The Rich get Richer; Regular People Lose Ground

Larry Beinhart gives an excellent explanation of our funny money economy:

When a government wants an economy to grow, it throws money at it.

The administration did that with spending on pharmaceuticals, homeland security, and a couple of wars. But their most important weapon of choice was tax cuts for the rich, especially on unearned income, capital gains, inheritance, dividends, and interest.

This was sold, and accepted, on the myth that the rich — the investing class — are the most creative and daring members of our society. Just unleash them and they will march off into the wilderness — actual, urban, or cyber — with sacks of cash over their shoulders and they will build things!Factories! Airlines! Housing! Toys! Computers! Undreamed wonders! Entire new civilizations! With jobs! jobs! jobs! Like an Ayn Rand novel!But that’s not what happened.

Because a shortage of cash was not the problem. The country, the world, is awash with cash.

The problem is that all that cash is flowing from credit sources, not from the production of actual goods and services:

In vastly oversimplified terms the credit economy works like this:

You own a house. It’s worth $100,000.

Someone buys the house, no money down. They borrow that money. Let’s say it’s a straight-line 8 percent, 30-year mortgage. Forget closing costs, points, and any other complications — that’s a $220,000 debt. It goes on the bank’s books as an asset.

Now you have $100,000. The bank has $220,000 (on paper). The buyer has a house worth $100,000. The bank has a lien on it, but the buyer will be gaining equity, plus he can get a second mortgage and home-improvement and other loans on it.

Again, this is a vast oversimplification, but that transaction has “created” something like $420,000 that is now “in play,” as part of the economy.

No “thing” has been created — no new business, no product, no jobs, no idea, no intellectual property, no entertainment.

But money has been created.

For the rich this works out very nicely. For the rest of us, and ultimately for the global economy, it’s a mega-disaster waiting to happen.

Michael Sky