The Thanksgiving Gift from the Feds

No group had more to be grateful for this Thanksgiving in America than the few people at the top of the pile. Over the last four decades, their wealth has soared…thanks largely to the feds.

In 1971, Richard Nixon cut the last link between the dollar and gold, creating a pure paper money system. Total credit market debt in the US rose more than 30 times since then. As a percentage of GDP, debt went up from about 150% to 350%.

In very round numbers, the money supply – M2 – went up ten times since the early ’70s (depending on how you measure it). So did the stock market, adding about $14trn to the nation’s wealth.

Who owns stocks? That’s right…the 1%…the people at the top…the rich.

And who runs these companies? The question demands a little cogitation. It seems obvious that the fed’s credit bubble raised the tide…and along with it the rich folks’ yachts. But did it also increase executive salaries? Maybe.

The Economic Policy Institute calculates that the typical worker got a real salary increase of only 5.9% over the last 30 years…But executive pay rose 127 times as much. Today, the execs earn about 206 times as much as the workers.

Why? Are executives really so much more valuable than they used to be? No one knows, but our guess is that as the feds bubbled up stock prices they also made corporate management seem much more important.

If investors thought their stocks would do no better than the US economy itself, they probably wouldn’t have been willing to give managers a lot of money. But the prospect of 1,000% in capital gains brought recklessness, extravagance and negligence to corporate compensation. Investors were willing to pay (or at least ignore) outrageous salaries as long as they thought they were getting rich too.

The trouble was, asset prices were not stable. Instead, they were floating on a sea of debt. And when a storm blew up in ’08 -’09, they began to sink.

In a matter of weeks, stocks had lost about half their value. The rich looked at their balance sheets. Ouch! They had lost $7trn in stock value. But that’s when they really got lucky. The feds quickly began their ‘Rescue the Rich’ programme, at a cost of more than $2trn. With that new tide of money rushing in, stocks went back up. The rich were saved!

Since the ‘recovery’ began, the top 1% has captured nine out of every ten dollars in extra earnings. And with Obama in the White House for another term…and Bernanke at his post at the Fed…there seems every likelihood that they’ll be about to get the other dollar over the next four years, giving them a clean sweep of all of America’s new earnings.

Yes, dear reader, the rich have never had it so good. There are only a few of them, and they get almost all the new wealth created in the whole country. Of course, there are other benefits too.

Rich people don’t have to depend on Obamacare or Social Security or student loans. Which is a good thing, since these programmes are all running deficits and will sooner or later go broke. Then, the rich will have it even better…because they’ll be the only ones still able to afford health care, retirement and university educations.

But what’s this? Americans used to admire people who made a lot of money. Now, they despise and distrust them. That was part of the reason Mitt Romney couldn’t win the White House, even with so many people unemployed. There was something fishy about a guy who had made so much money without getting his hands dirty.

And now, they don’t particularly appreciate the rest of ‘the rich’ either. We turn again to a dead economist, John Maynard Keynes, for an explanation:

‘… Governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some…’

That’s right, it enriches some…

‘Those to whom the system brings windfalls…become “profiteers” who are the object of the hatred…the process of wealth-getting degenerates into a gamble and a lottery…’

The rich are always the object of envy. Now, they’re becoming the object of hatred, too. Ordinary people figure that they must have done something wrong. How else could they have gotten so much money?

Perhaps they recall the phrase of Balzac: ‘Behind every great fortune is a great crime.’

But today’s rich, generally, are guilty of no crime other than being in the right place at the right time. They own and run public companies at a time when the feds are pumping cash and credit into the system.

So give thanks…ya lucky S.O.B.’s!


Bill Bonner
for Markets and Money

From the Archives…

Why the Worst is Not Over For China’s Economy
23-11-2012 – Greg Canavan

Currency Devaluation: While Europe Gets Sinned, Australia Sins
22-11-2012 – Nick Hubble

The Pyramid of Real Wealth
21-10-2012 – Dan Denning

The Revival of US Manufacturing: An Update
20-10-2012 – Chris Mayer

Australia’s ‘Eggs-in-One-Basket’ Banking Sector
19-10-2012 – Dan Denning

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail Markets and Money.
Bill Bonner

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