Washington & Wall Street: Income Inequality Starts with Inflation and Public Debt

Washington & Wall Street: Income Inequality Starts with Inflation and Public Debt

Last week, I spent a very enjoyable hour with my friend Barry Ritholtz, an American author, newspaper columnist, blogger, equities analyst, CIO of Ritholtz Wealth Management, and guest commentator on Bloomberg Television. He is just starting a new radio program on Bloomberg Radio which airs next month, and I am honored to be his first guest.

Barry is a center-left New York liberal, a very smart man who understands finance, markets, and economics very well – yet still pays homage to the idea of Keynesian economics. As a center-right Republican who is comfortable in the libertarian wing of the Grand Old Party, Barry and I always have some spirited debates over economic policy and the role of government, and especially the trendy topic of income inequality. 

During our discussion, Barry commented that he thought Washington should be providing more stimulus to help boost consumer demand and job growth, a familiar argument of from every dollar of deficit spending is just about nil and the neo-Keynesian creed. I describe Keynesian economics, especially today’s variety, as a coward’s road to socialism, because this liberal creed has pretty much run out of runway in terms of economic efficacy.

John Maynard Keynes, we should all remember, was a conservative man who understood and operated in the financial markets during awful economic times. His idea for using government spending to boost consumer demand in times of deflation was tempered by his fiscal conservatism. That is, he expected governments that ran deficits (or printed fiat money) in bad times to pay back the debt in good times. Unfortunately, American liberals never studied that section of the macroeconomics textbook. Neither have most Republicans, for that matter. 

Gary North, in his excellent critique of the socialist tendencies of Huffington Post blogger Ellen Brown, notes that in the depth of the Great Depression in 1934, Keynes was a supporter of the same money-printing policies that have been followed by the Federal Open Market Committee since 2008. But what Keynes saw as a necessary expedient for truly horrendous economic times has now become accepted policy today in Washington. 

Observers like Brown, with her limited understanding of economics or history, celebrate the idea of the Fed printing money to accommodate deficit spending. Her latest “big idea” is for states to sponsor public banks and essentially give money away, another form of deficit spending. Brown’s Public Banking Institute encourages the notion that public banks backed with tax dollars can boost economic growth, but this is hardly a new idea. 

Like most of American liberalism since FDR, the idea of public banks comes from the authoritarian economic models of 1920s Europe, the cradle of fascism a la Hitler and Mussolini. “Parastatal” entities such as Fannie Mae, Freddie Mac, the Federal Housing Administration, and even the Federal Reserve System already represent a layer of publicly funded leverage in the US economy. Brown’s big idea is to simply add another, new layer of public finance at the state level.

Neither Brown nor Paul Krugman nor my market savvy friend Barry Ritholtz seem able to accept the fact that by pulling tomorrow’s spending into the present day via inflation and public debt, and accommodating these policies with low interest rates from the Fed, we are slowly killing the economic hopes of all Americans, especially those of working people.

Since 1980, the real, inflation adjusted value of the dollar has fallen by nearly 75%. Over this same period, the wages of working people have been relatively flat, meaning that American families have lost enormous ground in terms of what their dollar will buy for housing, food, and other necessities. Over those three decades, Congress under both parties has happily voted for ever increasing federal budget deficits, based largely on the belief that deficit spending is good for Americans. These same luminaries now fret that “income inequality” is a public policy concern.

But the unspoken truth is that big deficits and easy-money policies from the Fed are ultimately paid for with higher inflation and low dollar purchasing power. When you look today at the US housing market, for example, the one thing that stands out is that in many states cash buyers represent the majority of purchasers. 

In Florida, for example, an astounding 60% of home buyers paid cash for homes in December. Nationally the average was over 40%. Many of these purchases were made either by institutional investors trying to escape the fed’s financial repression or foreign nationals seeking economic haven in the US. But the one group that is not participating in the housing market is first time home buyers. New American families lack the income and assets to qualify for a mortgage in today’s tough economic environment. 

At the end of the day, the slow corrosive effect of inflation in terms of rising prices for housing, health care, and basic necessities on American consumers is the cause of income inequality. When we talk about income inequality and the increasing gap between rich and poor in America, one of the first things we need to address is ending federal budget deficits and eliminating the inflationary bias of the US economy. 

Once we take the pressure off of the Federal Open Market Committee to facilitate government deficit spending and debt issuance we can start to create an economy where inflation is not robbing consumers of purchasing power every year. Remember that even a one or two percent inflation rate, compounded over 30 years, is a disaster for all Americans, rich and poor. It is time to realize that the problem of “income inequality” is a largely self-inflicted predicament that starts with federal deficits and ever-rising public debt.