Why the Rich Keep Getting Richer

While the rest of us are suffering through a pandemic and the worst depression in 90 years, the wealthy just keep filling their coffers with billions and more billions. Of course, they have to avoid getting COVID-19, even though they have the best health care money can buy, but otherwise everything is going according to plan.

What’s the plan exactly? First of all, it is to keep an ever growing stock market rolling along. After an initial stock market crash last March which was instigated by panicked investors, the market righted itself and is fast approaching its peak from pre-COVID days.

How is this possible with 30 to 50 million people out of work? How is it even conceivable when millions are too frightened of the future to go shopping?

The Federal Reserve Bank

A dubious institution, called the Federal Reserve Bank, is the billionaire’s friend. It is a non-Constutional, independent branch of government, sort of. It’s been controversial since it was founded by an Act of Congress in 1913, but the argument has been going on since Alexander Hamilton’s day.

Thanks to a Broadway show, and other media, Hamilton has received a flurry of publicity designed to make him appear to be a nice man. He wasn’t. Many people disliked him for his politics, including Thomas Jefferson. Gore Vidal said he was a spy for Great Britain during the Revolutionary War (Aaron Burr has always been a personal hero of mine).

Hamilton persuaded Congress to authorize an archaic version of the Fed in 1791. President Washinton dithered on signing it. He asked all members of his cabinet to submit written remarks about the propriety of him signing the bill. Thomas Jefferson wrote that it was unconstitutional. But the bankers prevailed and Washington ultimately signed it. This first central bank only lasted 20 years because of opposition that said it was enriching the already wealthy.

They Said We Couldn’t Afford Medicare-for-All, and then…

What has the Federal Reserve been doing lately? In March, the Fed announced that it would loan $1 trillion a day to banks, and offer short term (14-day) loans of $1 trillion each week. In addition it was buying up billions in T-bills, as fast as it could.

All of these actions increase the supply of money in circulation. It’s not done with briefcases full of $1,000 bills, but by authorizing loans to various big banks. The banks take the loans and make further loans to the top 1 percent and to corporations. Much of the money goes into the banks’ favorite mutual funds. The stock market goes shooting up, and everyone’s happy. Except, that as a political economist, it seems somehow unfair to me, as it may seem to you.

The result of this unprecedented creation of money has been a bonanza for billionaires in the amount of $584 billion (March 18 - June 17) in their bank accounts. Twenty-nine spanking new billionaires joined the club that already counted 643 of the super-wealthy. At the same time, 45.5 million workers filed for unemployment.

The cynical among us may say, “so what, it doesn’t hurt me.” However, such one-sided actions will boomerang back to smack the cynical and the optimistic, alike. You cannot warp the economy as the Fed has done, without creating serious repercussions. This is not just a ripple from one butterfly flapping its wings in Japan. It’s more like a herd of buffalo headed right at you.

What Is Holding Back Inflation?

Most people have heard of the German post-WWI hyper-inflation. At its height in 1923, there were 12 zeros after the number on the Mark. Granted, the reasons for the hyper-inflation had to do with impossible war reparation the victors wanted Germany to pay. This time, we’ve done it to ourselves.

It goes like this: The Fed recently changed its measurement of inflation from the CPI (Consumer Price Index) to something called the PCE (Personal Consumption Expenditures), which seems to give a lower figure for the increase in prices. What was the “core inflation rate” for the 12 months going back from July 2020? It was 1.6 percent, but that’s not including food or oil. With both of them added, the rate was 5.6 percent.

I have a theory as to why the inflation rate isn’t sky-high with all the trillions of dollars that the Fed is pumping into Wall Street. These are no ordinary times as you well know. Neither is it an ordinary dip in the economy that we’ve plunged into, and which is deeply connected with the pandemic. The particular type of depression we find ourselves in is called an “under-consumption depression.”

This is not to say that billionaires don’t consume. The luxury housing market in L.A. is red hot. Jeffrey Katzenberg sold his home to an unknown buyer for $125 million. Jeff Bezos bought the Geffen mansion for $165 million. David Geffen downsized into a $68 million bungalow (LA Times A9, Aug. 14). The rich do consume, but at a much smaller percentage of their income than does the working class, which, in normal times, consumes their entire income, plus credit card debt.

More people than just the 1 percent are benefiting from the Fed’s actions, just not to the degree of the billionaire class. Let’s say there are perhaps 20 percent, the upper middle-class, who own their own homes, have a nice stash in the bank, and are doing quite well in the stock market. That gives us 21 percent of the population, who can’t complain.

The rest of us, the remaining 79 percent, or around 250 million Americans, the working class, aren’t buying as much stuff as we used to before the pandemic. How can we buy anything except absolute necessities, like food, when we don’t know how we are going to pay the rent or the mortgage, or the doctor’s bill (health care costs rose 5.9 percent in the past year).

Has the Final Blow to Capitalism Been Struck by Capitalists?

So how is this monster, we call the economy, functioning when it’s trillions short on the consumption end, and overflowing with trillions on the top financial end. It looks to me like it’s performing a balancing act. This monster just lost the use of its back legs, but it’s doing handstands, and getting around somehow.

What would happen if suddenly everyone started consuming again? Then we might see real inflation. Perhaps that’s why Congress is so reluctant to make a deal that would help the working class, and raise consumption. Remember, it was the government that told everyone to go home (with good reason). Maybe that’s why Congress happily voted $600 per week in extra unemployment benefits back in April. At the time, some of the grumpiest members of Congress pointed out that workers would make more money at home than at work. Maybe that was the idea.

So what will happen when the pandemic slackens, or ends, and people start consuming again? No one really knows. We haven’t been through anything like this within the memory of living people. Perhaps there will be massive inflation. Perhaps when the masks come off, we’ll see who the real monsters are.