The way money and finance work in the global economic system tends to make the rich even richer while leaving behind average citizens. Central banks printing vast sums of cheap credit, combined with the deregulation of the banking sector, have created an avalanche of money flooding financial markets. This tidal wave of easy money provides ample fuel for speculation by the world’s wealthiest investors and corporations. Yet, it usually fails to support productive investments broadly benefiting society.
This article explores how the unfettered creation of money enriches the 1% at the top more than ever before, inflating dangerous asset bubbles. It also proposes reining the financial sector before inequality and instability reach tipping points. Fundamental reforms to banking and the monetary system are needed to build a fairer economy that serves everyone. The monetization of debt by national governments has increased the world debt supply and money supply when central banks purchase the debt caused by deficit spending and put it on their balance sheets.
How the Rich get Richer
The phenomenon of the rich getting richer is a complex one that spans a range of mechanisms in the world economy. Economic research, academic papers, books, and studies provide a multidimensional perspective on this issue. Here’s a concise exploration based on these sources:
- Compound Interest & Investment Returns: At a fundamental level, money earns money through dividends, capital gains, interest, and over time, these gains compounds. Wealthier individuals, who have more capital to invest, can harness the power of compound gains to a greater extent than those with less capital.
- Access to Investment Opportunities: The rich often have access to exclusive investment opportunities that aren’t available to the general public. This includes private equity deals, venture capital, and preferreds. These investments can potentially offer much higher returns than standard opportunities. Preferred securities, also known as “preferreds” or “hybrids,” share the characteristics of both stocks and bonds, and may offer investors higher yields than common stock or corporate bonds.
- Economies of Scale: The more wealth and assets someone has, the more they can benefit from economies of scale. For example, hiring a top-tier financial adviser becomes cost-effective when managing larger portfolios, potentially leading to better investment strategies and higher returns.
- Tax Strategies: With resources to hire expert tax consultants, the wealthy can often leverage legal loopholes, offshore accounts, trusts, and other mechanisms to minimize their tax liabilities. This allows them to retain a larger proportion of their wealth.
- Financial Literacy: Research has shown that individuals with higher financial literacy tend to make better investment decisions, leading to higher returns. Wealthier individuals often have better education and resources to improve their financial literacy.
- Globalization: The globalization of the economy has allowed wealthy entrepreneurs and corporations to tap into global markets, further increasing their wealth. This effect is particularly pronounced for tech giants and multinational corporations.
- Regulatory and Policy Environment: Various policies, from deregulation to pro-business tax reforms, can disproportionately benefit the wealthy. For example, preferential tax rates for capital gains in many countries benefit those who earn income from investments more than those who earn income from labor. Tax codes reward producers by taxing profits after expenses. Employees are taxed before their expenses.
- Inheritance: Wealth is often passed down from generation to generation, allowing the rich to build upon the assets and advantages of their predecessors.
- Leverage: The wealthy have the ability to borrow large sums of money to invest, potentially amplifying their returns. While this comes with increased risk, sophisticated financial management can mitigate some of these risks.
- Network Effects: Being wealthy often grants access to elite networks, which can provide business opportunities and partnerships that aren’t available to the general populace.
- Technological Advancement: The digital age has enabled those at the forefront of technological innovation (think tech entrepreneurs) to amass wealth at an unprecedented rate.
- Asset Bubbles: Central bank policies, such as quantitative easing, have been argued by some economists to inflate asset prices, benefiting those who already own these assets. As currency supply increases the earning power of wages decreases hurting employees who rely on their paycheck as their only source of income.
- Rent-seeking Behavior: Rent-seeking behavior in economics refers to actions taken by individuals or entities to earn income, wealth, or any other benefits without a corresponding contribution to productivity or the creation of new wealth. Instead of generating new economic value, rent-seeking redistributes resources from one group to another, often without adding any beneficial output. This behavior can distort resource allocation and hinder economic growth.
- The Financialization of the Economy: Over the past few decades, the financial sector has grown significantly in many economies. This growth has led to enormous wealth creation for those involved in finance and investment.
The flow of money in the world economy is influenced by a myriad of factors. The rich, due to their resources, knowledge, and networks, are often in a position to navigate this flow in ways that continually enhance their wealth.
Let’s dig deeper.
Central banks continue pumping money into the economy
Central banks worldwide have taken unprecedented steps to pump liquidity into financial systems since the 2008 financial crisis and the 2020 lockdowns. By keeping interest rates at rock-bottom levels and purchasing assets like government bonds, central banks aim to encourage lending and spending. However, critics argue this deluge of cheap money has fueled asset bubbles and rising inequality. This increase in the money supply, combined with government spending with stimulus and near-zero interest rates, was exacerbated in 2020 during the pandemic lockdowns, likely leading to the high inflation we have experienced in the past two years.
Savers lose billions every year due to low-interest rates
With interest rates at historic lows, savers earn virtually nothing on their deposits. The real value of savings is being steadily eroded by inflation. Retirees and others relying on interest income have seen their purchasing power decline from their social security and pensions. Despite the risks, some even resort to holding cash to avoid losing money in bank accounts due to the fear of bank failures and withdrawal limit fears worldwide. Banks paying near zero percent on savings accounts hurts savers and try to encourage spending and investing by not rewarding saving.
Money pours into real estate, inflating housing bubbles
Seeking returns, investors have poured money into real estate, driving prices up dramatically in many cities. Places like London, New York, and California have seen an explosion in luxury property targeted at the super-rich. As money lending is easy to get for most high-income home buyers and real estate investors, housing becomes unaffordable for average citizens. Many also fear the rise of housing bubbles that could burst violently, leaving people stuck with mortgages underwater versus home values like in 2008. Easy money and low-interest rates create bubbles in real estate. Now with the recent increase in interest rates with homes still near all-time highs homes are unaffordable for the majority of people in most major cities.
Deregulation unleashed an avalanche of money.
Starting in the 1980s, politicians in the US and UK championed financial deregulation. Removing restrictions on banks and capital flows allowed money to move quickly around the globe. Complex financial instruments flourished in the shadow banking system beyond regulatory oversight. This flood of cash facilitated the housing bubble and the 2008 crash. The massive injections of currency in the Western world since 2020 has led to more and more money chasing the same quantity of good, increasing prices through the entire supply chain and labor markets.
Private banks create money with loans and reap huge profits
Unlike common perception, most money today is created not by central banks but by private banks through issuing loans. This enables banks to reap billions in interest payments. Critics argue banks should not have this privileged money creation power, but rather, it should be a public function. Credit creation is the same as money production, which is primarily digital.
The Federal Reserve discount window makes it easy to get money fast. The discount window is a central bank facility that offers commercial banks very short-term loans (often overnight). The Federal Reserve extends discount window loans to financial institutions that, in turn, support commercial industries.[1]
Also, fractional reserve requirements were also suspended in 2020. As announced on March 15, 2020, the Board reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions.[2] This sets almost no limits on banks’ abilities to extend credit through lending.
Startups struggle to access loans despite abundant cheap money
Despite trillions sloshing around global markets, small businesses and startups often struggle to obtain loans from banks that view them as too risky. This inhibits innovation. Many argue cheap central bank money should be directed towards productive investments rather than fuelling speculation. This was also seen with the trouble so many small businesses had trouble getting Paycheck Protection Loans (PPP) in 2020 while bigger more well-connected companies had little trouble. Many people also had trouble getting their unemployment benefits.
Companies are traded between investors like casino chips
With abundant cheap credit, corporations engage in ever-larger mergers and acquisitions. Ownership changes hands rapidly between private equity firms, hedge funds, and corporations making huge speculative bets. Employees and communities often suffer from this casino-like environment. Many IPO stocks are just exit strategies for early investors as they don’t fundamentally earn profits.
To build a fairer system, states must reduce debt burdens
Excessive public and private debt makes economies fragile and indebted to banks. There are huge tax burdens on the middle-class and working-class at every level from earning to spending money which takes a higher percentage of their income than the wealthy in sales taxes, property taxes, and many hidden taxes. Government deficit spending puts a huge burden on lower-income taxpayers.
Stricter regulations on banking are urgently needed
To prevent future crises and curb reckless speculation, rules are required to increase bank capital requirements, enact financial transaction taxes, separate retail and investment banking, and reform money creation powers. Finance must be reined in to serve society rather than drive inequality.[3]
Key Takeaways
- Central banks have flooded markets with easy money, which may widen wealth gaps rather than fuel broad growth.
- Rock-bottom interest rates rob savers and retirees, eroding the value of their assets.
- Real estate speculation fueled by cheap credit shuts ordinary people out of housing markets.
- Deregulation since the 1980s allowed unrestrained growth of complex finance and shadowed banks.
- Private banks generate immense profits by lending money they create digitally.
- Small businesses and startups are starved of funding, while speculators have abundant access to cheap credit.
- Corporations are traded between professional investors like gambling chips in a global casino.
- Re-regulation of banking and money creation is essential to stabilizing finance and reducing inequality.
Conclusion
Central and private banks’ unprecedented expansion of money and credit has enriched elite investors but left the real economy starved. Removing checks on capital flows and banking created an unstable system prone to crises. We must implement financial reforms that reduce speculative finance and channel money toward productive, sustainable goals to build an economy that serves society. Taming the power of bankers over the economy and policy is critical to reducing inequality and promoting broadly shared prosperity.
