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.

And more thoughts…

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 Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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6 Comments on "The Growing Fiscal Disparity Between Insiders and Outsiders"

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Nathan Chattaway
Not a bad theory Bill. You’ve got my attention. However, I think you are still to make the crucial connection between money and energy. Money is merely a representation of energy. When a currency is operating correctly, it should represent a promise to do a certain amount of work (expend energy). Most fiat currencies are wildly disconnected from this actual meaning. What we’re seeing is these currencies devalue down to something more closely approximating the remaining energy. It’s going to be painful for all countries with economies based on the impossible concept of continual economic growth as measured by GDP.… Read more »
Nathan Chattaway

For a far more eloquent description of this, have a look at this blog:


I’ve been thinking about this for a while. The political divide seems to be split into one side calling the other socialists, and the other gready capitalists. And both sides are getting angrier and angrier.

I think they are both right. The insiders get the government to create socialist policies that steal from the middle class and give to the poor, presumably to prevent revolution.

They then create different policies that steal from the middle classes to give to them selves.

So the top 1% and the bottom 20% get stuff for nothing, the rest of us get screwed.

Ron Jones
“My politics are short and sweet, like the old woman’s dance,” he declared: “I am in favor of a national bank, the internal improvements system, and a high protective tariff.” ~Abraham Lincoln Internal improvements are what we now refer to as “corporate welfare”… government contracts, subsidies, special tax incentives, low interest loans, etc. When we grant government the power to take from some and give to others, it is inevitable that the well-connected will benefit disproportionately. And… since Lincoln’s war to consolidate power in Washington, the relentless drive towards centralisation has continued apace. Now, we are ruled by a global… Read more »

@ Nathan Chattaway.

Ok Malthus, whatever you say…

News flash, current oil production is in a small portion of known reserves, these known reserves will last at least a hundred years. More importantly thanks to the market system that has incentive to guarantee supply, when known reserves get a little lower exploration will expand to uncover huge amounts of reserves we have not yet proven.

Haitans, Cubans, Nigerians, Afghans and Iraqis would swap with an Australian anyday, hell they’d even jump at the chance to swap with a New Zealander too.

Nathan Chattaway
If current oil production is “in a small portion of known reserves” why are oil companies risking deepwater drilling and tar sands conversion? Because we’ve already extracted all the easy to get at, sweet crude. The remaining oil will be increasingly harder and more expensive to extract (in Energy Return On Energy Invested – EROEI – terms). If we have enough known reserves to last 100 years, why in 2008 when oil prices were at $147 a barrel, did OPEC production increase by a mere 4 million barrels a day, while rest of world production didn’t increase at all? Surely… Read more »
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