65% of the land in England and Wales is owned by just 25,000 landowners. These mega land owners are aristocrats, corporations and extremely rich individuals. The other half is shared by over 62 million citizens. Home owners own only 5% of the land. This is revealed in a new book “Who Owns England?”
The World Inequality Database shows that the United Arab Emirates is the most unequal nation based upon taxable income. The top 1% of earners there have a pre tax income of over US$ 891,000. The order of inequality on that basis then flows to Singapore, USA, Bahrain, the UK, Australia, France, Canada, Brazil, South Africa, China, India.
Then there is the concept of being Equally Miserable. This is measured in various ways. One is an economic measure called the Gini Coefficient which is a number between 0 (or 0%) and 1 (or 100%), where 0 corresponds with perfect equality (where everyone has the same income) and 1 corresponds with perfect inequality (where one person has all the income—and everyone else has zero income). The Gini coefficient has many shortcomings as a measure. The reliability of economic and income data is one problem. A large retired population or a large youth component in a nation will push the number higher.
Then there is the inequality-adjusted human development index (IHDI). This is a composite statistic of life expectancy, education, and per capita income indicators. The HDI was developed by Pakistani economist Mahbub ul Haq. It is often framed in terms of whether people are able to “be” and “do” desirable things in their life. However, the index does not include several factors, such as the net wealth per capita, the relative quality of goods, CO2 emissions, the crime rate or risk of insolvency in a country. The top 10 nations are Iceland, Japan, Norway, Switzerland, Finland, Sweden, Australia, Germany, Denmark, the Netherlands. The worst nation is the Central African Republic. And almost all of the lower ranking nations are in Africa. The United States is ranked number 25.
Then there is Home Ownership as a measure of wealth and possibly well being. The top nations are Mauritius, Romania, Singapore, Croatia, Slovakia, China, Lithuania, Macedonia, Russia, Hungary, Poland. Ex communist nations have very high home ownership rates and very low household debt rates. That is an inconvenient truth for the purveyors of the concepts of “the exceptional nation” and “the greatest nation on Earth”. The United States is ranked 40th on the list.
CAPITALISM HAS A PROBLEM
In a capitalist economy, fresh new money is 97% created by commercial banks when they create a bank loan for a willing borrower. 3% is created as cash by the sovereign — new notes and coins. So inequality of wealth is baked into the cake. The people who can gain access to fresh new money as it is created by the banks are the already wealthy or the already rich in terms of disposable income. They can offer collateral to a bank as an insurance against debt default. So the bank is very willing to loan them fresh new money. This gives them a compounding advantage over time.
If CPI inflation (the cost of living) is falling or low, then people with fresh new money have the opportunity of spending that money on assets rather than goods and services. They compete for prized assets amongst themselves, buying existing homes, stocks, bonds, precious metals, diamonds, art and other collectibles. As the asset prices rise, they can offer more collateral so they can borrow even more from the commercial banks. It’s a great game for Scrooge McDuck.
CPI inflation has been falling ever since its peak in 1980 in the advanced economies and is now very low by historical measures. The central bankers have been “inflation fighters” for all of that time and only recently (finally) have they realized that the world changed in 1980. Now they are desperately trying to keep CPI inflation positive and are just succeeding.
Since 1980, the Dow Jones Industrial Average of stock prices has risen from around 2,000 to 25,000. A UK house purchased in 1980 for approximately 100,000 Pounds is now priced at about 2.5 million Pounds. Fresh new money has been created all that time in huge quantities by commercial banks and, in a relative sense, most of it has been used by the relatively wealthy in buying and trading assets.
The CPI inflation rate in the US in 1980 was almost 15% per annum and has been steadily falling ever since. It is now below 2%. The wealthy have had no difficulty meeting the progressively lower costs of living.
THE OTHER PROBLEM
There is another problem with Capitalism. Wealthy people and high income earners are given preferential access (by law) to early investment opportunities that are excluded from the rest of the society. This is how Angel Investing, Venture Capital, Managed Investment Schemes, Private Equity and Hedge Funds work. The rich are given privileged access to these opportunities because they are deemed more able to “take risk” by laws that are deliberately established to “protect” the less wealthy. In effect, in the long term, they are “protected” from becoming wealthy. Another neat trick that works well for Scrooge McDuck. The irony is that these laws are usually created by the parties coming from the Left side of politics.
COMMUNISM IS NOT THE SOLUTION
SOCIALISM IS NOT THE SOLUTION
So is Communism or Socialism the solution? Or are they just formulas for making everyone “equally miserable”?
In Communism, there are no banks. The fresh new money is created by the sovereign (the group of dictators) and dished out by a centralized command and control system according to their perceived need. It is hard to think of a worse distribution system for the efficient allocation of financial (and other) resources. Poor economic outcomes are almost certain to occur and the collapse of labor productivity appears baked into the cake as people give up. In the USSR, the saying was “we pretend to work and they pretend to pay us”. The system collapsed in 1989 after 70 years of “equality”.
In Socialism, the emphasis is on redistribution of wealth via taxes. But the wealthy in most advanced economies are already paying most of the taxes and can often avoid further taxes. Killing, discouraging or excluding the entrepreneurs has been tried in extreme cases but that just leaves the less capable to fend for themselves and the economy inevitably shrinks.
REDESIGNING CAPITALISM & DEMOCRACY
We must first accept that no Utopian solution to these problems exists. Utopian Socialism was largely invented in the 1830’s by a Frenchman, Charles Fourier and its successes have been few. His work is the inspirational base for Feminism (he invented the word), Socialism, Marxism, National Socialism (the German Nazi Party), the formation of Mikveh Israel by Charles Netter and the formation of the USSR. Almost 200 years have passed and not much good has come from it all.
If no Utopian socialist or communist solution exists, we must tinker with the core elements of capitalism. We must move towards more access to fresh new money by all citizens. Because money dies when bank loans are repaid, we must always create more as fresh new money. Perhaps we could issue all fresh new money to citizens on the basis of a lottery? That may be a better system. Or perhaps half of it — better still. After all, we don’t want to kill entrepreneurial endeavor. And, while we are at it, perhaps we could also “elect” half our political representatives using the same method. In ancient Greece, the so-called birthplace of democracy, the political representatives were chosen by lottery. This is also called Sortition. Reference: https://en.wikipedia.org/wiki/Sortition
The parliament of the German-speaking Belgian community (Ostbelgien, 77.000 inhabitants) – which enjoys some political autonomy in the Belgian federal system – has officially and unanimously decided on February 25 to use sortition on a permanent basis, starting after the next elections in the fall. Sortition may be the future — of both Democracy and Capitalism.
If all of this were implemented, the endless and bitter Left Right Dialectic of politics as it is currently practiced would be vastly diminished and more people would have the opportunity of access to fresh new capital. And we would all welcome such as progress.
In economics, things work until they don’t. Until next week ………… Make your own conclusions, do your own research. BOOM does not offer investment advice.
Return to the BOOM Main Website – BOOM Finance and Economics at http://boomfinanceandeconomics.com/
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HOW MOST MONEY IS CREATED
BANKS CREATE FRESH NEW MONEY OUT OF THIN AIR
(but they always need a Borrower to do so)
THERE IS NO SUCH THING AS A DEPOSIT
BANKS PURCHASE SECURITIES, THEY DON’T MAKE LOANS
BANKS DON’T TAKE DEPOSITS, THEY BORROW YOUR MONEY
How is Most New Money Created ?
LOANS CREATE DEPOSITS — that is how almost all new money is created in the economy (by commercial banks making loans).
From the Bank of England Quarterly Bulletin Q1 2014 —
“Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.“
“Most money in the modern economy is in the form of bank deposits, which are created by commercial banks themselves”.
Quarterly Bulletins Index
Most economists are unaware of this and even ignore the banking & finance sectors in their econometric models.
On 25th April 2017, the central bank of Germany, the Bundesbank, released a statement on this matter —
“In terms of volume, the majority of the money supply is made up of book money, which is created through transactions between banks and domestic customers. Sight deposits are an example of book money: sight deposits are created when a bank settles transactions with a customer, ie it grants a credit, say, or purchases an asset and credits the corresponding amount to the customer’s bank account in return. This means that banks can create book money just by making an accounting entry: according to the Bundesbank’s economists, “this refutes a popular misconception that banks act simply as intermediaries at the time of lending – i.e. that banks can only grant credit using funds placed with them previously as deposits by other customers”. By the same token, excess central bank reserves are not a necessary precondition for a bank to grant credit (and thus create money).”
The Reserve Bank of Australia (Australia’s central bank) has also contributed to the issue in a speech by Christopher Kent, the Assistant Governor on September 19th 2018.
“…… the vast bulk of broad money consists of bank deposits”
“Money can be created …….. when financial intermediaries make loans”
“In the first instance, the process of money creation requires a willing borrower.”
“It’s also worth emphasizing that the process of money creation is not the result of the actions of any single bank – rather, the banking system as a whole acts to create money.”
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