% (expected to reach 2000% by 2018) devours the life savings of every Venezuelan. Food shortages along with high food prices caused the average poor Venezuelan to lose 19 pounds last year. Violent protests wrack Venezuela leaving some no choice but to flee their homes hoping to find a better life in a neighboring country. Others, with medical or engineering degrees in hand, have fled to Columbia but have found no work except as prostitutes. Economic sanctions squeeze Venezuela, restricting its ability to borrow money, though some nations, for political reasons, may lend at punitive rates. Meanwhile, President Maduro apparently has no intention of stepping down or declaring bankruptcy.

We might not give this situation much thought because 1) we can’t seem to do much about it and 2) we cannot imagine ourselves in Venezuelan’s shoes because we think this kind of economic collapse only happens in socialist/communist nations headed by a dictator. We may even look at Venezuela’s plight and say, “they’re getting what they deserve.”

It seems preposterous to think the United States could ever experience such a fate, but is it really? Can the havoc wreaked by socialist dictators be replicated in a capitalist democracy?

Common Threads

To answer these questions we ought to look for similarities in our economies.

For example, though we don’t have a dictatorship, state-owned enterprise or central government planning of the economy like Venezuela has, we have a central bank that wields enormous influence over our economy and free enterprise. Artificially low interest rates, induced by the Federal Reserve, direct capital from where it would naturally flow into wasteful endeavors much in the same way a socialist government directs its citizens into endeavors they would normally not engage in.

We also share a system of unsustainable wealth transfers.

Unsustainable Wealth Transfers in Venezuela

Venezuela’s leaders wanted to decrease inequality and increase the size of its middle class. But, instead of investing in a diversified economy and paying for social programs via taxes, Venezuela nationalized its oil industry, and used oil revenues to purchase foreign goods and to pay for social programs. When oil prices plummeted, Venezuela’s economy could neither pay for imports nor produce the goods required to sustain its people.

Not only had Venezuela failed to invest capital in productive endeavors, it hadn’t even attempted to move its poor workers into more productive enterprises. Venezuela’s leaders chose instead to feed its social programs with proceeds from a finite natural resource (oil) whose price they could not control.

The result was predictable. When oil revenues fell, the government started printing money to pay for social services. As inflation increased and the nation destabilized, even more foreign capital fled the country.

Unable to provide for its own needs, Venezuela must buy what it needs from other nations. As their currency devalues in relation to other currencies, the price of foreign goods increases. Since the only thing they have to offer is their currency, they print more which only makes it less valuable. This downward spiral of inflation and currency devaluation usually ends in hyperinflation if that nation has, for reasons of war or economic neglect, lost the ability to produce its own necessities.

Most instances of hyperinflation have occurred in nations that have lost a war that destroyed much of their infrastructure and capital equipment. War reparations and debt exacerbate the situation. Venezuela is heavily in debt, doesn’t pay its bills and its Socialist leaders have destroyed their economy from within. Even with a reversal of course, Venezuela faces a grim future.

Unsustainable Wealth Transfers in the United States

The United States has a much stronger, larger and more diversified economy than Venezuela, so it would seem we do not face the same dangers. But we too have reduced our capacity to produce what we need, relying on cheap imports for many of our basic goods while increasingly selling services to the world.

Instead of exporting oil, we export dollars to fund our social programs and purchase foreign goods. Because the dollar is the world’s reserve currency, our trade deficit provides a seemingly never-ending supply of foreign-owned dollars ready to purchase our debt (Treasuries). We then use those dollars to fund our ever-increasing social programs, thus decreasing the burden of American taxpayers and placing it, in part, on the shoulders of our trading partners.

Contentious Narrative

The contentious narrative in America concerning social programs stems, in part, from the belief on one side that all social spending comes directly out of their pockets via taxation and the conviction on the other side that we need social safety nets because the economy isn’t generating growth for everyone. Few voices point out that there is little incentive for either political party to make unpopular decisions to decrease spending on social programs as long as the U. S. dollar remains the world’s reserve currency.

Just as contentious is the subject of inequality. Some are convinced it only occurs because of differences in ability and effort while others insist it mainly results from oppression and/or crony capitalism. Lost is the fact that, like Venezuela, we have failed to invest capital properly. Because of artificially low interest rates, large quantities of capital have been diverted from productive investment into asset bubbles that mostly benefit the wealthy.

Will our large and diverse economy shield us from calamity even though we, like Venezuela, have funded our social programs from an unsustainable source and have neglected our economy so that more people are dependent on social programs?

To complete the comparison of the U.S with Venezuela we need to determine if the path we are on predictably and inexorably leads to a currency collapse. Part 2 in this series discusses that and more.

Can Your Presidential Candidate Fix the Economy?

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Stolen Jobs, Stolen Future

Stagnating wages, American job losses to overseas workers, underemployment and inequality have all been front-and-center issues for both Democrats and Republicans in this year’s presidential election.

You’ve probably heard pundits and politicians blame our economic problems on crony capitalism, Wall Street greed, the Federal Reserve, corrupt financial markets, unfavorable trade agreements, unfair trade practices by China, high taxes on business, excessive regulation, lax regulation, the 1%, the welfare state, excessive debt, not enough monetary stimulus and on and on. The proposed solutions outnumber the problems.

One idea consistently expressed, with differing emphasis, is that American job losses, underemployment, stagnating wages and income inequality are somehow related to global trade. But there reality ends and magical thinking begins. Politicians go on to tell us what we want to hear –that the United States can unilaterally fix the problems caused by other nations if only we elect them to the office of president.

The arguments go like this – America has lost good paying jobs to other countries and workers’ wages have stagnated because greedy corporations ship jobs overseas to low-wage foreign workers and because of unfair trade practices by nations such as China. If we stop all this unfairness, then our economy will improve.

But what if the problem is not how global trade is practiced – what if the problem is global trade?

The Trouble With One Way Economics

Too often politicians look at economic problems only from one side. They conclude that if we can somehow force other nations to play by the rules (rules which may or may not be fair to begin with) then our economy will thrive.

Too many of our nation’s lawmakers believe they can solve our national debt problem without considering global trade.1

However, we can boil down America’s economic woes to this one fact – we consume more than we produce and have done so each of the past forty years. For this economic gravity-defying feat to even be possible, other nations have to produce more than they consume. Overconsumption by the world’s trade deficit nations must match under-consumption by the world’s trade surplus nations. It takes two to tango in the global economy; no one dances alone.

But this begs the question: Why would any nation willingly under-consume year after year?

China’s Economic “Miracle”
The Problem

Imagine yourself in the place of a Chinese leader in the last century. What would you have done to move hundreds of millions of people out of poverty?

Thievery aside, wealth comes from producing more than you consume. To consider yourself wealthier, you must produce more of what you desire or produce more of what someone else desires so that you can exchange it for what you want.

So, to move millions of people out of poverty, their productivity must increase.

But, World War II and the Chinese Civil War left China’s industry in ruins. Starting from such a low point even Communist centralization could bring about an increased standard of living as evidenced by 4-6% annual GDP growth between 1953 and 1978.2 After all, when people’s efforts shift from the destruction of war to the construction of peace, the standard of living must improve. The State guaranteed access to medical care, basic education and housing.

Even so, in 1978 Chinese workers, on average, earned only three percent of wage earners in the United States.3 Two reasons for this readily come to mind: Chinese workers produced less per hour of work than American workers and Chinese wages lagged behind workers’ productivity. (That’s what happens when the state sets the wage rate.)

China remained very poor. If China ever hoped to get out of poverty, it would need to increase productivity and industrialization offered the best way to achieve this end.

However, China needed markets for their value-added products. You can sell a lot more goods to rich people in developed countries than you can to poor peasants in your own.

China, lacking adequate higher education, investment capital and the intellectual property necessary to make their workers more productive, would find it very difficult to compete with economically developed nations. But, by turning a weakness – millions of low-wage workers – into strength by lowering production costs, China gained a competitive advantage in the global marketplace.

The Solution

China set out to improve its economy through investment in infrastructure and capital equipment because both improve worker productivity. But they also needed something more important that the communist system could not provide – incentive.

In 1978, two years after Mao Zedong’s death, and after years of state control of all productive assets, Deng Xiaoping began reforms in China that “encouraged the formation of rural enterprises and private businesses, liberalized foreign trade and investment, relaxed state control over some prices, and invested in industrial production and the education of its workforce.” 4

Thus the miracle began. Rural workers attracted by higher wages moved to the cities. With a seemingly endless supply of new low-wage workers China could maintain their low production cost advantage for a very long time.

The Conundrum

But remember, the whole purpose of this economic endeavor was to lift people out of poverty and to, as Deng Xiaoping said, “Enrich yourselves.” For incentives to perform an economic miracle, wage increases should track productivity. Eventually as China succeeded in making a percentage of its citizens more productive, their average wage went up.

But, should wages in China closely approach levels earned by workers in developed nations, the engine of export growth would stop because Chinese companies would no longer be able to easily undersell their competitors.5 China’s experiment with economic reform would come to a halt, enriching some but leaving hundreds of millions in poverty. Having created such massive inequality would certainly give egalitarians in China a major case of heartburn if not existential angst.6

China could keep the average wage sufficiently low despite increases for experienced workers if low-wage workers continually entered the export industry workforce. But, as it turns out, demographics and increased job opportunities provided by small business growth in rural areas have combined to slow the flow of low-wage workers prematurely.7 So, the Chinese government simply had to have other methods at their disposal for keeping the export engine running smoothly.

China’s Trade Policy

China follows the Asian economic growth model that includes central bank intervention to maintain undervalued currencies, wage growth that lags behind worker productivity increases, and financial repression in the form of artificially low interest rates.8

All three of these policies reduce household consumption. All three are “hidden” taxes that, like regular taxes, reduce household disposable income and transfer it to someone else.

For example:

  • When China devalues its currency, its households can purchase fewer foreign made goods so that their overall consumption is less. China’s exporters can lower prices without affecting their profit margins allowing them to sell more and undercut the competition in price.9 Said another way, devaluing the currency transfers money from households (importers) to the tradable goods sector (exporters).
  • Wages that lag behind productivity transfer wealth from workers to employers spurring the production of tradable goods while repressing household consumption.10
  • Artificially low interest rates transfer wealth from savers to the first users of borrowed money, which, in China tend to be government, infrastructure investors, manufacturers and real estate developers.11

These policies work together to maintain the Chinese export engine even as the wage gap between China and its competitors narrows.

More importantly, these “hidden” taxes force under-consumption upon Chinese households in the same way an income tax does; a move that has simultaneously helped millions escape poverty while enriching owners of capital.

Inequality Has No Borders

China has more billionaires than any country other than the United States even though it ranks 113th among nations in per capita income.12

Remarkably, both China and the U.S. have experienced staggering inequality via transfers of wealth from labor to capital owners.13 This has occurred even though they have vastly different political and economic systems and even though one is the world’s largest exporter and creditor nation and the other is the world’s largest importer and debtor nation.

The common link is not that both countries have lazy people and hard-working people. The common link is global trade and government policy that enables wealth transfers. There is one glaring difference, however. In China, the working class has been made wealthier by global trade while in the U.S. middle class wages have stagnated and household debt has increased.

Headed Toward Oblivion

Applying band-aid solutions to isolated wrongs without addressing structural problems won’t fix our economy. The global economic system must change.

The primary problem in our global economy is unrelenting imbalanced trade. Nations with trade surpluses, like China and Germany, must raise their consumption and nations with trade deficits like the U.S. must reduce consumption. I’ll let the reader judge whether they might see such cooperation in their lifetime.

Even if rebalancing is forced upon us by economic crisis, structural problems will still exist, namely, the problem of a single nation having the world’s reserve currency. We cannot avoid trade imbalances given the current global economic system so any rebalancing will be temporary.

I see several paths to take from our current situation:

  • Reverse the trend toward increased globalization. Brexit represents this sentiment. I favor this option.
  • Because using a single nation’s currency as the world’s reserve currency must always result in that nation becoming indebted to the world as the United States has, some have suggested expanding the use of a type of transnational currency called Special Drawing Rights.14 But this seems to me to be just an intermediate step toward a one-world currency.
  • Allow the free flow of labor across borders to counterbalance the advantage free flow of capital gives its owners. Though unlikely in a world where nationalism is still strong and terrorism is on the rise, this would fit perfectly into the progressive agenda. Such blurring of national boundaries is a short step away from a one-world government.

What the economic and political elite have done to the economy is tragic, but unless we address structural issues in both the national and global economies, things will only get worse. Let’s not pretend our economic woes will disappear if we elect our favorite candidate to the office of President of the United States.

 

Notes:
  1. Most Americans are unaware of the advantage U.S. businesses enjoy because of the dollar’s status as the world’s reserve currency or that other nations help finance our internal debt with their dollar reserves.
  2. GDP growth was erratic during this period. For example, GDP growth in 1961, 1964, 1967 and 1970 was -26%, +15%, -8%, and +16% respectively. (World Bank data)
  3. Hongbin Li, Lei Li, Binzhen Wu, and Yanyan Xiong, “The End of Cheap Chinese Labor”. Journal of Economic Perspectives, Volume 26, Number 4 – Fall 2012, pages 57-74
  4. Zuliu Hu, Mohsin S. Khan, “Economic Issues 8 — Why Is China Growing So Fast?“. International Monetary Fund, June 1997
  5. Technically, China’s advantage disappears when the gap in labor productivity between it and its trading partners is equal to or greater than the wage gap. If China’s workers were equally productive as America’s, then the advantage would be based solely on wages.
  6. Even if you take the view that Communist leaders were disingenuous about employing economic reform for the benefit of the masses, only wanting to enrich themselves off of labors’ backs, then this failure would still be unacceptable.
  7. Hongbin Li, Lei Li, Binzhen Wu, and Yanyan Xiong, “The End of Cheap Chinese Labor”. Journal of Economic Perspectives, Volume 26, Number 4 – Fall 2012, pages 57-74
  8. Michael Pettis, The Great Rebalancing, (2013). Princeton, New Jersey: Princeton University Press, p 53
  9. Ibid., p 33
  10. Ibid., p 56
  11. Michael Pettis, The Great Rebalancing, (2013). Princeton, New Jersey: Princeton University Press, p 60
  12. CIA, The World Factbook
  13. Previous articles have discussed wealth transfers that occur due to financial repression and inflation (Feeling Repressed), malinvestment of resources into asset bubbles (Money Changers and Inequality, Part 1), and economic rents (Why Christians Care About Economics).
  14. Michael Pettis, The Great Rebalancing, (2013). Princeton, New Jersey: Princeton University Press, p 152

 

 

 

 

 

 

 

 

 

 

 

Feeling Repressed?

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Do you feel repressed? No? Well, maybe you should.

Please let me explain. If you live in a nation that has a central bank (and who doesn’t?) then you are probably subjected to some form of financial repression.

Governments spend money on wars or the preparation for war and on social programs. Governments spend a lot of money. Trouble is, they don’t have any money. But you do. You have money because you worked and provided a tangible good or service for which someone else was willing to pay you.

Since the government has no money they get it from you through taxation or through borrowing. Governments issue bonds that people purchase and in return the government pays back the bondholders both principal and interest. So, where does the government get the money to pay back its creditors?

Tax increases are obvious and unpopular so governments usually pay back bondholders by selling yet more bonds. As long as the government can find buyers for its debt, then its leaders are lulled into thinking they need not raise taxes or cut spending.1  Instead, government debt is continuously increased. Eventually paying even the interest on all the debt becomes burdensome. 2

There are a few ways a government can reduce its debt. Economic growth and the increased taxes that accompany it is one way. A two-pronged approach of raising taxes and decreasing spending is the most obvious solution, but tax increases are opposed by one side as vehemently as spending decreases are by the other. Outright default or restructuring of debt is not an avenue that the U.S. is willing to go down at this point.

What if there was another way to pay off the debt? What if there was some sort of “hidden tax” that the government could levy to pay down its debt? There is. It’s called financial repression.

What Is Financial Repression?

Financial repression refers to methods used by governments and central banks to liquidate public and private debts and ease the burden of servicing those debts following periods of war or financial crisis.3  Governments promote monetary policies that favor debtors because they themselves are debtors.

Financial repression includes but is not limited to the following: capping interest rates banks can pay on savings deposits, interest rates for loans capped through the central bank’s target interest rate, and requiring pension funds to hold government debt.4  All of these actions direct funds to government that would normally flow elsewhere. It makes borrowing cheap for government.

But when the Federal Reserve talks about interest rates it doesn’t mention anything about trying to reduce government debt or financial repression. Instead, they base their monetary policy on “promoting maximum employment, stable prices, and moderate long-term interest rates.” They believe their mandate is best accomplished by monetary policy that has a 2% rate of inflation as its goal.5  Setting interest rates charged to banks near zero for the past seven years has been an attempt to stimulate the economy and increase employment.

So why do I believe that Fed policy is, in fact, financial repression and not economic stimulus?

 

  • First, their policy is based on the erroneous belief that demand creates supply and the irrational fear that deflation is the worst thing that can happen to an economy. In short, I don’t believe their policies can accomplish their stated purpose.
  • Second, the fact is, paying interest on our nation’s debt has already reached the point of being burdensome. The only rate of interest we can really afford is 0%. Therefore it is imperative that interests rates be kept near zero.
  • Third, employing quantitative easing (QE) proves how desperate the government is to keep interest rates low. When the Fed buys government bonds from banks in large amounts, the interest rate on bonds naturally goes down. Therefore, the government doesn’t have to offer higher rates to attract buyers (creditors) so the interest burden on its debt is less than if interest rates were higher. The Fed creates the artificial demand for its own debt and keeps interest rates down by printing money! It is only incidental that the fed hopes the money will circulate causing the economy to grow yielding more taxes to reduce the debt.
Why Use the Term Financial Repression?

So, you may ask, why use the term financial repression? Who gets hurt when the government and central bank intervene in the marketplace in this manner?

  • If there is any inflation at all, anyone who saves will see the purchasing power of his savings erode. Retirees are especially vulnerable because they are usually not in a position to put their money into higher yield, higher risk investments such as stocks that have the potential for large losses.
  • People who live within their means are forced to subsidize spendthrifts. Not only do Fed policies reduce the debt of the government, they reduce the debt of private individuals and corporations as well which have reached record levels in the last decade. The Fed’s policies make it possible for borrowers to get their hands on money at a lower interest rate than they could in a free market. A lower interest rate is forced upon savers who, without such interference, would receive a higher rate of interest from banks competing for deposits. This is not wealth creation; this is yet another example of wealth transferred from one group to another.
  • The economy as a whole suffers when financial repression is employed. Inequality rises when capital flows into stocks, not solely based on value, but because other alternative places to park money yield no return thanks to the Federal Reserve. Then, of course, prices are bid up and a bubble forms.  The system is set up in favor of the rich who have access to the first use of capital.6 When the bubble pops, capital is wiped out having served little purpose in growing the economy.  Then, the Fed and the Treasury bail out the financial sector.
  • Unemployed workers are harmed when they can only find part-time work or work at a lower wage because capital has been funneled into non-productive asset bubbles instead of being used to build factories or start new businesses.
  • Proponents of current monetary policy would argue that low-interest rates allow more people to obtain a home mortgage. Aside from the fact that indebting yourself for most of your working life might not be a good idea, the Federal Reserve’s policies essentially remove an important option for many people – to wait until they have saved more money. People who want to buy a home are harmed as the government entices them to borrow by offering low interest rates and tax incentives, and by producing asset bubbles prompting people to buy before they would normally for fear of being priced out of the market. This is especially true during a period of stagnating wages that are also a direct result of the same Fed policies.
Summary

Financial repression punishes you for saving, rewards you for going into debt, increases inequality, provides a disincentive for elected officials to balance the national budget, is a deceptive way to fund government spending, and tends to replace unemployment with underemployment. It produces a boom-bust economic cycle and then is offered as additional medicine to cure the diseases it caused in the first place.

On second thought, if you are retired or you live within your means or you are a member of the future generation who will more than likely pay the highest price for the Fed’s misguided policies, then maybe you shouldn’t feel repressed. The term is too vague. Maybe you should feel like someone who has been forced to contribute to someone else’s prosperity and later forced to suffer the consequences of their financial folly when the economy crashes because borrowers’ short-term gains came at the expense of long-term investment in the economy.

 

 

Notes:
  1. In the case of the wars in Iraq and Afghanistan, taxes were decreased and spending increased. Evidently it was believed that the tax cuts would increase tax revenues from individuals and corporations due to economic growth enough to offset the cost of the wars.  It didn’t turn out that way.
  2. Anyone with substantial credit card debt knows this. The difference between the credit card holder and the government is that the government can lower to zero the percentage interest rate it pays on the balance owed.
  3. “Financial Repression Redux”, Finance & Development, June 2011, Vol. 48, Carmen M. Reinhart, Jacob F. Kirkegaard, and M. Belen Sbrancia
  4. “The Liquidation of Government Debt” Carmen M. Reinhart, M. Belen Sbrancia, NBER Working Paper 16893
  5. “Statement on Longer-Run Goals and Monetary Policy Strategy”
  6. Read about the Cantillon Effect in my blog – Inequality, Part 3