Opinion

Backlash

There’s an old adage: There are two guarantees in life: Death and taxes. Let’s modernize this a bit shall we? While it’s true even the rich still die these days (for now), but taxes are already a debatable question. After all taxes for corporations and the rich have come down dramatically in recent years and gaming of tax codes is the professional obsession of myriads of full time lobbyists and accountants who have found and lobbied every which way for the ultra wealthy to  minimize tax exposure in tax havens, offshore accounts and clever deduction schemes.

No, the modernized version of the death and taxes adage has morphed into something more sinister:

There are two guarantees in life: The rich get obscenely rich, everybody else gets to carry ever more obscene public debt levels.

This week we again get to see an annual ritual: The rich and powerful meet in Davos (119 billionaires are attending) and they get to ravel in having gotten even richer versus the year before and obscenely so as easy money by central bankers have once again levitated the prices of the very assets disproportionally owned by the wealthy: Stocks.

Look, no reasonable person would argue that the super wealthy don’t deserve to be super wealthy if they create something amazing of value add. Jeff Bezos deserves to be rich because he’s created an amazing growth business. Bill Gates deserves to be rich because he’s created an amazing growth business. Nobody is or should be arguing that. That’s not the point here.

The point is that their wealth is so obscenely accelerating that most people can’t even comprehend it, the numbers so large they give little perspective of how vast the wealth inequality equation is skewed.

Concurrent with the annual Davos meeting Oxfam releases the latest stats each year and they do give perspective:

The wealth inequality equation is accelerating to fast that the super rich can’t help but get richer, even if they try to give all their wealth away.
Take Bill Gates, arguably the most philanthropic person on the planet, long retired from Microsoft is again one of the richest two people on the planet adding over $22.7B to his wealth in 2019 alone. Not bad for a retired guy.

The secret of course: Vast ownership in stocks, $MSFT being at the forefront of his holdings of course. Bill Gates has been selling $MSFT stocks for decades, but he’s got so many shares he can’t get rid of them apparently.

And Bill Gates recognizes there’s a problem calling for higher taxes on the super wealthy:

“the Microsoft founder pointed to the widening gap between the haves and have-nots — income inequality is at the highest level in a half-century — as reason to hike taxes on the rich.

“That’s why I’m for a tax system in which, if you have more money, you pay a higher percentage in taxes,” Gates wrote in a blog post on New Year’s Eve. “And I think the rich should pay more than they currently do, and that includes Melinda and me.”

Gates, who’s worth an estimated $114 billion after he added $22.7 billion to his fortune in 2019, according to Bloomberg’s Billionaires Index, proposed several steps to make the U.S. tax system “more fair.” Those included raising the capital gains tax “probably to the same level as taxes on labor.” In 2018, a single average worker in the U.S. faced a 29.6 percent tax burden on their pre-tax earnings, or about $17,596 in taxes, according to the Tax Foundation.”

But frankly one can currently very much doubt the political viability of such a proposition. For one the rich just got a nirvana in tax cuts:

To get any of that changed would require a radical shift in American politics. Yes we see rumblings from the Bernie Sanders and Elizabeth Warrens of the world, but they’re not even close to being elected or even nominated. Would pro business candidates such as Bloomberg or Biden be capable or willing to change the tax codes that have benefitted the political donor class for decades? As an academic question aside it’s not even a realistic question to ask as neither have won the presidency and may not. Republicans control the Senate and that ends the tax increase question dead in its tracks for the moment.

Besides, taxes are not the root cause of wealth inequality, they are just the icing on the cake. Bill Gates didn’t add $22.7B in wealth in 2019 because he saved on taxes. He added this much wealth as a result of stock markets again accelerating higher, not because of vast growth in market earnings, but because of multiple expansion driven by easy central bank policies.

The general public has no clue how central banks work, they don’t understand the policies that are driving the wealth inequality equation. But they see the rich getting richer while the debt burdens that they shoulder are increasing year after year:

“The world’s already huge debt load smashed the record for the highest debt-to-GDP ratio before 2019 was even over.

In fact, it broke that record in the first nine months of last year. Global debt, which comprises borrowings from households, governments and companies, grew by $9 trillion to nearly $253 trillion during that period, according to the Institute of International Finance.
That puts the global debt-to-GDP ratio at 322%……..Such massive worldwide debt is a real risk for the global economy, especially because the IIF expects levels to rise even further in 2020.

“Spurred by low interest rates and loose financial conditions, we estimate that total global debt will exceed $257 trillion” in the first quarter of 2020, the IIF said.
The Federal Reserve lowered interest rates three times last year, and the European Central Bank’s benchmark rate is still at its post-financial crisis lows.”

See here’s the real dynamic: In a world of measured low inflation and weak wage growth easy central bank money creates vast price inflation in the assets owned by the few making the rich richer, but also enables the taking on ever higher debt burdens leaving everyone else to foot the ultimate bill.

There are two guarantees in life: The rich get obscenely rich, everybody else gets to carry ever more obscene public debt levels.

That is the measured outcome of the central bank easy money dynamic that has been with us now for decades, but has taken on new obscene forms in the past 10 years with absolutely no end in sight.

This is the dynamic that has to change or face a building of an unprecedented public backlash. This is impossible you say? Why?

Hoping for raising taxes on the rich is squabbling for the scraps from Longshank’s table. It’s missing the root causes. For true change the central banking cartel control over the wealth inequality equation must not only be acknowledged (which they refuse to do), but it needs to be dramatically altered.

There’s of course a massive problem with that very proposition. What happens when that dynamic changes and asset prices collapse and wealth inequality takes on a more traditional form? The global economy, so depend on easy money and cheap debt would face a deep recession, a depression even, and the non wealthy would be the first to get hit, losing their jobs, facing default on their loans and plummeting real estate prices.

We’ve already seen the end of this movie:

In the end nothing changes. The world is trapped in a cheap money fueled high debt cycle and the rich will keep getting richer and the plebs will end up footing the bill.

The big practical question for investors to consider is this: With the ever more recognized dynamics of wealth inequality result in a political rebellion first, one that changes the regulatory and tax outlook in the years to come?

I guess we’ll find out more on November 3rd. In the meantime we get to see Davos unfold in usual fashion, lots of words with little action, and then a very contentious presidential election process in 2020. Politics are inherently unpredictable, especially when elections are driven by strongly held emotions. If these emotions gain traction on the wealth inequality front watch for signs of building backlash for such signs could go a long way to reduce future multiples, multiples that are currently pricing in nothing but perfection making them particularly vulnerable to unexpected backlash.


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Categories: Opinion

17 replies »

  1. There might be a way out of the low interest rate & higher debt spiral, Sven. You’ve likened easy money to addiction. If one needs to taper off a drug, it’s often best done slowly. That would be one way for the central banks to reverse the interest rate cycle — slowly. Not by 0.25% every 2 months, but by 0.25% every so many months or years – when the economy is doing well. It should be done without a systematic increase in rates, like the Fed tried in the past, which essentially announces “we’re planning a recession.”

    As far a Bill Gates and his pronouncements that the wealthy should pay higher taxes, I’ve yet to hear of any of them doing it! All they need to do is not claim any deductions. They will pay higher taxes, and the rest of us will be spared their “virtuous” pretenses of generosity to the government.

  2. The current system is living on “life support” right now thanks to the central banks…eventually it will just implode….as all systems do. This is what history teaches us. And frankly, there is way too much admiration for all those billionaires….if they really wanted, they could make the system more fair and less destructive for our planet. But they don’t. Why don’t we move to a system ecourages : LESS IS MORE. Why not live slower, with less stuff and less needs. Of course, the whole propaganda machine is just the inverse: always more, bigger and faster. No wonder so many people feel unhappy.

  3. Taxing people is not the way to address the inequality; look at the causes – i.e. a financial system where everything is miss-priced since our so called elite decided that we didn’t need anything to back our currencies with anything. Te result has bee run away government spending & corporate and consumer borrowing as a result of centrally planned interest rates by clueless idiots. The market must be allowed to set prices – it will in the end no matter how much they try to rig things; we need to face the music.

  4. Sven isn’t an American so let me inform him that most Americans totally support asset inflation because they imagine they will be the beneficiary someday. Thus some squabble about higher taxes for the rich but inflating assets isn’t even subject to question. In fact the American Dream is to get in on the ground floor of an asset which will inflate. Thus gaining the only freedom that matters. Financial freedom.

  5. Bezos doesn’t deserve to be the richest person in the world for making a business which has barely ever made a profit. Gates got crazy rich because of a stupid interpretation of copyright law. The government, through law, made Gates rich.
    Admittedly profit is an antiquated concept.

  6. It seems to be the basis of income inequality in the Unites States is that there are simply too few capitalists. The gutting of anti-trust legislation and the endless mergers since the early 1980’s is a huge factor in the accumulation of capital among the few. Small to midsize businesses can’t compete.

    • That’s a very good point, and nowhere is the concentration more deadly than in banking (otherwise none would have dared imposing negative rates or a loan:savings rate differential of over 100x. Sven would have done his readers a real service by pointing out that the central banks are literally owned by the too-big-to-fail private banks, and provide them nearly interest-free money in the trillions (to the extent that new debt can be created) while allowing them to charge double-digit rates to their own cardholders
      1. New anti-usury laws.
      2. Abolish central banks (face it, this is not going to happen short of a Bastille moment)
      3. Enforce long-existing anti-trust law.
      4. Restore Glass-Steagall.
      Regarding taxes: The IRS was created in 1913 with the promise that only the top 1% would be paying any taxes. Today, it is a part of that 1% that are the only ones, including many Fortune-500 companies, who pay NO taxes.

  7. Super wealth is super greed. Gates, Bezos, etc could have easily given all their employees stock options and ownership in the companies they started once they became super rich. Instead, they continued to get even more super rich each and every day. To be honest, I have seen individuals sell their companies and make millionaires out of everyone who worked there, taking only 5-10% for themselves. It is rare. It would seem that greed is a fundamental human emotion, a collective mental disease in America it would seem as most believe they can get rich if they only try hard enough. What they do not understand is that luck plays a huge role, and any rich person who denies the role of luck is lying to themselves, to deal with the trickle of guilt that might plague them at times of honesty.

    So how about we help those super rich with the greed mental disease, and give them a good reason to stop stressing in order to get on the Forbes richest persons list, and instead enjoy the money while they are young.

    New 2021 income tax rates: 50% income tax from $1 million to $10 million, 60% income tax from $10M to $50M, 70% income tax from $50M to $100M, 80% income tax from $100M to $500M, 90% income tax from $500M to $1 billion, 100% income tax rate from $1B to infinity. Add a 80% wealth tax above $1 billion, and in 50 years we will not have 2,000 billionaires worth more than 5 billion humans. Keep your $150 billion Bezos and Gates for now, yet your kids “only” get $30 billion after the 80% estate tax. Seems reasonable?

    Note that the top tax rate was 91% when Kenedy was President. Reagan-omics “Trickle Down” started this mess in the early 80s, as Reagan dropped the top tax rate from 70% in 1981 to 50%, and then from 50% to only 28% in 1986. GDP, wages, equality, etc…started falling from 1980’s until now (pull up the historical charts). Trickle down did not work during the last 30 years, so I find it amazing we tried it again in 2018 as people like me got a huge tax break, but for how long, and at what cost?

    • Life is lottery for everything (health, career, finances, children, love..)…it’s all about luck. And very few will admit that luck played a large role in being “successful”, whatever this means….because frankly I am so fed up that “success” is so heavily tied to status and power in our society. What about being successful in kindness and empathy.

  8. Think fundamentals for a moment.

    Q: What do we tax?

    A: Almost all personal taxes are levied on earned income (mostly work, and higher on work than ‘un-earned’ income like interest on capital and capital gains) and expenditure.

    Q: What does this ‘achieve’?

    A: It makes it much harder for hard workers to become wealthy. Perhaps that is a purpose?

    There needs to be a switch from taxing worked for income and general expentiture onto taxing current wealth and unearned income. This would make it easier for people to become wealthy (whereapon they will gleefully pay the wealth tax?) and reduce the tendency for the already weathly to become more obscenely wealthy.

    (I have two more comments to post on this: sliding Tobin tax; why do we tax – but they are for tomorrow)

  9. In the end nothing changes: The Great Depression was caused by massive inflation of stock prices, causing an asset bubble, based on huge numbers of people borrowing money to create leverage and buy into a sure thing because they had no choice, other than to be left behind.

    The current stock market bubble is much the same – but this time the lender is the Fed rather than the banks and the borrower is the broad market dominated by the billionaires. The economic dynamics now are no different than back in 1929. Borrowing money from the future to spike asset prices now.

  10. 2/3 Sliding Tobin tax – a general financial txn tax but based on profit and how long held

    Over the last near 50 years and much more so in the last 25 years securitisation and financialisation has grown dramatically through our economies. The proportion of the financial sector in developed economies’ GDP has approximately trebled to perhaps 30% now. Much of this is speculative and acts as a tax on ‘real GDP’. It is not directly taxed.

    I would tax profits on all financial txns based on how long held. eg. 90% if held less than 1 second, 70% if held less than 1 minute, 50% less than 1 hour, 20% less than 24 hours, 0% if held 10 days. Losses would not be taxed but could not be offset against profits. Thus, appropriate longer term hedging would be tax free, short term speculation would be taxed.

    Of course this would necessitate all such txns being processed on officially recognised exchanges, so poof go dark pools etc. Any txns found outside these would be forfeit.

  11. 3/3 Why do we tax?

    To make us all richer!

    An at least basic level of infrastructure, goods and services greatly increases the wealth and well being of people, society and economy. This is beyond dispute. The only real questions are what is funded, how that funding is organised and where does the money come from. Countries with higher state involvement in infrastructures and higher taxation tend to be happier, more equitable and richer.

    It seems fairly absurd that the wealthy entities (corporations and people) which benefit most from publicly funded infrastructures tend to be taxed the least. This desperately needs to change.

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