What's Really Behind "Income Inequality"

May 3, 2012

• Worth screaming about: How the Fed drove a famous painting to a record price
• “Super-wealthy money shufflers” load up on art, while American workers produce more and earn less: Lessons from a chart that’s gone viral, and the story the chart doesn’t show
• The wisdom of the crowd? Americans’ choice for “safest” investment two years in a row
• Comeuppance continues, new pain for Spain: Bolivia adds insult to Argentina’s injury
• Sarnoff on “the little exceptions that get you”... an update on Addison’s documentary project... a poignant account of “family businesses that led to strong work ethics”... and more!

“When you create monetary inflation,” says the one and only Marc Faber, “it doesn’t touch everything at the same time.

“At certain times,” he tells the Financial Sense Newshour, “it may go into wages or it could go into commodities or it can go into consumer prices or it can go into real estate or it can go into equities or commodities or it can go into precious metals or art prices and so forth and so on — but not at the same time.”

The part about art came to mind as a CNN breaking news alert flashed across this editor’s iPad last night: “Edvard Munch’s The Scream sells for a record $119,922,500 at Sotheby’s in New York.”

“The Fed basically since 2008,” Dr. Faber goes on, “has expanded its balance sheet with the intention to stabilize the housing market and boost housing prices, but that is precisely the asset that hasn’t gone up.”

There are exceptions, of course: “in Aspen and from Madison Avenue and Park Avenue and so forth,” he says. “In prestigious locations around the world, real estate has continued to go up in value.”

The world’s “super-wealthy money shufflers,” Faber wrote in a recent Gloom Boom & Doom Report “have been the prime beneficiaries of the asset inflation we have experienced since the early 1980s.”

The U.S. working class... not so much.

Which brings us to this chart; it’s making the Internet rounds this May Day week...



Starting at the end of World War II, as U.S. workers became more productive, their pay kept pace... until the early ’70s. Ever since, they’ve had less to show for their productivity gains.

The chart comes from the left-leaning Economic Policy Institute — whose president Larry Mishel predictably concludes the break in the two lines “is the result of various laissez-faire policies... including globalization, deregulation, privatization, eroded unionization and weakened labor standards.”

“It’s no coincidence that the two lines in this chart diverge in the early 1970s,” says our macro strategist, Dan Amoss — who comes to some rather different conclusions.

“The August 1971 separation of the dollar from gold set in motion the unchecked growth of government and banking, aided by a supportive Federal Reserve. The Fed prevents the lower prices brought about by productivity from improving living standards. In this inflation-targeting Bernanke regime, laborers and those on fixed income are victims.”

That is, in contrast to the super-wealthy money shufflers, “private-sector laborers are often the last to receive the new dollars that are borrowed and printed into existence, and by the time they do receive them, the cost structure of the economy has inflated.

“This monetary system prioritizes creditors and shareholders over labor,” Dan concludes, “and it will eventually lead to political turmoil.”

On this point, even the economists who get it wrong agree. “It’s a combustible concoction wherever it occurs,” says the former Labor Secretary Robert Reich: “Increasing productivity, widening inequality and rising unemployment create tinderbox societies.”

Worse still are the two alternatives Reich lays out: “Public anger and frustration can ignite in two very different ways. One is toward reforms that more broadly share the productivity gains. The other is toward demagogues that turn people against one another.”

Mr. Reich clearly prefers the former outcome. But neither is a good one if you’ve worked hard to accumulate your own wealth... or if you’re struggling against all odds to do so.

The “Eat the Rich” mentality was out there on May Day; it was largely peaceful. Whether it will remain that way later this month at the NATO summit in Chicago... or in August at the Republican convention in Tampa... or in September at the Democratic convention in Charlotte... remains to be seen.

But when the mother of all financial bubbles starts to burst, you need to be ready for anything.

Major U.S. stock indexes are drifting down this morning. Once again the S&P 500 is connected to the 1,400 level by the slenderest of threads.

Traders appear unimpressed by a substantial drop in first-time unemployment claims to 365,000. And growth in the service sector is slowing; the ISM nonmanufacturing survey for April printed this morning at 53.5, the lowest this year.

“So far this week,” Options Hotline’s Steve Sarnoff wrote his readers last night, “it’s been a May grey market, as the ‘Sell in May and go away’ axiom is getting a lot of play on the tout box.”

“My judgment based on experience reminds us the trouble with putting much stock in such approaches is: A) They tend to be quite fickle and B) ‘It’s those little exceptions that get you.’”

“Rising unemployment bolsters the anti-austerity movement in Europe. Stateside, Bernanke and crew remain poised to apply creative money-printing methods in what just happens to be a presidential election year. Overall, technical signs are pointing toward capital moving out of bonds and into gold.”

For the moment, however, gold is approaching a one-month low at $1,634.

Silver’s ability to hold onto the $30 level is being severely tested at $30.13. The white metal withstood the pressure last week, but the pressure’s back on...

For the second year in a row, a plurality of Americans polled by Gallup believe gold is “the single safest long-term investment option.”



The 28% who chose gold is smaller than last year’s 34%. Chalk that up to when the poll was conducted: Last year’s survey took place in mid-August, when gold had jumped nearly $300 in six weeks to $1,770.

Once again, gold was the predominant choice among older Americans and people without a college degree and incomes between $30,000-75,000.

Karma’s biting Spain yet again today: The Bolivian government has sent in the military to seize the local assets of the Spanish power grid operator Red Electrica.

Bolivian president and Chavez wannabe Evo Morales ordered the move on May Day, accusing the company of failing to invest enough.

Hmmm... Readers with good memories will recall that was the same excuse Argentina used last month to nationalize the Spanish firm Repsol’s stake in the oil producer YPF.

And longtime readers will recognize how these moves amount to Spain’s comeuppance for going after the crew of Odyssey Marine: Earlier this year, the Tampa-based private treasure hunters were ordered by a U.S. court to hand over a huge find to the Spanish government.

[Ed. Note: If you’re wondering about the status of Addison’s documentary Risk! — in which the Odyssey Marine saga plays a central role — he’s talking with several folks both inside and outside Agora Financial HQ about the best way to get it in front of as many eyes as possible.

Among the people he’s been consulting is John Papola, the creator of the brilliant Keynes vs. Hayek rap videos from a year ago...



And among the ideas under consideration is to break up the documentary into bite-size chunks... perhaps a 10-part series that we’d unveil first on the Agora Financial website. What do you think? Let us know if you have an opinion...

Mr. Papola, by the way, wrote the foreword to Laissez Faire Books’ new edition of Hayek’s A Tiger by the Tail. “This book, originally published in 1972,” says that foreword, “followed by F.A. Hayek’s Nobel in economics two years later, stands as vitally influential historical events in that period of decline” — indeed, right as the productivity line on that chart above broke away from the wage line.

Addison thought the work important enough to include in a set we call “Economics in One Library” — four volumes that form a foundation for understanding the economy and markets. They are...

• Frederic Bastiat’s The Law
• Henry Hazlitt’s Economics in One Lesson
• Garet Garrett’s A Bubble That Broke the World
• Hayek’s A Tiger by the Tail.

We send bound copies of these four books to everyone who joins the Laissez Faire Club. Members also receive a new e-book every Friday. For a complete rundown of the benefits that come with club membership... please give this a careful look.]

“I grew up on an oil field in close proximity to many ranches and farms,” writes a reader, reacting to the Labor Department’s now-defunct proposal to bring farm chores under the child labor laws.

“On the other side of that oil field was a harbor with a large fishing fleet. My grandfather had a great pal who was a fisherman. The common denominator of these three cultures was family businesses, which led to strong work ethics formed from somewhere around the age of 8.”

“I spent many years as a professor of engineering at a school specializing in mining, oil, geology and etc. On the scholarship committee, we were continuously confronted with the problem of what criteria should we use to award scholarships. Because of our location (Golden, Colo.) we attracted students from metropolitan areas, but also from a large area of the country with low population density.”

“I soon learned to forget such criteria as extracurricular activities and grades: If an applicant applied from certain high schools, give him a scholarship. One time a colleague noted that I awarded a scholarship to a student at the bottom of his class. I replied, ‘True, but he is also third in his class and has good grades.’ He went through our curriculum fine and later started a very successful service company now run by his son (also a graduate). Grew up on a ranch.”

“As an engineering school, we fought our students’ tendency to concentrate only on technical subjects — I had a reading program in laboratory courses in an attempt to correct the problem — of a type that included Atlas Shrugged. The only requirement was to read the books.

“It was interesting that most of the students would finish early and the heated discussions were in the student commons because they were not part of the lab curriculum per se. Grades were on the technical aspects of the labs. I wish I had had Laissez Faire Books at the time; I could have really wound them up.”

“Upon hearing of the pending legislation, I actually sat down and shed a tear for the demise of the idea of an American. Thanks to Agora and Laissez Faire for trying to preserve the idea.”

The 5: Thank you for the kind words. As synchronicity would have it, The Idea of America — the essay collection edited by Bill Bonner and Pierre Lemieux — is the e-book selection that goes out tomorrow to members of the Laissez Faire Club.

Members get a new e-book every Friday; and that’s only the start of the many benefits you get when you join.

“I just wanted to send all of you a warm thank-you,” says a belated acknowledgment of The 5’s fifth anniversary — “for taking the trouble to put out The 5 every weekday!

“I’ve taken the few minutes to read it almost every day it comes for the past few years, and I’ve found your group’s take on things really helpful.”

“I have Niall Ferguson’s excellent books,” writes a reader after yesterday’s edition, “and his Barron’s article.”

“Toynbee described it all many years ago in his discussion about the collapse of civilizations due to strangling themselves with centralized regulations.”

The 5: Amen.

Cheers,

Dave Gonigam
The 5 Min. Forecast

P.S. A reminder that both professor Ferguson and Dr. Faber will join us in Vancouver this July for the Agora Financial Investment Symposium.

Tech-oriented investors will want to hear from speakers like Juan Enriquez and Michael West. Is resource investing your thing? We’ll have Rick Rule and the always colorful Marcio Mello. Do you have an international view? We’ll have experts from places as diverse as Canada and Thailand. Plus, the editors of the Agora Financial publications you rely on.

We’d love to have you join us: Your invitation is at this link.
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