Eric Harrington – The Big Lie, Part 3 – Wealth Redistribution

In the recent election, John McCain, made a centerpiece of his failing campaign the suggestion that Barack Obama was a “Socialists” who wanted to “redistribute the wealth”.  This phrase has been used by Conservatives for decades to suggest that “Laze fare Liberals want to take money from good, hard working Americans and give it to the lazy, unmotivated  poor.”

Unfortunately, this is another in a long list of Conservative double speak and propaganda used to promote their supply-side, trickle-down fantasy world. The facts, however,  tell a very different story..

When you look at the “Market” with a broad lens, you do see dramatic wealth redistribution alright, but it is not going down the chain, as suggested by Conservative spin-masters, but rather up

Now I know it’s no great revelation when I suggest that wages of the top 5% have dramatically outpaced everyone one else, to the tune of thousands of percent — CEO’s make 400 times the average corporate wage now up from only 40 times 30 years ago– but the Conservatives are ready to counter that “that is the American way! We can’t tell companies what they can pay their executives or they won’t be able to get the best people! The market must decide such things!”  But while excessive executive compensation is a complicated problem that needs to be addressed, it is only a drop in the bucket, and not the real driver of the wealth redistribution in this country. It is just a symptom.

The real driver of wealth redistribution in this country (and the free market world) is the Bubble/Crash cycle we have all become painfully aware of in recent months.  While Harvard economists will go to great lengths to explain that this time was different and why, the truth is these cycles have been occurring for centuries, and they are another chapter in the Big Lie..

Here is the real scoop on “economic cycles” as the elite economists will call it..  It appears likely that Bubbles and Crashes are ‘Engineered” by the financial elite (i.e. international banks, multinational companies, etc..) with the express purpose of effectively redistributing the real tangible wealth in the economy that is created through hard work, ingenuity, invention, and innovation by the working class (and remember even most well paid CEO’s of smaller companies are still really part of the working class) UP the chain.. Supply-siders will call it Market Consolidation, and that is a very accurate description –all the wealth is being consolidated in the hands of a few.

First comes the bubble.  Housing, Dot Com, South Sea Corporations, Tulips, there have been many. This most recent housing bubble is very similar to the 1873 Depression, the REAL Great Depression. Bubbles are typically created by an irrational flood of investment from the less sophisticated and even some moderately sophisticated investors driven mostly by hype,  and then a second prime ingredient in economic Bubbles —  some rule, regulation, or standard business practice that is changed to encourage vigorous investment,  often in conjunction with an exciting “new business frontier.” 

During a Bubble there is a strong growth throughout in the economy, even in many areas not directly involved,  such as the housing bubble which really started during the dot com boom… Then when the market is inflated enough, the whole house of cards collapses and we have a crash.  Many lose everything, many more get just hurt, but not everyone loses just because they lose a lot of money or stock value.…Only those who are leveraged and cash poor get really hurt. On the other hand, those who still have access to lots of cash BUY and buy big, because lots of hard work, ingenuity, invention and innovation built up during the bubble is often up for sale at pennies on the dollar after the crash.    

In the end, it is the working class who does not have the market savvy and resources to preserve cash for the inevitable crash, or the market sophistication to truly diversify, who takes the big hit. It is the small investor’s and even the small public companies that lose big, effectively shifting that wealth into the pockets of the big conglomerates with lots of cash.  

Wait, you say! The super rich lose Billions in a stock market crash too!  And yes this is true, but at the international market level, money isn’t real, it is really quite relative, literally, i.e. it’s value is only tangible when viewed in relation to what you can BUY with it..  So when the market goes down, yes they lose, but so does everyone else, and those who have CASH left over enjoy a fire sale, and substantially increase their wealth compared to everyone else, always with the knowledge that it is ones proportion of the total wealth that counts, not the amount..  i.e. it’s not how much money you have, but what you can buy with it, or better yet how well you can compete.  And in reality at highest levels of wealth, it is really about power, not money. Money is relative, power is not.

Now this is certainly not true for the average person.. The cost of our lives do not fluctuate dramatically with market upheavals. Our mortgage stays the same, our insurance, etc.. But at the international corporate level, their are huge dynamics at play with market volatility and they always favor the strong internationally diversified company.

Why are our markets so vulnerable to this boom/bust cycle?  One word,


As the markets have grown in sophistication, there has evolved a new sub-economy. One that produces nothing, nor has any money to actually loan out to help businesses;  this new group of marketeers make their money exclusively off of moving money around.  And for these marketeers, i.e. the Wall Street crowd, market volatility is necessary to make big money in the short term investing exemplified by the frenetic activity on the stock market floor each day.  It is much like a big Casino, and the volatility makes it all possible…

Little do these pawns realize, however, that they are just the machinery which allows the really super-rich to extract their on-going tithe from the masses.   All the wall street crowd KNOWS is they need volatility to make money, so they create more and more complex processes to speculate such as leveraged buying, short sales, and derivatives.  Leverage, or the process by which an investment bank effectively creates money though a loan to itself to invest in stock speculation, is particularly dangerous and has brought down more than one major investment bank..

I know your thinking to yourself, “but LOTS of people made a lot of money off this last bubble. Isn’t that the basic nature of the market? Some win and some lose.”  And this is true.. But again, if you look with a broad lens, far more lose money than gain. And where does the difference go? Into the relative value and market advantages of the really powerful companies and their investors… 

 Now it’s easy to suggest that this is the basic nature of the free-market and why people can still get rich in this country, and while this is true on a very simplistic level, it does not imply that this is the healthy way to run an economy.

When the middle class thrives and grows, economies thrive and grow. When they suffer, economies suffer. This is a documented fact. The middle class does ALL the real work, the creativity, the innovation. They are the engine of the economy, not the market.  Market volatility helps a lucky few in the middle, and hurts the rest, but it ALWAYS helps those at the very top long term.  They win on either side of the bubble… 

The only kind of economy that really supports a healthy middle class is one of consistent, low volatility growth.  Will that reduce the number of people who get rich in the US? Absolutely.. But it will take the lives of everyone else off of the roller coaster… Great people with great ideas will still succeed.  But the ones who get rich purely on luck or good timing will drop dramatically..  They can go to Vegas where pure luck still prevails…


The solution?  I list several steps I and other real economists agree would help reduce our market volatility in the post entitled “a bold plan for economic recovery“.  The result — less big scores for the speculators, but instead a strong and steady growth market with more predictable returns for the average investor who does not have the time to spend all day analyzing what stocks to buy and sell.  A market that favors strong companies and innovative companies, not just well hyped companies.  A market that insulates itself from crashes, and better reflects the actual performance of the companies it represents, as opposed to hype and emotion..

This Boom/Bust process is the real mechanism which has created the dramatic wealth stratification in this country. I call it a process as opposed to a cycle, because evidence points to this being a manipulated, intentional phenomena, not just an inherent property of the free market. But even if it is a natural function of a free market, it is not a healthy, productive one, unless you are at the top…  More than any law or policy or tax, any administration or party has ever created, a lack of sensible market regulation and intentional promotion of market volatility is the primary driver for wealth redistribution in this country, and contrary to all the conservative propaganda, the wealth is not moving from the middle class to the poor. It is moving from the working class to the super rich.



~ by Eric Harrington on October 27, 2008.

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