The Growing Fiscal Disparity Between Insiders and Outsiders

To the barricades!

Today, we continue to explore our new idea. Alert readers have already figured out that it is not a completely new idea. The ancient Greeks toyed with it too. Really new ideas are extremely rare.

In our modern version, it might be called the General Theory of Decadence…or the Cycles of Growth and Decline, or more playfully, the Unified Zombie Theory.

Life goes on. Material progress accumulates. The story of human life on earth grows longer, and more interesting. We see no end to it. But each component part comes to an end. Each life, each economy, each company, each society and each civilization still shrivels, corrodes, and exterminates itself. The past must become history so that the future may become the present.

It takes many downsides to make upside progress. And then, the progress – if there is any outside of real science and technology – is probably only barely positive…and painfully cyclical. One generation learns. The next forgets.

We’ll come back to this in a second…

First, a look at the news:

Dow up 83 points yesterday. Gold headed towards $1,400. And the Great Correction continues.

As to Europe’s debt problems, the press seems unable to make up its mind.

“Portuguese bond sale boosts confidence,” says The Financial Times.

Oh yeah?

“Portugal fails to quell fears with auction,” counters The Wall Street Journal.

The International Herald Tribune threw its lot with the FT:

“Pessimists kept at bay in Portugal’s bond sale.”

In short, who knows? Europe has too much debt. Just like America. Sooner or later, some of that debt will be written off. Or worse. Portugal is just like Illinois or California. Only smaller and less important.

Meanwhile, in the US…

“Housing weighs down the recovery,” writes Mort Zuckerman in the FT. There are 5.5 million households with mortgages that are at least 20% higher than their houses’ value, he says. Delinquencies are still rising. The loss so far is greater than in the Great Depression, adds Zillow. And the Case-Shiller numbers show it getting worse.

But let’s turn to murder for a minute…

“Obama says polarized nation needs healing,” says a headline at Yahoo! News.

A guy goes off his head and starts shooting people in Arizona. The whole nation needs “healing,” says the president.

The media is full of argument on the subject. Are Rush Limbaugh and Sarah Palin to blame? Strident political rhetoric? Loose gun laws?

Palin says she is a victim of “blood libel.” The New York Times refers to a “climate of hate.”

Why are people so angry at one another anyway?

Relax… Our theory explains it. When people are creating wealth they have little reason to get mad at one another. Sure, someone takes a shot at a Congressman from time to time, but it tends to be a personal matter. And the politico probably has it coming.

Not so in the degenerate phase. When people try to live at each other’s expense, it naturally gives rise to widespread rivalry and resentment. The poor want food-stamps, welfare and unemployment comp. The rich want tax cuts and government contracts. The feds try to give everything to everybody – especially to their insider friends. Then, they go broke and everyone gets mad.

Just take a look at the TSA’s new peek-a-boo screening machines. They probably do no more for the safety of Americans than US troops in Afghanistan. But, like the war, they make some people rich.

Government officials – including many ex-congressmen – pushed hard for the machinery…despite much evidence that it didn’t work…and then went to work for the manufacturer.

This kind of soft corruption is so ubiquitous that the media barely thought it newsworthy. But thanks to TSA, the wars in Iraq and Afghanistan, medicare, shovel-ready stimulus projects and hundreds of other initiatives, a lot of people are a lot richer than they were a few years ago.

Naturally, with so many greasy bones on the ground, no wonder the dogs fight.

And, naturally, the inside dogs are soon the envy of the outsiders. The insiders…smart, well-connected hustlers…are able to move fast and take advantage of the opportunities as they present themselves. The outsiders – the lumpen, the middle and lower classes, the taxpayers, mooches, and patsies – get the scraps…if there are any left.

One phenomenon that has been much discussed is the widening gap between rich and poor. Some economists think the gap itself causes financial crises. Others think it is merely “unfair” and needs to be addressed by government. Often they believe it is a consequence of a lack of intervention on the part of government. The feds shouldn’t have cut taxes on the rich, they say. Or, the feds should have regulated Wall Street more effectively.

Almost no economists have been able to identify the real cause of this wealth disparity. But it is obvious. It is explained by our theory…

As far as we know, this is the first time it has been explained. So pay attention: as a wealth-producing society degenerates into a wealth redistributing society…and then finally, a wealth-destroying society, the difference between insiders and outsiders becomes more pronounced.

A man with the right connections in Washington can get a juicy contract. Soon, he can be sipping coffee in Potomac, along with your editor. He has a huge advantage over the hoi polloi. He can leverage his insider status into million-dollar paydays.

On a larger scale, let’s look at the work of the US Federal Reserve. This insiders’ bank is supposed to be working for the good of all. It didn’t even exist during much of America’s most productive, wealth-producing history. But now it fiddles US money and interest rates. For whose benefit?

Again, it is obvious… It lends to insider banks below the rate of consumer price inflation. It has been doing so off and on for decades, and consistently for nearly the last 10 years. Even with free money coming their way, the bankers still manage to lose money, pay themselves fortunes and occasionally go broke. And then, the Fed steps in to bail them out.

Pretty nice deal, huh?

Less obvious, the Fed’s easy money policies encourage asset price speculation. Today, the Fed gives the bankers money. The bankers put the money to work where they think they can earn fast profits – not in difficult and risky new business ventures, but by betting against the Fed itself. They buy commodities. Emerging markets. And debt too.

This speculation provides no jobs to the working classes. In fact, it hurts them. It raises the cost of food and energy.

“World moves closer to food shock,” says one headline.

“India may ban wheat exports,” says another.

“Grain prices soar as US slashes outlook,” adds The Wall Street Journal.

Corn is at a 30-month high. Brent Crude oil hit $98 yesterday. And the poor working stiff is stuck. His income is falling. His costs are rising.

Meanwhile, the very few, very rich get richer. Their portfolios bulge with financial profits… And their businesses enjoy relatively low labor costs.

This is the kind of situation, left unchecked, that leads to revolution. In Germany, the hyperinflation of the ’20s led to street fighting…and the rise of Adolph Hitler. In France, hunger in the late 18th century led to the guillotine.

More to come…


Bill Bonner
for The Daily Reckoning

The Daily Reckoning