Monday, June 24, 2013

About the Rich Getting Richer

Last week the stock market crashed after the Fed said that it will eventually scale back on its efforts to keep interest rates low. The correlation between the two explains why the rich are doing so much better than the rest of the country.

For years the Fed has been pumping money into the economy. Normally this would be inflationary but only a few places in the economy had indicated any sort of bubble. The stock market is the biggest.

What is going on is simple - investors are borrowing money at record-low rates and using it to buy stocks. There are other investments going on at the same time. What is not happening is the money going for traditional investments. Businesses are not using the money to expand.

That keeps the money bottled up at the top. Only a limited number of people are in a position to benefit from this, mainly financial institutions. People involved with those institutions are making a LOT of money but they aren't spending it.

There are contributing factors. The new financial regulations institutionalize Too Big to Fail which encourages risky behavior. The financial institutions know that the tax payers will bail them out if their investments go bad.

But all of this depends on cheap money so any hint that the Fed might allow rates to climb in the future is bad news.

Note that none of this involves tax law or unions. Progressives worry about the concentration of money at the top but their remedies will be ineffective.

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