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Who Rules America: An Investment Manager's View on the Top 1%

362 points by ph0rque 15y ago

Astrohacker 15y ago
It makes perfect sense that most people in the top 0.1% are associated with the financial and banking industries if you know how banks work. Banks, and the Federal Reserve, create new money. They give this money to themselves, and then loan it out. This is as bad as, and effectively equivalent to, counterfeiting. Creating new money, i.e. counterfeiting, i.e. inflation, does not create new wealth. It merely changes the distribution of the purchasing power of the money away from most people who have the money and to the people who get the new money. This is where the wealth of the top 0.1% comes from. Freshly printed money. It is a terrible system. The people with the highest wealth are not contributing in proportion to their wealth. Rather, they are stealing their wealth from the bottom 99.9% by stealing their purchasing power by printing new money. If you would like to read a thorough argument about how fractional reserve banks and the Federal Reserve are scams, read "The Mystery of Banking" by Murray Rothbard. Google it and you will see it is available for free at mises.org. For some reason this subject is very polarized and I get downvoted whenever I explain this. Don't downvote me just because you are uncomfortable with what I'm saying. Note that I am not ignorant. I have learned about economics. It just so happens that when trying to understand the issues myself, I have arrived conclusions that are not mainstream. But they are the correct conclusions in so far as I presently understand.
- danenania 15y ago
  Yep, fiat money systems are at the core of modern wealth inequality. Regulations and other measures will have little impact until we address this. Bailouts, taxes, budgets, deficits, regulations: none of it has much relative quantitative significance when the Fed is doling out many trillions behind the scenes. This money directly benefits the very wealthiest and regressively dilutes the rest on a scale that vastly exceeds the effects of any other policies. Abuse of fiat money is the ultimate economic elephant in the room.
  - deleted 15y ago
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  - lucasjung 15y ago
    It's funny that you say this, because prior to the adoption of fiat money systems, class-warfare leaders agitated for decades (centuries, even?) in favor of a system of fiat money, because they saw fiat money as a way to reduce wealth inequality. The logic goes like this: 1: In general, poor people borrow money from rich people. Interest payments on these loans is a transfer of wealth from the poor to the rich: an increase in debt inequality. 2: Fiat money is much more subject to inflation than commodity money. 3: When inflation occurs, the real value of debts is reduced. 4: By adopting fiat money and the accompanying continuous inflation, a situation would be created whereby poor people could borrow money from the rich, use it to create wealth for themselves, and then effectively pay back less than they had borrowed. I'm not saying they were right, I'm just describing their ideas. I find the whole situation ironic.
- waterlesscloud 15y ago
  It makes sense that the members of the top 0.1% that a professional money manager comes in contact with are associated with the financial and banking industries. Yes, that I agree with.
- eternal_skeptic 15y ago
  You say "Banks, and the Federal Reserve, create new money". That is factually untrue: only the Federal Reserve can legally create new money in the US. Since you mentioned it by name, you are definitely talking about the US, but the same state holds in virtually all developed countries as well: one designated "central bank" entity creates money, the others don't. Per your main point, yes, the central bank creates money, but it doesn't "give" it to anyone. Seriously, you describe it as if there's a "printing party" at the FR, and only the rich get invited to grab booty bags stuffed with trillions of freshly minted dollars. The truth, of course, is that the FR (and secondary banks) can only lend that money. They lend it for a variety of people and reasons. Not too long ago, they lent it to too many people. Not because their kind heart, but because it's a business: they lend it out hoping to get it back with interest. Who do they lend it out to? Well, to some of the people here, for starters. Because what you failed to consider is that if I'm already at the top 0.1%, the best thing for me is to keep the situation static: not printing any new money. Because you're talking about the top 0.1% dollar earners and holders. Inflation dilutes their assets and earnings just like everybody else's, and in absolute values, they lose more. Lending is (generally) an instrument of economic growth, a way to fund innovation and investment in production of new products and services. Guess what, if nobody can get loans, new businesses and startups won't get funding either.
  - Astrohacker 15y ago
    Here's how banks counterfeit money. You deposit $100. The bank loans out $80 of your money to someone else. They put that money back in the bank. The bank now has $100 - all your money. But your checking account says $100, and the loanee's checking account says $80, for a total of $180. The bank has now effectively created--that is, counterfeited--$80 in new money. They gave this new money to themselves, and then loaned it out. Since their reserves are still over 20% (or whatever the present reserve requirement is), they keep doing this until 80% of the money is money they have counterfeited and loaned out. And the Fed does give money to banks. They gave loans at 0% interest to Goldman Sachs who then buys government debt with it and earns interest >0%. That is the same as giving them the new money. And that is only one way, but there are others. Another way is by buying government debt from banks using freshly printed money at prices that are necessarily above what the market value would be if there wasn't an institution like the Fed that can print new money any time it wants to buy stuff.
- shawndrost 15y ago
  "counterfeiting... stealing... scams..." "For some reason this subject is very polarized." Baffling!
- webXL 15y ago
  As much as I favor low taxation and hate class warfare attacks on the wealthy, I think we ought to tax "freshly printed money" at a much higher rate, or figure out a more equitable way to create money... if we have to create money. Our financial system (the one created and regulated by the U.S. Federal Government) is so corrupt, as evident by TARP and the lack of lending and recovery. The only way its gonna change is if the dollar stops acting as the world's reserve currency, i.e. collapses. Only then do I think we have a chance of replacing it with something better. Don't hold your breath. The rest of the world is just as corrupt and financially unhealthy, so the dollar will remain superior. Edit: Oh come on, why the downvote?
  - Astrohacker 15y ago
    There's no reason to create new money[1]. As I argued in my post, all inflation can do is change the distribution of the purchasing power of the money... not create new wealth. But the market already handles the distribution or purchasing power just fine through normal market forces. Good businesses get more purchasing power and grow. Bad businesses lose purchasing power until they collapse. The only reason to inflate the money supply is to scam everyone because you get all the new money. As for replacing the dollar, bitcoin is the only reasonable alternative that presently exists. Fiat currencies almost certainly will never work, because the temptation to inflate them is too great. Gold can't work because you can't send it over the internet. But bitcoins both can't be inflated and can be sent over the internet. No government will decide to switch from dollars/Euros/whatever to bitcoins. Rather, it will be the market that chooses them if they are appropriate. [1] If you actually halted inflation of the dollar, then as technology continues to increase the supply of everything, eventually the dollar would be so valuable that a cup of coffee would cost less than a penny. You would need to make new monetary units worth less than a penny so that cheap things like coffee can be purchased with them. You would do this by taking your pennies to a bank and getting, say, 100 penny pennies with each penny, and then a cup of coffee could cost 78 penny pennies.
    - webXL 15y ago
      Right, new dollars have to enter the economy somewhere, and the purchasing power is increased at those points of entry, decreased everywhere else by an proportional amount. I'm all for bitcoin but the powers at be will find a way to stop it if it catches on. But the cat is out of the bag. I just can't see the dollar standing up to all the benefits a technology like bitcoin affords.
- eurohacker 15y ago
  there is a documentary called "Money Masters" available on Youtube that explains the history of this Federal Reserve monetary system, Fed is basicly unconstitutional private institution
- trunnell 15y ago
  This misses the point of the article, which is that many in the top 0.1% got there from some form of self-dealing. His argument is that they are profiting from their position in the economy rather than from the value they add. And by position, he doesn't mean nearness to the money press. I think he means nearness to the center of wealth and power, which at the moment happens to be the financial industry. > This is where the wealth of the top 0.1% comes from. Freshly printed money. I'm sorry but this statement is very wrong. Newly printed money enters the economy through interbank loans. If I borrow $100 my net worth is exactly the same as before. I'm not any wealthier. To set the record straight: the ability to expand or contract the money supply is an essential tool in managing the economy: the Fed can cool things down in a bubble (by raising rates and contracting the money supply) or heat things up in a downturn (by lowering rates and expanding the money supply). Otherwise, inflation or deflation can spiral out of control. > Creating new money, i.e. counterfeiting, i.e. inflation, does not create new wealth. Ok, but creating new money in an effort to grow the economy while managing inflation does create new wealth-- or more accurately, creates an environment in which wealth can more easily be created. Especially in comparison to the alternative: an unmanaged economy that is completely at the mercy of panics and bubbles. Think the last crash was bad? The unemployment rate rose to 14% during the six years following the panic of 1873, which was largely caused and substantially prolonged by the inflexibility of the money supply (which was still tied to silver and gold). I'm getting a little tired of the anti-fiat currency crowd. You say you learned about economics; you might want to get your money back. I'm sure you're a very smart person, astrohacker, but your perspective here is unsupported and stands in direct contradiction to the last 80 years of economic thought. And no, the bitcoin crowd do not count as economists.
  - watchandwait 15y ago
    The self-dealing by the banks since 2008 has been almost wholly underwritten by the Fed and the Treasury. Beyond TARP there are myriad guarantees, lending programs, and regulatory exemptions, all designed to provide the banks with greater profit and allowing them to offload risk, usually to the Fed or the taxpayer. Indeed, if you look closely, much of the "profit" in the banking system today is coming from banks borrowing at Fed subsidized rates and lending that money back to the U.S. government.
- djm 15y ago
  Agreed. Inflation amounts to stealing from people with savings. I haven't read the book you linked to yet but I just wanted to chime in and reference another great little book "How and economy grows and why it crashes" by Peter & Andrew Schiff. It's an extremely readable cartoon book that explains recent American economic history in a comic fashion and shows the differences between keynesian and austrian thinking on the subject.
auganov 15y ago
A typical article spreading hate towards the rich portraying them as people that have insight into secret evil money making techniques unavailable to other people. Any ways that hate has always been there and I don't think it's going anywhere. Just delete it from HN, no need for it here.
jwingy 15y ago
I personally don't care much that these people are wealthy or even able to evade paying as much taxes as we do. The problem I have, and the problem I think the author is trying to expose is that DUE to their wealth, these top 0.1% are able to exert a vastly disproportionate amount of influence on our political and legal system, often times to the detriment of the other 99.9% of us, and preventing politicians from making the level headed, balanced decisions they need to make. Even if the people as a organized collective can get together to rally against a certain issue, and even if that group can win, anybody with lobbying power (e.g. money) can simply lobby again at a later time to throw in some rider on a completely unrelated bill to pass some law getting what they want.
mkramlich 15y ago
This started off sounding like it was going to be a Repub/TeaParty/Koch-style political propaganda piece, but the further I went into it the more pleasantly surprised I became. Makes some good points about the distinction between different groups and tiers at the top of the American income ladders. It's true that the concerns and goals and challenges of upper income "working class" folks like small business entrepreneurs, doctors, lawyers are different than the folks from Real Money and the big financial firms, banks, executives of huge multi-nationals, etc. I also have become increasingly confident in the theory that the so-called credit crisis a few years ago was basically a setup or con job. There's a lot of evidence, at least at the level of circumstance and motive and means, aligned with it being true.
- aodin 15y ago
  To those curious about this claim, I would recommend Nomi Prin's "It takes a Pillage". She, a former manager at Goldman Sachs, makes a strong argument for the bailouts being criminal.
recampbell 15y ago
Regarding those who will only bring home 15k per month post retirement: "And, for those folks who made enough to accumulate this much wealth during their working years, the reduction in income and lifestyle during retirement can be stressful." This is where I started laughing out loud! What a profound lack of perspective.
- forensic 15y ago
  If you're unable to identify with those people, then you lack perspective as well. Having perspective includes the perspectives of the top 1% as well as the perspectives as the bottom 99%.
- danenania 15y ago
  Sounds like simply an observed fact to me. He didn't say he felt sorry for them, just that it causes them stress. The point was that these people aren't beyond financial worry.
- cantbecool 15y ago
  I too did the same exact thing, and I share your opinion. People in the upper echelon, especially in the finance industry, have lost their minds. What ever happened to aphorism living below your means. I guess people that the quote references are not financially prudent, and honestly, deserve to suffer in my eyes, since they probably caused this mess to begin with. Shit, to be honest, I'd be lucky to net 1/7th a month of that income while working this year. Hopefully, if everything goes better than plan, I'd be able to land a fulfilling job where I can net 1/6th, but I am highly skeptical though.
- deleted 15y ago
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- rayiner 15y ago
  The point of the article isn't that we should pity those folks making "only" $300k/year. They have nice houses and nice cars and eat at nice restaurants. However, they still need to worry about money. If your $300k/year is coming from your labor as a lawyer, and you go blind, your financial situation does a 180. If your $300k/year is coming from dividends on the huge pile of stock you own, that's a totally different ballgame.
rdl 15y ago
Why the fuck does he consider CEOs and others who sell their companies to be "directly connected to the finance industry?" To that extent, a cashier at wal-mart is directly connected to the finance industry because she helps a traded corporation make revenue.
- pg 15y ago
  As far as I can tell he equates making money from the sale of stock rather than from salary with being part of the finance industry. I stopped reading when I realized that.
  - rdl 15y ago
    Yeah, craziness. If he'd be open about his agenda but consistent with the terms reality uses, I'd be fine with it. I actually think carry should be taxed as regular income (except that the people who get carry are the kind of people who could structure to get around this). I'd also be ok with capital gains and regular income being taxed at the same rate IFF that top rate were low (say, 25%) without deductions/credits, AMT, etc. A flat ~25-30% tax for everyone, plus a decent personal exemption (possibly even refundable, so if it's "$20-30k in free money from the government per person per year, paid in cash or paid as a credit against taxes owed", some people can live 100% on the credit and not work. Allowing capital gains to offset capital losses, with carryover, probably is enough privilege to capital gains vs. regular income. It may create some disinvestment at the margin, but there's plenty of capital out there. For a startup founder making $100mm at exit, there isn't really an argument that he'd take the $200k/yr job instead of the $100k/yr job with the shot at the big exit due to being taxed 25% vs. 15% at exit; the uncertainty remains in the "will my company sell (and will it be for big money)", not the tax rate at that time. That said, I'm totally happy taking every capital gain benefit available to me; waiting 5 years for a $10mm tax-free capital gain (Small Business Jobs Act of 2010, good for investments including founder shares purchased until 12-31-2011) is pretty damn nice.
  - kds 15y ago
    But in a way this rings true - after an exit event if the former CEO/founder gets mostly stocks/paper his financial well-being is deeply connected with the general well-being of Wall Street, as a system. The more bullish is the market - the better for him, and for the whole ecosystem of financial institutions that serve him. In this sense he is a part of the financial industry and shares the general systemic risk (though, of course, this varies in individual cases and portfolios) His position is no different than hers - the enriched with stocks ex-wife of an investment banker after the divorce (also a kind of exit strategy, btw).
kleptco 15y ago
People who tend to accumulate lot's of money tend to be sociopaths and should be closely monitored and controlled.
mattmorgan 15y ago
If some of the top 1% can't retire comfortably, then who IS retiring these days?
HSO 15y ago
Coming from HN, this just caught my eye on the NYT: "Even Marked Up, Luxury Goods Fly Off Shelves" (http://www.nytimes.com/2011/08/04/business/sales-of-luxury-goods-are-recovering-strongly.html?hpw&pagewanted=all http://www.nytimes.com/2011/08/04/business/sales-of-luxury-g...) while the country struggles to pay its debts and is losing its future. Just goes to show how separated the top .5% of American society has become from the rest... What I as a an "Asian-European" will never get is the unmitigated adoration of material wealth in American society/mass culture. Can't help but feel that is also a part of the problem. I mean, you don't have to be all ethical and bright to realize that Einstein, for instance, was not particularly wealthy and yet deserved (and commanded) orders of magnitude more respect than your typical billionaire. What's with the obsession about bling?
- mattmorgan 15y ago
  > you don't have to be all ethical and bright to realize Yes, you do. Perhaps these traits are more rare than you realize. You're not just coaxing me to tell you that you are special, right? :)
sekou 15y ago
If there is a reluctance among the very wealthy to pay taxes, I'd guess that they don't trust a government that they believe to be inefficient, and that they see no benefit in paying taxes for themselves or their businesses. It seems like in order to get into that top .5 percent, you'd usually have to have a certain kind of perspective about reality, and to change the mindset of someone who takes every possible action in terms what's best for the growth of their wealth or their business might not be easy, sometimes close to impossible. Regulation is important here to keep these folks from getting carried away. You'd have to get them to see the value in growing the economy as a whole and how that serves their interest. And hey, they may already know that and just not think the government is any good at growing the economy. I guess it's about finding common ground and moving in a way that the very wealthy and everyone else thinks is beneficial and responsible.
- Klinky 15y ago
  I think most of the reason you can't trust the government is because these people are pulling the strings of the government. When you have a political structure where money means everything, money buys power. These people don't pay taxes because they have built the system so they don't have to. It's not that they don't trust the .gov, they essentially are the .gov.
mahyarm 15y ago
Nice to know the numbers.
yummyfajitas 15y ago
The author of this article seems to be trying to confuse things: Membership in this elite group is likely to come from being involved in some aspect of the financial services or banking industry, real estate development involved with those industries, or government contracting. What does "involved in some aspect" mean? ...built a small company and was acquired with stock from a multi-national. Stock is often called a "paper" asset...CEO of a medium-cap tech company...another was able to amass $12M after taxes by her early thirties from stock options as a high level programmer in a successful IT company.
- noahth 15y ago
  I agree that those examples are not great at conveying the main point he's trying to make, but let's consider for a moment that the top .1% evaluates to a larger number than 5. Maybe he was calling out notable exceptions, or maybe it's just a poorly edited piece of writing.
  - neuroelectronic 15y ago
    He was calling out notable exceptions... | but it's infrequent to meet one whose wealth wasn't acquired through direct or indirect participation in the financial and banking industries.
    - yummyfajitas 15y ago
      I don't think he was calling out exceptions. The paragraph intersperses people working in finance (or their ex-wives) with people not working in finance and draws no distinction between them. "One client runs a division of a major international investment bank..." In fact, one particular sentence lists both financial wealth and non-financial wealth: "Another client with a net worth in the $10M range is the ex-wife of a managing director of a major investment bank, while another was able to amass $12M after taxes by her early thirties from stock options as a high level programmer in a successful IT company." But maybe noahth is right, and the article is just poorly edited.
- neuroelectronic 15y ago
arjunnarayan 15y ago
There's a pretty simple solution: Abolish the capital gains tax, and tax all capital gains at the income tax rate. There is no more "capital gain". Only income. Whether your income was earned through labor or rents on capital that you own seems rather irrelevant to me.
- lionhearted 15y ago
  Let's think about secondary effects. What percent of very wealthy Americans do you think would renounce their citizenship based on this? How much less investment capital would there be in the USA based on that? Note: Not asking for a value judgment ("good riddance if they do!" - not productive). Just your estimate as to what percent of wealthy Americans would give up their citizenship and how much less investment capital would result. It's an important detail to consider.
  - ww520 15y ago
    The wealthy can renounce U.S. citizenship and lose the protection of U.S. system on their properties. Just don't cry when some thugs in their new home island state rob them of their wealth. The U.S. system provides the scalability for these people to make vast wealth. Shouldn't they pay it back to keep it up? The system is expensive to upkeep. There ain't no free lunch.
    - econgeeker 15y ago
      You think property rights don't exist elsewhere? The only "free lunch" is the one paid for with stolen money, e.g.: taxes. The rich are leaving and renouncing. There are a lot of countries out there, and many of them provide a more hospitable climate for wealth.
  - rayiner 15y ago
    Renounce their citizenship to go where? Europe (which is far less friendly to the rich)? Asia (what's the point of being rich if you have to live in the developing world?) Fears of wealthy people leaving are a red-herring. Plus, who says we have a shortage of investment capital in the US? There is a ton of money floating around from pension funds and 401k accounts, even leaving out the money held by the very wealthy. If you look at the economy today, it's absurd to say that lack of capital is the reason for the lack of top-line growth.
nazgulnarsil 15y ago
This is encouraging. Want to know what a truly sick economy looks like? One where the top 1% inherited their assets/incomes. Ignoring the huge selection effects in talking about the top .1% of winners in the financial markets is silly.
- Duff 15y ago
  What planet are you from? This guy's mega-rich clients are mostly from "financial services, real estate and government contracting". All of those things are either indirectly or directly subsidized by the US taxpayer. So the public is borrowing money and these folks are capitalizing it. And the Republicans claim to not be in favor of redistribution of wealth! The bizarre thing is that if you looked at an analysis like this 25, 50, 100, 150 years ago, the picture would be different. The robber barons of the past built things, employed people. Investment bankers lobby for regulation to drum up business, and gouge people for their services, whatever they are.
  - nazgulnarsil 15y ago
    Things aren't great. I'm not saying that. I'm not an apologist for the pretend free-market. I'm just saying this isn't the doom and gloom the original author or the vast majority of readers will probably think. WHat do you think 99% of human history looks like anyway? It looks like a boot stomping on a human face. Decrying the winners of the financial game, rigged though it is, as villains is just laughable compared to anything except rich white people problems.
srbloom 15y ago
I already knew the about the vast disparity in the top 1% of earners, but I did not know how difficult it is to retire comfortably. A 30-year retirement is quite a luxury.
- pyoung 15y ago
  Who knew that 'Live fast, love hard, die Young' would also be a fiscally responsible lifestyle!
torstesu 15y ago
Reminds me of the Citigroup reports on plutonomy that was allegedly leaked. The reports give an interesting, and to some degree offensive, look into the mindset of the plutocrats -- that is, the richest of the rich http://dl.dropbox.com/u/810028/101001citigroup-plutonomy-report-pt1.pdf http://dl.dropbox.com/u/810028/101001citigroup-plutonomy-rep... http://dl.dropbox.com/u/810028/101001citigroup-plutonomy-report-pt2.pdf http://dl.dropbox.com/u/810028/101001citigroup-plutonomy-rep...
numlocked 15y ago
Another client with a net worth in the $10M range is the ex-wife of a managing director of a major investment bank, while another was able to amass $12M after taxes by her early thirties from stock options as a high level programmer in a successful IT company. The picture is clear; entry into the top 0.5% and, particularly, the top 0.1% is usually the result of some association with the financial industry and its creations. I find it questionable as to whether the majority in this group actually adds value or simply diverts value from the US economy and business into its pockets and the pockets of the uber-wealthy who hire them. This paragraph ruffled my feathers quite a bit. It's overreaching to say that a programmer who managed to make out like a bandit when their company hit it big is just "diverting value from the US economy". That scenario is quite a bit different than, say, profiting off of elaborate financial engineering. And of course large amounts of money have "ties" to the financial industry. What the heck else are you going to do with the money? Equating a programmer who happened to strike it rich during an IPO (presumably) with an investment banker as both being tied to the financial services industry is ridiculous.
- intended 15y ago
  To unruffle your feathers a bit - I read this article earlier this week on a finance blog. To an extent, the language and profession influence here is slanted towards people following the financial readers. His larger thread is about how the lower 5% are different from the top 1%. That the top 1% is made up primarily of finance types, but that he has clients who have reached the top 1% from different entry points.
- forensic 15y ago
  Programmers who get acquired are being acquired (i.e. paid) mostly by people in the financial industry. IPOs are largely driven by large investment houses which are managed by people in the financial industry. The financial industry itself is really just a word that describes people who decide where to direct vast sums of money. As soon as you are directing vast sums of money you get labeled as part of the financial industry.
deleted 15y ago
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- InclinedPlane 15y ago
  Pass. If you think that the state of America's economy today in any way requires violent insurrection to "rectify" then you have either a bizarrely warped sense of reality or a very unusual set of ideals.
rmason 15y ago
Take a good look at the Forbes 400. The vast majority of them are entrepreneurs and though a sizeable number made their money from the financial industry it's no where near a majority - not even close. http://www.forbes.com/wealth/forbes-400/list http://www.forbes.com/wealth/forbes-400/list
- deleted 15y ago
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- tedkimble 15y ago
  What's your point? The author is talking about the top 0.5%, or even just the top 0.1%. The Forbes 400 represents the top 0.0000132%. Sure, maybe entrepreneurs are the majority in that group, but don't trick yourself into thinking the other 1.5 million in the top 0.5% are too.
  - rmason 15y ago
    We don't have the Forbes 4 million to view. But for every Zuckerberg on that list there are more than a few members of that 0.1% from members companies on that list. I am not doubting that the financial industry influence is quite concentrated compared to others, but I am not convinced he's totally proven his case. Maybe the firm he represents has an outsized proportion of financial people as their clients.
    - Tsagadai 15y ago
      Look at the filings for big companies. Usually the top incomes and options are given to the CEO, COO and CFO. CFOs are often sitting on large sacks of money and directly participating in the finance industry. Even companies with no other ties to finance or banking are usually playing around with the same mechanisms as hedge funds, banks and other investment organisations. You are making the mistake of thinking the only income a business makes today is from its core products and services. Most large businesses are making plenty of income from interest and investments if they aren't overflowing with debt.
- 15y ago
aj700 15y ago
Possible self-rectification Elite keeps serfs ignorant by providing no economics education. Voters fail to grasp debt situation. US soft defaults, inflation etc. Dollar loses preeminence, 50% of value, the unwarranted part. Massive inflation affecting all imports, which is most of what people buy, since America makes very little. Inflation acts as wealth tax, and transfers value from old to young. Many factories move (back) to US. More jobs. Less inequality. So, I think the demand for dollars from overseas investors who want safety really hurts the US. You could do all this without the evaluation if you would start seeing China as a threat and get protectionist now. Autarchy, in fact.
- rayiner 15y ago
  So in a modern economy, accumulated wealth as an "earmark" on current and future productivity. People don't buy food and store it for retirement. They buy shares in Intel and get dividends from the labor of future workers to pay for their retirement. The current state of affairs seems to be one where too much has gotten earmarked. Those booming corporate profits that come from layoffs rather than above-the-line growth are going partly to CEOs, sure, but they're going mostly to retirement, pension, etc, funds. Retirees/near-retirees earmarking future productivity. I think inflation is inevitable as the younger generation decides to reallocate this distribution of the fruits of its own labor.
cjy 15y ago
I found this article poorly written and defended. I didn't find it HN worthy. It is basically an investment manager complaining that the wealthiest Americans are mostly in finance and don't pay enough taxes because most of their earnings are from capital gains. He makes a lot of presuppositions in his writing that he never defends. For example: "I asked if her colleagues talked about or understood how much damage was created in the broader economy from their activities." How does finance destroy the broader economy in general? Liquid functional capital markets are critical for a stable economy. Finance is only bad for the economy when incentives are structures so that government limits the downside. "America's top corporations reported 31% profit growth and a 31% reduction in taxes, the latter due to profit outsourcing to low tax rate countries." Outsourcing is not bad. He treats it like it is a dirty world. Companies should have work done where it is most efficient. Google comparative advantage. "It wasn't the hard-working 99.5%" Because the top .5% aren't hard working. "In my view, the American dream of striking it rich is merely a well-marketed fantasy that keeps the bottom 99.5% hoping for better and prevents social and political instability. The odds of getting into that top 0.5% are very slim and the door is kept firmly shut by those within it." By definition, the odds of getting into the top .5% have to be very slim because only .5% of the population can get in there. Also, I should note that the lower 99.5% benefit from lower capital gains taxes when it comes to appreciation on their homes. Obviously, this hasn't been a benefit lately. But, this is important given that the home constitutes the biggest chunk of net worth for many families.
- rayiner 15y ago
  > How does finance destroy the broader economy in general? Liquid functional capital markets are critical for a stable economy. Finance is only bad for the economy when incentives are structures so that government limits the downside. False dichotomy. The article talks about the current financial system in the US hurting the economy. It's not suggesting dismantling the financial system in general. Step back for a moment. The financial industry is infrastructure. It's there to grease the wheels of productive industry. It facilitates growth, but cannot in itself create that growth. Now, last year the financial industry accounted for something like 1/3 of corporate profits. It's gotten absolutely immense. Do we need such massive institutions just to create "liquid functional capital markets?" Are these companies so profitable because they're really creating enormous amounts of value for the economy, or because being close to the money makes it easier to justify taking a percentage cut of the money flowing through the system? Now, I'm not attacking them just because they're profitable. But to an extent they're profitable because the benefit tremendously from government protection. When Apple innovates and sells iPhones, they pay 35% tax on those profits, but when a trader at Goldman moves money around to make profits, they pay less than half that in taxes. If we believe that tax rates create incentive structures, does it really make sense to incentivize the latter so much more heavily than the former?
sigil 15y ago
Common fallacy: personifying "the top N%" as if it were some mostly static set of people -- hard for anyone else to break in, rare that anyone falls out once they make it in. The old class system anxiety. In reality, the further you get towards the top, the harder it gets to stay there: The composition of the very top income groups changed dramatically over time. Less than half (39 percent or 42 percent depending on the measure) of those in the top 1 percent in 1996 were still in the top 1 percent in 2005. Less than one-fourth of the individuals in the top 1/100th percent in 1996 remained in that group in 2005. [1] Here's another study with similar results across all income brackets. [2] None of the brackets are very stable; people move around quite a bit. Or, we could just sit around reading collections of personal anecdotes. Seriously, why is this article on the front page? [1] http://www.entrepreneur.com/tradejournals/article/206340741.html http://www.entrepreneur.com/tradejournals/article/206340741.... [2] http://books.google.com/books?id=lhiIyq8ylUMC&lpg=PA146&ots=52lc_0w_bL&dq=tomas%20sowell%20household%20income%20misleading&pg=PA147#v=onepage&q&f=false http://books.google.com/books?id=lhiIyq8ylUMC&lpg=PA146&...
dodo53 15y ago
>One of our clients, net worth in the $60M range, built a small company and was acquired with stock from a multi-national. Stock is often called a "paper" asset. This seems odd (also the example of programmer with stock options later) - so is he saying that because the payment is in equity you're in the financial sector / not producing real value? I'd read that last line as being disparaging about stock because it's "paper". The only example with any bite is the investment banker admitting they think they add no value.
rwmj 15y ago
Be interesting to get comparative figures for France pre-revolution.
pedram 15y ago
It's interesting how boldly he states on the front page that "conspiracy theories are wrong": http://sociology.ucsc.edu/whorulesamerica/ http://sociology.ucsc.edu/whorulesamerica/ Why would some rich people conspire to get more power? That would be immoral.
tomelders 15y ago
Works out that around 31,191 people rule america. That works out at about 33 people per member of congress. A manageable number I suppose, should they all decide to lobby. I do find it highly unlikely that they'll ever reach a consensus at those sort of numbers though. That said, around 1,245 of the top 0.01% should statistically be sociopaths, which is a concern.
- po 15y ago
  That said, around 1,245 of the top 0.01% should statistically be sociopaths, which is a concern. Assuming an even distribution… which is unlikely.
  - tomelders 15y ago
    the distribution is skewed towards the top 0.1%. According to "This American Life", the percentage of psychopaths* is higher amongst the wealthy and successful than the rest of society. Not sure what the definition of wealthy and successful is though. *I wrote sociopaths by accident, although there's some debate as to wether there's a difference between the two. Also, what's with the down votes? What did I say..?
    - po 15y ago
      Right that was my point... that the top 0.1% would probably have more. How did you arrive at the ~1k number you did? By extrapolating from general population incidence of sociopaths? That only works with even distribution.
      - tomelders 15y ago
        I wasn't being totally serious, but I calculated the top 0.1% of total US population, and then 4% of that, which is apparently the percentage of sociopaths/psychopaths for that section of society. The average across the entire US population is about 1%.
michaelochurch 15y ago
Terrible writing. I'll sum it up: hard working people in the bottom half of the "top 1%" are not evil power-brokers but the most successful professionals. You have to look at the top 0.5 or top 0.1% (I'd argue that even 0.1% is generous) before engaging "the corridors of power", which consists of financial and real estate elites as well as contractors exploiting corrupt government officials. Is this news? A more interesting exposition might be the ruse that exists because Americans conflate these two classes of rich. It has all sorts of pernicious cultural effects. American conservatism is founded on the false belief that the $5m/year bankers are merely scaled-up versions of the $400k/year neurosurgeon who has been working hard since he was 6... when in fact, they're totally different. This is fairly important if one looks at where revolutions begin. They usually start from the high end from the middle class, among people who are "rich" but not especially powerful. The American colonists were very wealthy, but had no clout because they were 3000 miles away from those making the decisions. The French revolutionary thought leaders were wealthy salon denizens, although far from the court at Versailles, and therefore increasingly out-of-power as the clouds darkened over France. History describes such revolutionaries, radicals, and agitators as "middle class" in hindsight (they're our heroes, and the U.S. associates "middle class" reflexively with virtue) but these people did, in fact, come overwhelmingly from the richest ~5 percent. The American "Founding Fathers" were downright rich. Revolutionary agitation usually comes when hard-working, intelligent, and previously fortunate people become out of power and hit a ceiling, either because society is deeply stagnant or because they're actively being deprived of autonomy. Eventually, conflict between the small, closed, social-network-based "upper" elite and the larger, fluid, merit-based "upper-middle" elite reaches a boiling point. It was this way at the end of the 18th century in America and France, and it will very likely be this way in the major conflict of the first third of the 21st century. The danger is that the conservative American has been misled into believing that the more noble elite ("elitist liberal intellectuals") is the oppressor while the truly damaging elite is held up as the good one, as if there were any similarity between a $20m/year, fifth-generation-wealthy banker and "Joe the Plumber". There's not. But conservative Americans have been led to believe that bankers are hard-working people just like them while "intellectuals" are an elitist enemy oppressor. Culture is, in the U.S., slowly replacing race as the elite's favorite divide-and-conquer mechanism. American conservatism is a machine for driving a wedge between the people who are trying to save this society ("liberal intellectuals", although neither word should be pejorative) and the common people of the country they are trying to save. No news in the OP. The world is run by a morally debased and increasingly incompetent oligarchy, heavily intertwined with the banking system and with about 40% of its membership in the U.S. upper class. That was only news in 2008 to people who weren't paying attention.
kds 15y ago
"Give me control of a nation's money supply, and I care not who makes its laws." -- Mayer Amschel Rothschild (1744 - 1812), a popularly-alleged quote
ch 15y ago
"Ordinary citizens in the bottom 99.9% are largely not aware of these systems, do not understand how they work, are unlikely to participate in them, and have little likelihood of entering the top 0.5%, much less the top 0.1%." So how does an ordinary citizen become aware of 'these systems' and begin to participate in 'them'?
shapoopy 15y ago
While I appreciate the effort to bring attention to the serious differences between the simply well-off and the astonishingly-rich-and-powerful, I'm having trouble wrapping my head around some of this: "While income and lifestyle are all relative, an after-tax income between $6.6k and $8.3k per month today will hardly buy the fantasy lifestyles that Americans see on TV and would consider 'rich.' In many areas in California or the East Coast, this positions one squarely in the hard working upper-middle class, and strict budgeting will be essential. An income of $190k post tax or $15.8k per month will certainly buy a nice lifestyle but is far from rich." What in the hell? Where I come from, six figures is rich, period. I grew up in a household whose yearly income was a bit over $100,000 (pre-tax), and had no delusions about my place in the economy. Sure, weren't "free from financial worry," but we nonetheless could afford the occasional vacation and a new or semi-new car when we needed it. My significant other comes from a place where $50,000 each year (pre-tax) is considered rich (and this in the apparently-mythical California, no less). She grew up with a pre-tax annual income of less than $10,000. While it's inaccurate an potentially damaging to misrepresent the degree to which it truly is the super-rich that benefit most dramatically from our economy, it also seems just as potentially damaging to write as though we really are all in the middle-class. This article seems to utterly silence the existence of poverty and the working class in order to make its point. Maybe I just come from one of those strange parts of the country where we still have backwards things like "industry" and a "proletariat." I suspect, however, there's a lot more folks from places like where I'm from than places like the strange utopia this guy lives in. Uh, </end_rant>?
irisdai 15y ago
Koch Brother-backed tea party is a dangerous sign of this claim, if the law and public allow top 0.?1% to control the psychopath of US. So-called "small government" is just an excuse of going down to dictatorship by the rich few.

362 points by ph0rque 15y ago

It makes perfect sense that most people in the top 0.1% are associated with the financial and banking industries if you know how banks work. Banks, and the Federal Reserve, create new money. They give this money to themselves, and then loan it out. This is as bad as, and effectively equivalent to, counterfeiting. Creating new money, i.e. counterfeiting, i.e. inflation, does not create new wealth. It merely changes the distribution of the purchasing power of the money away from most people who have the money and to the people who get the new money. This is where the wealth of the top 0.1% comes from. Freshly printed money. It is a terrible system. The people with the highest wealth are not contributing in proportion to their wealth. Rather, they are stealing their wealth from the bottom 99.9% by stealing their purchasing power by printing new money. If you would like to read a thorough argument about how fractional reserve banks and the Federal Reserve are scams, read "The Mystery of Banking" by Murray Rothbard. Google it and you will see it is available for free at mises.org. For some reason this subject is very polarized and I get downvoted whenever I explain this. Don't downvote me just because you are uncomfortable with what I'm saying. Note that I am not ignorant. I have learned about economics. It just so happens that when trying to understand the issues myself, I have arrived conclusions that are not mainstream. But they are the correct conclusions in so far as I presently understand.

danenania 15y ago
Yep, fiat money systems are at the core of modern wealth inequality. Regulations and other measures will have little impact until we address this. Bailouts, taxes, budgets, deficits, regulations: none of it has much relative quantitative significance when the Fed is doling out many trillions behind the scenes. This money directly benefits the very wealthiest and regressively dilutes the rest on a scale that vastly exceeds the effects of any other policies. Abuse of fiat money is the ultimate economic elephant in the room.
- deleted 15y ago
  [deleted]
- lucasjung 15y ago
  It's funny that you say this, because prior to the adoption of fiat money systems, class-warfare leaders agitated for decades (centuries, even?) in favor of a system of fiat money, because they saw fiat money as a way to reduce wealth inequality. The logic goes like this: 1: In general, poor people borrow money from rich people. Interest payments on these loans is a transfer of wealth from the poor to the rich: an increase in debt inequality. 2: Fiat money is much more subject to inflation than commodity money. 3: When inflation occurs, the real value of debts is reduced. 4: By adopting fiat money and the accompanying continuous inflation, a situation would be created whereby poor people could borrow money from the rich, use it to create wealth for themselves, and then effectively pay back less than they had borrowed. I'm not saying they were right, I'm just describing their ideas. I find the whole situation ironic.
waterlesscloud 15y ago
It makes sense that the members of the top 0.1% that a professional money manager comes in contact with are associated with the financial and banking industries. Yes, that I agree with.
eternal_skeptic 15y ago
You say "Banks, and the Federal Reserve, create new money". That is factually untrue: only the Federal Reserve can legally create new money in the US. Since you mentioned it by name, you are definitely talking about the US, but the same state holds in virtually all developed countries as well: one designated "central bank" entity creates money, the others don't. Per your main point, yes, the central bank creates money, but it doesn't "give" it to anyone. Seriously, you describe it as if there's a "printing party" at the FR, and only the rich get invited to grab booty bags stuffed with trillions of freshly minted dollars. The truth, of course, is that the FR (and secondary banks) can only lend that money. They lend it for a variety of people and reasons. Not too long ago, they lent it to too many people. Not because their kind heart, but because it's a business: they lend it out hoping to get it back with interest. Who do they lend it out to? Well, to some of the people here, for starters. Because what you failed to consider is that if I'm already at the top 0.1%, the best thing for me is to keep the situation static: not printing any new money. Because you're talking about the top 0.1% dollar earners and holders. Inflation dilutes their assets and earnings just like everybody else's, and in absolute values, they lose more. Lending is (generally) an instrument of economic growth, a way to fund innovation and investment in production of new products and services. Guess what, if nobody can get loans, new businesses and startups won't get funding either.
- Astrohacker 15y ago
  Here's how banks counterfeit money. You deposit $100. The bank loans out $80 of your money to someone else. They put that money back in the bank. The bank now has $100 - all your money. But your checking account says $100, and the loanee's checking account says $80, for a total of $180. The bank has now effectively created--that is, counterfeited--$80 in new money. They gave this new money to themselves, and then loaned it out. Since their reserves are still over 20% (or whatever the present reserve requirement is), they keep doing this until 80% of the money is money they have counterfeited and loaned out. And the Fed does give money to banks. They gave loans at 0% interest to Goldman Sachs who then buys government debt with it and earns interest >0%. That is the same as giving them the new money. And that is only one way, but there are others. Another way is by buying government debt from banks using freshly printed money at prices that are necessarily above what the market value would be if there wasn't an institution like the Fed that can print new money any time it wants to buy stuff.
shawndrost 15y ago
"counterfeiting... stealing... scams..." "For some reason this subject is very polarized." Baffling!
webXL 15y ago
As much as I favor low taxation and hate class warfare attacks on the wealthy, I think we ought to tax "freshly printed money" at a much higher rate, or figure out a more equitable way to create money... if we have to create money. Our financial system (the one created and regulated by the U.S. Federal Government) is so corrupt, as evident by TARP and the lack of lending and recovery. The only way its gonna change is if the dollar stops acting as the world's reserve currency, i.e. collapses. Only then do I think we have a chance of replacing it with something better. Don't hold your breath. The rest of the world is just as corrupt and financially unhealthy, so the dollar will remain superior. Edit: Oh come on, why the downvote?
- Astrohacker 15y ago
  There's no reason to create new money[1]. As I argued in my post, all inflation can do is change the distribution of the purchasing power of the money... not create new wealth. But the market already handles the distribution or purchasing power just fine through normal market forces. Good businesses get more purchasing power and grow. Bad businesses lose purchasing power until they collapse. The only reason to inflate the money supply is to scam everyone because you get all the new money. As for replacing the dollar, bitcoin is the only reasonable alternative that presently exists. Fiat currencies almost certainly will never work, because the temptation to inflate them is too great. Gold can't work because you can't send it over the internet. But bitcoins both can't be inflated and can be sent over the internet. No government will decide to switch from dollars/Euros/whatever to bitcoins. Rather, it will be the market that chooses them if they are appropriate. [1] If you actually halted inflation of the dollar, then as technology continues to increase the supply of everything, eventually the dollar would be so valuable that a cup of coffee would cost less than a penny. You would need to make new monetary units worth less than a penny so that cheap things like coffee can be purchased with them. You would do this by taking your pennies to a bank and getting, say, 100 penny pennies with each penny, and then a cup of coffee could cost 78 penny pennies.
  - webXL 15y ago
    Right, new dollars have to enter the economy somewhere, and the purchasing power is increased at those points of entry, decreased everywhere else by an proportional amount. I'm all for bitcoin but the powers at be will find a way to stop it if it catches on. But the cat is out of the bag. I just can't see the dollar standing up to all the benefits a technology like bitcoin affords.
eurohacker 15y ago
there is a documentary called "Money Masters" available on Youtube that explains the history of this Federal Reserve monetary system, Fed is basicly unconstitutional private institution
trunnell 15y ago
This misses the point of the article, which is that many in the top 0.1% got there from some form of self-dealing. His argument is that they are profiting from their position in the economy rather than from the value they add. And by position, he doesn't mean nearness to the money press. I think he means nearness to the center of wealth and power, which at the moment happens to be the financial industry. > This is where the wealth of the top 0.1% comes from. Freshly printed money. I'm sorry but this statement is very wrong. Newly printed money enters the economy through interbank loans. If I borrow $100 my net worth is exactly the same as before. I'm not any wealthier. To set the record straight: the ability to expand or contract the money supply is an essential tool in managing the economy: the Fed can cool things down in a bubble (by raising rates and contracting the money supply) or heat things up in a downturn (by lowering rates and expanding the money supply). Otherwise, inflation or deflation can spiral out of control. > Creating new money, i.e. counterfeiting, i.e. inflation, does not create new wealth. Ok, but creating new money in an effort to grow the economy while managing inflation does create new wealth-- or more accurately, creates an environment in which wealth can more easily be created. Especially in comparison to the alternative: an unmanaged economy that is completely at the mercy of panics and bubbles. Think the last crash was bad? The unemployment rate rose to 14% during the six years following the panic of 1873, which was largely caused and substantially prolonged by the inflexibility of the money supply (which was still tied to silver and gold). I'm getting a little tired of the anti-fiat currency crowd. You say you learned about economics; you might want to get your money back. I'm sure you're a very smart person, astrohacker, but your perspective here is unsupported and stands in direct contradiction to the last 80 years of economic thought. And no, the bitcoin crowd do not count as economists.
- watchandwait 15y ago
  The self-dealing by the banks since 2008 has been almost wholly underwritten by the Fed and the Treasury. Beyond TARP there are myriad guarantees, lending programs, and regulatory exemptions, all designed to provide the banks with greater profit and allowing them to offload risk, usually to the Fed or the taxpayer. Indeed, if you look closely, much of the "profit" in the banking system today is coming from banks borrowing at Fed subsidized rates and lending that money back to the U.S. government.
djm 15y ago
Agreed. Inflation amounts to stealing from people with savings. I haven't read the book you linked to yet but I just wanted to chime in and reference another great little book "How and economy grows and why it crashes" by Peter & Andrew Schiff. It's an extremely readable cartoon book that explains recent American economic history in a comic fashion and shows the differences between keynesian and austrian thinking on the subject.

auganov 15y ago

A typical article spreading hate towards the rich portraying them as people that have insight into secret evil money making techniques unavailable to other people. Any ways that hate has always been there and I don't think it's going anywhere. Just delete it from HN, no need for it here.

jwingy 15y ago

I personally don't care much that these people are wealthy or even able to evade paying as much taxes as we do. The problem I have, and the problem I think the author is trying to expose is that DUE to their wealth, these top 0.1% are able to exert a vastly disproportionate amount of influence on our political and legal system, often times to the detriment of the other 99.9% of us, and preventing politicians from making the level headed, balanced decisions they need to make. Even if the people as a organized collective can get together to rally against a certain issue, and even if that group can win, anybody with lobbying power (e.g. money) can simply lobby again at a later time to throw in some rider on a completely unrelated bill to pass some law getting what they want.

mkramlich 15y ago

This started off sounding like it was going to be a Repub/TeaParty/Koch-style political propaganda piece, but the further I went into it the more pleasantly surprised I became. Makes some good points about the distinction between different groups and tiers at the top of the American income ladders. It's true that the concerns and goals and challenges of upper income "working class" folks like small business entrepreneurs, doctors, lawyers are different than the folks from Real Money and the big financial firms, banks, executives of huge multi-nationals, etc. I also have become increasingly confident in the theory that the so-called credit crisis a few years ago was basically a setup or con job. There's a lot of evidence, at least at the level of circumstance and motive and means, aligned with it being true.

aodin 15y ago
To those curious about this claim, I would recommend Nomi Prin's "It takes a Pillage". She, a former manager at Goldman Sachs, makes a strong argument for the bailouts being criminal.

recampbell 15y ago

Regarding those who will only bring home 15k per month post retirement: "And, for those folks who made enough to accumulate this much wealth during their working years, the reduction in income and lifestyle during retirement can be stressful." This is where I started laughing out loud! What a profound lack of perspective.

forensic 15y ago
If you're unable to identify with those people, then you lack perspective as well. Having perspective includes the perspectives of the top 1% as well as the perspectives as the bottom 99%.
danenania 15y ago
Sounds like simply an observed fact to me. He didn't say he felt sorry for them, just that it causes them stress. The point was that these people aren't beyond financial worry.
cantbecool 15y ago
I too did the same exact thing, and I share your opinion. People in the upper echelon, especially in the finance industry, have lost their minds. What ever happened to aphorism living below your means. I guess people that the quote references are not financially prudent, and honestly, deserve to suffer in my eyes, since they probably caused this mess to begin with. Shit, to be honest, I'd be lucky to net 1/7th a month of that income while working this year. Hopefully, if everything goes better than plan, I'd be able to land a fulfilling job where I can net 1/6th, but I am highly skeptical though.
deleted 15y ago
[deleted]
rayiner 15y ago
The point of the article isn't that we should pity those folks making "only" $300k/year. They have nice houses and nice cars and eat at nice restaurants. However, they still need to worry about money. If your $300k/year is coming from your labor as a lawyer, and you go blind, your financial situation does a 180. If your $300k/year is coming from dividends on the huge pile of stock you own, that's a totally different ballgame.

rdl 15y ago

Why the fuck does he consider CEOs and others who sell their companies to be "directly connected to the finance industry?" To that extent, a cashier at wal-mart is directly connected to the finance industry because she helps a traded corporation make revenue.

pg 15y ago
As far as I can tell he equates making money from the sale of stock rather than from salary with being part of the finance industry. I stopped reading when I realized that.
- rdl 15y ago
  Yeah, craziness. If he'd be open about his agenda but consistent with the terms reality uses, I'd be fine with it. I actually think carry should be taxed as regular income (except that the people who get carry are the kind of people who could structure to get around this). I'd also be ok with capital gains and regular income being taxed at the same rate IFF that top rate were low (say, 25%) without deductions/credits, AMT, etc. A flat ~25-30% tax for everyone, plus a decent personal exemption (possibly even refundable, so if it's "$20-30k in free money from the government per person per year, paid in cash or paid as a credit against taxes owed", some people can live 100% on the credit and not work. Allowing capital gains to offset capital losses, with carryover, probably is enough privilege to capital gains vs. regular income. It may create some disinvestment at the margin, but there's plenty of capital out there. For a startup founder making $100mm at exit, there isn't really an argument that he'd take the $200k/yr job instead of the $100k/yr job with the shot at the big exit due to being taxed 25% vs. 15% at exit; the uncertainty remains in the "will my company sell (and will it be for big money)", not the tax rate at that time. That said, I'm totally happy taking every capital gain benefit available to me; waiting 5 years for a $10mm tax-free capital gain (Small Business Jobs Act of 2010, good for investments including founder shares purchased until 12-31-2011) is pretty damn nice.
- kds 15y ago
  But in a way this rings true - after an exit event if the former CEO/founder gets mostly stocks/paper his financial well-being is deeply connected with the general well-being of Wall Street, as a system. The more bullish is the market - the better for him, and for the whole ecosystem of financial institutions that serve him. In this sense he is a part of the financial industry and shares the general systemic risk (though, of course, this varies in individual cases and portfolios) His position is no different than hers - the enriched with stocks ex-wife of an investment banker after the divorce (also a kind of exit strategy, btw).

kleptco 15y ago

People who tend to accumulate lot's of money tend to be sociopaths and should be closely monitored and controlled.

mattmorgan 15y ago

If some of the top 1% can't retire comfortably, then who IS retiring these days?

HSO 15y ago

Coming from HN, this just caught my eye on the NYT: "Even Marked Up, Luxury Goods Fly Off Shelves" (http://www.nytimes.com/2011/08/04/business/sales-of-luxury-goods-are-recovering-strongly.html?hpw&pagewanted=all http://www.nytimes.com/2011/08/04/business/sales-of-luxury-g...) while the country struggles to pay its debts and is losing its future. Just goes to show how separated the top .5% of American society has become from the rest... What I as a an "Asian-European" will never get is the unmitigated adoration of material wealth in American society/mass culture. Can't help but feel that is also a part of the problem. I mean, you don't have to be all ethical and bright to realize that Einstein, for instance, was not particularly wealthy and yet deserved (and commanded) orders of magnitude more respect than your typical billionaire. What's with the obsession about bling?

mattmorgan 15y ago
> you don't have to be all ethical and bright to realize Yes, you do. Perhaps these traits are more rare than you realize. You're not just coaxing me to tell you that you are special, right? :)

sekou 15y ago

If there is a reluctance among the very wealthy to pay taxes, I'd guess that they don't trust a government that they believe to be inefficient, and that they see no benefit in paying taxes for themselves or their businesses. It seems like in order to get into that top .5 percent, you'd usually have to have a certain kind of perspective about reality, and to change the mindset of someone who takes every possible action in terms what's best for the growth of their wealth or their business might not be easy, sometimes close to impossible. Regulation is important here to keep these folks from getting carried away. You'd have to get them to see the value in growing the economy as a whole and how that serves their interest. And hey, they may already know that and just not think the government is any good at growing the economy. I guess it's about finding common ground and moving in a way that the very wealthy and everyone else thinks is beneficial and responsible.

Klinky 15y ago
I think most of the reason you can't trust the government is because these people are pulling the strings of the government. When you have a political structure where money means everything, money buys power. These people don't pay taxes because they have built the system so they don't have to. It's not that they don't trust the .gov, they essentially are the .gov.

mahyarm 15y ago

Nice to know the numbers.

yummyfajitas 15y ago

The author of this article seems to be trying to confuse things: Membership in this elite group is likely to come from being involved in some aspect of the financial services or banking industry, real estate development involved with those industries, or government contracting. What does "involved in some aspect" mean? ...built a small company and was acquired with stock from a multi-national. Stock is often called a "paper" asset...CEO of a medium-cap tech company...another was able to amass $12M after taxes by her early thirties from stock options as a high level programmer in a successful IT company.

noahth 15y ago
I agree that those examples are not great at conveying the main point he's trying to make, but let's consider for a moment that the top .1% evaluates to a larger number than 5. Maybe he was calling out notable exceptions, or maybe it's just a poorly edited piece of writing.
- neuroelectronic 15y ago
  He was calling out notable exceptions... | but it's infrequent to meet one whose wealth wasn't acquired through direct or indirect participation in the financial and banking industries.
  - yummyfajitas 15y ago
    I don't think he was calling out exceptions. The paragraph intersperses people working in finance (or their ex-wives) with people not working in finance and draws no distinction between them. "One client runs a division of a major international investment bank..." In fact, one particular sentence lists both financial wealth and non-financial wealth: "Another client with a net worth in the $10M range is the ex-wife of a managing director of a major investment bank, while another was able to amass $12M after taxes by her early thirties from stock options as a high level programmer in a successful IT company." But maybe noahth is right, and the article is just poorly edited.
neuroelectronic 15y ago

arjunnarayan 15y ago

There's a pretty simple solution: Abolish the capital gains tax, and tax all capital gains at the income tax rate. There is no more "capital gain". Only income. Whether your income was earned through labor or rents on capital that you own seems rather irrelevant to me.

lionhearted 15y ago
Let's think about secondary effects. What percent of very wealthy Americans do you think would renounce their citizenship based on this? How much less investment capital would there be in the USA based on that? Note: Not asking for a value judgment ("good riddance if they do!" - not productive). Just your estimate as to what percent of wealthy Americans would give up their citizenship and how much less investment capital would result. It's an important detail to consider.
- ww520 15y ago
  The wealthy can renounce U.S. citizenship and lose the protection of U.S. system on their properties. Just don't cry when some thugs in their new home island state rob them of their wealth. The U.S. system provides the scalability for these people to make vast wealth. Shouldn't they pay it back to keep it up? The system is expensive to upkeep. There ain't no free lunch.
  - econgeeker 15y ago
    You think property rights don't exist elsewhere? The only "free lunch" is the one paid for with stolen money, e.g.: taxes. The rich are leaving and renouncing. There are a lot of countries out there, and many of them provide a more hospitable climate for wealth.
- rayiner 15y ago
  Renounce their citizenship to go where? Europe (which is far less friendly to the rich)? Asia (what's the point of being rich if you have to live in the developing world?) Fears of wealthy people leaving are a red-herring. Plus, who says we have a shortage of investment capital in the US? There is a ton of money floating around from pension funds and 401k accounts, even leaving out the money held by the very wealthy. If you look at the economy today, it's absurd to say that lack of capital is the reason for the lack of top-line growth.

nazgulnarsil 15y ago

This is encouraging. Want to know what a truly sick economy looks like? One where the top 1% inherited their assets/incomes. Ignoring the huge selection effects in talking about the top .1% of winners in the financial markets is silly.

Duff 15y ago
What planet are you from? This guy's mega-rich clients are mostly from "financial services, real estate and government contracting". All of those things are either indirectly or directly subsidized by the US taxpayer. So the public is borrowing money and these folks are capitalizing it. And the Republicans claim to not be in favor of redistribution of wealth! The bizarre thing is that if you looked at an analysis like this 25, 50, 100, 150 years ago, the picture would be different. The robber barons of the past built things, employed people. Investment bankers lobby for regulation to drum up business, and gouge people for their services, whatever they are.
- nazgulnarsil 15y ago
  Things aren't great. I'm not saying that. I'm not an apologist for the pretend free-market. I'm just saying this isn't the doom and gloom the original author or the vast majority of readers will probably think. WHat do you think 99% of human history looks like anyway? It looks like a boot stomping on a human face. Decrying the winners of the financial game, rigged though it is, as villains is just laughable compared to anything except rich white people problems.

srbloom 15y ago

I already knew the about the vast disparity in the top 1% of earners, but I did not know how difficult it is to retire comfortably. A 30-year retirement is quite a luxury.

pyoung 15y ago
Who knew that 'Live fast, love hard, die Young' would also be a fiscally responsible lifestyle!

torstesu 15y ago

Reminds me of the Citigroup reports on plutonomy that was allegedly leaked. The reports give an interesting, and to some degree offensive, look into the mindset of the plutocrats -- that is, the richest of the rich http://dl.dropbox.com/u/810028/101001citigroup-plutonomy-report-pt1.pdf http://dl.dropbox.com/u/810028/101001citigroup-plutonomy-rep... http://dl.dropbox.com/u/810028/101001citigroup-plutonomy-report-pt2.pdf http://dl.dropbox.com/u/810028/101001citigroup-plutonomy-rep...

numlocked 15y ago

Another client with a net worth in the $10M range is the ex-wife of a managing director of a major investment bank, while another was able to amass $12M after taxes by her early thirties from stock options as a high level programmer in a successful IT company. The picture is clear; entry into the top 0.5% and, particularly, the top 0.1% is usually the result of some association with the financial industry and its creations. I find it questionable as to whether the majority in this group actually adds value or simply diverts value from the US economy and business into its pockets and the pockets of the uber-wealthy who hire them. This paragraph ruffled my feathers quite a bit. It's overreaching to say that a programmer who managed to make out like a bandit when their company hit it big is just "diverting value from the US economy". That scenario is quite a bit different than, say, profiting off of elaborate financial engineering. And of course large amounts of money have "ties" to the financial industry. What the heck else are you going to do with the money? Equating a programmer who happened to strike it rich during an IPO (presumably) with an investment banker as both being tied to the financial services industry is ridiculous.

intended 15y ago
To unruffle your feathers a bit - I read this article earlier this week on a finance blog. To an extent, the language and profession influence here is slanted towards people following the financial readers. His larger thread is about how the lower 5% are different from the top 1%. That the top 1% is made up primarily of finance types, but that he has clients who have reached the top 1% from different entry points.
forensic 15y ago
Programmers who get acquired are being acquired (i.e. paid) mostly by people in the financial industry. IPOs are largely driven by large investment houses which are managed by people in the financial industry. The financial industry itself is really just a word that describes people who decide where to direct vast sums of money. As soon as you are directing vast sums of money you get labeled as part of the financial industry.

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InclinedPlane 15y ago
Pass. If you think that the state of America's economy today in any way requires violent insurrection to "rectify" then you have either a bizarrely warped sense of reality or a very unusual set of ideals.

rmason 15y ago

Take a good look at the Forbes 400. The vast majority of them are entrepreneurs and though a sizeable number made their money from the financial industry it's no where near a majority - not even close. http://www.forbes.com/wealth/forbes-400/list http://www.forbes.com/wealth/forbes-400/list

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tedkimble 15y ago
What's your point? The author is talking about the top 0.5%, or even just the top 0.1%. The Forbes 400 represents the top 0.0000132%. Sure, maybe entrepreneurs are the majority in that group, but don't trick yourself into thinking the other 1.5 million in the top 0.5% are too.
- rmason 15y ago
  We don't have the Forbes 4 million to view. But for every Zuckerberg on that list there are more than a few members of that 0.1% from members companies on that list. I am not doubting that the financial industry influence is quite concentrated compared to others, but I am not convinced he's totally proven his case. Maybe the firm he represents has an outsized proportion of financial people as their clients.
  - Tsagadai 15y ago
    Look at the filings for big companies. Usually the top incomes and options are given to the CEO, COO and CFO. CFOs are often sitting on large sacks of money and directly participating in the finance industry. Even companies with no other ties to finance or banking are usually playing around with the same mechanisms as hedge funds, banks and other investment organisations. You are making the mistake of thinking the only income a business makes today is from its core products and services. Most large businesses are making plenty of income from interest and investments if they aren't overflowing with debt.
15y ago

aj700 15y ago

Possible self-rectification Elite keeps serfs ignorant by providing no economics education. Voters fail to grasp debt situation. US soft defaults, inflation etc. Dollar loses preeminence, 50% of value, the unwarranted part. Massive inflation affecting all imports, which is most of what people buy, since America makes very little. Inflation acts as wealth tax, and transfers value from old to young. Many factories move (back) to US. More jobs. Less inequality. So, I think the demand for dollars from overseas investors who want safety really hurts the US. You could do all this without the evaluation if you would start seeing China as a threat and get protectionist now. Autarchy, in fact.

rayiner 15y ago
So in a modern economy, accumulated wealth as an "earmark" on current and future productivity. People don't buy food and store it for retirement. They buy shares in Intel and get dividends from the labor of future workers to pay for their retirement. The current state of affairs seems to be one where too much has gotten earmarked. Those booming corporate profits that come from layoffs rather than above-the-line growth are going partly to CEOs, sure, but they're going mostly to retirement, pension, etc, funds. Retirees/near-retirees earmarking future productivity. I think inflation is inevitable as the younger generation decides to reallocate this distribution of the fruits of its own labor.

cjy 15y ago

I found this article poorly written and defended. I didn't find it HN worthy. It is basically an investment manager complaining that the wealthiest Americans are mostly in finance and don't pay enough taxes because most of their earnings are from capital gains. He makes a lot of presuppositions in his writing that he never defends. For example: "I asked if her colleagues talked about or understood how much damage was created in the broader economy from their activities." How does finance destroy the broader economy in general? Liquid functional capital markets are critical for a stable economy. Finance is only bad for the economy when incentives are structures so that government limits the downside. "America's top corporations reported 31% profit growth and a 31% reduction in taxes, the latter due to profit outsourcing to low tax rate countries." Outsourcing is not bad. He treats it like it is a dirty world. Companies should have work done where it is most efficient. Google comparative advantage. "It wasn't the hard-working 99.5%" Because the top .5% aren't hard working. "In my view, the American dream of striking it rich is merely a well-marketed fantasy that keeps the bottom 99.5% hoping for better and prevents social and political instability. The odds of getting into that top 0.5% are very slim and the door is kept firmly shut by those within it." By definition, the odds of getting into the top .5% have to be very slim because only .5% of the population can get in there. Also, I should note that the lower 99.5% benefit from lower capital gains taxes when it comes to appreciation on their homes. Obviously, this hasn't been a benefit lately. But, this is important given that the home constitutes the biggest chunk of net worth for many families.

rayiner 15y ago
> How does finance destroy the broader economy in general? Liquid functional capital markets are critical for a stable economy. Finance is only bad for the economy when incentives are structures so that government limits the downside. False dichotomy. The article talks about the current financial system in the US hurting the economy. It's not suggesting dismantling the financial system in general. Step back for a moment. The financial industry is infrastructure. It's there to grease the wheels of productive industry. It facilitates growth, but cannot in itself create that growth. Now, last year the financial industry accounted for something like 1/3 of corporate profits. It's gotten absolutely immense. Do we need such massive institutions just to create "liquid functional capital markets?" Are these companies so profitable because they're really creating enormous amounts of value for the economy, or because being close to the money makes it easier to justify taking a percentage cut of the money flowing through the system? Now, I'm not attacking them just because they're profitable. But to an extent they're profitable because the benefit tremendously from government protection. When Apple innovates and sells iPhones, they pay 35% tax on those profits, but when a trader at Goldman moves money around to make profits, they pay less than half that in taxes. If we believe that tax rates create incentive structures, does it really make sense to incentivize the latter so much more heavily than the former?

sigil 15y ago

Common fallacy: personifying "the top N%" as if it were some mostly static set of people -- hard for anyone else to break in, rare that anyone falls out once they make it in. The old class system anxiety. In reality, the further you get towards the top, the harder it gets to stay there: The composition of the very top income groups changed dramatically over time. Less than half (39 percent or 42 percent depending on the measure) of those in the top 1 percent in 1996 were still in the top 1 percent in 2005. Less than one-fourth of the individuals in the top 1/100th percent in 1996 remained in that group in 2005. [1] Here's another study with similar results across all income brackets. [2] None of the brackets are very stable; people move around quite a bit. Or, we could just sit around reading collections of personal anecdotes. Seriously, why is this article on the front page? [1] http://www.entrepreneur.com/tradejournals/article/206340741.html http://www.entrepreneur.com/tradejournals/article/206340741.... [2] http://books.google.com/books?id=lhiIyq8ylUMC&lpg=PA146&ots=52lc_0w_bL&dq=tomas%20sowell%20household%20income%20misleading&pg=PA147#v=onepage&q&f=false http://books.google.com/books?id=lhiIyq8ylUMC&lpg=PA146&...

dodo53 15y ago

>One of our clients, net worth in the $60M range, built a small company and was acquired with stock from a multi-national. Stock is often called a "paper" asset. This seems odd (also the example of programmer with stock options later) - so is he saying that because the payment is in equity you're in the financial sector / not producing real value? I'd read that last line as being disparaging about stock because it's "paper". The only example with any bite is the investment banker admitting they think they add no value.

rwmj 15y ago

Be interesting to get comparative figures for France pre-revolution.

pedram 15y ago

It's interesting how boldly he states on the front page that "conspiracy theories are wrong": http://sociology.ucsc.edu/whorulesamerica/ http://sociology.ucsc.edu/whorulesamerica/ Why would some rich people conspire to get more power? That would be immoral.

tomelders 15y ago

Works out that around 31,191 people rule america. That works out at about 33 people per member of congress. A manageable number I suppose, should they all decide to lobby. I do find it highly unlikely that they'll ever reach a consensus at those sort of numbers though. That said, around 1,245 of the top 0.01% should statistically be sociopaths, which is a concern.

po 15y ago
That said, around 1,245 of the top 0.01% should statistically be sociopaths, which is a concern. Assuming an even distribution… which is unlikely.
- tomelders 15y ago
  the distribution is skewed towards the top 0.1%. According to "This American Life", the percentage of psychopaths* is higher amongst the wealthy and successful than the rest of society. Not sure what the definition of wealthy and successful is though. *I wrote sociopaths by accident, although there's some debate as to wether there's a difference between the two. Also, what's with the down votes? What did I say..?
  - po 15y ago
    Right that was my point... that the top 0.1% would probably have more. How did you arrive at the ~1k number you did? By extrapolating from general population incidence of sociopaths? That only works with even distribution.
    - tomelders 15y ago
      I wasn't being totally serious, but I calculated the top 0.1% of total US population, and then 4% of that, which is apparently the percentage of sociopaths/psychopaths for that section of society. The average across the entire US population is about 1%.

michaelochurch 15y ago

Terrible writing. I'll sum it up: hard working people in the bottom half of the "top 1%" are not evil power-brokers but the most successful professionals. You have to look at the top 0.5 or top 0.1% (I'd argue that even 0.1% is generous) before engaging "the corridors of power", which consists of financial and real estate elites as well as contractors exploiting corrupt government officials. Is this news? A more interesting exposition might be the ruse that exists because Americans conflate these two classes of rich. It has all sorts of pernicious cultural effects. American conservatism is founded on the false belief that the $5m/year bankers are merely scaled-up versions of the $400k/year neurosurgeon who has been working hard since he was 6... when in fact, they're totally different. This is fairly important if one looks at where revolutions begin. They usually start from the high end from the middle class, among people who are "rich" but not especially powerful. The American colonists were very wealthy, but had no clout because they were 3000 miles away from those making the decisions. The French revolutionary thought leaders were wealthy salon denizens, although far from the court at Versailles, and therefore increasingly out-of-power as the clouds darkened over France. History describes such revolutionaries, radicals, and agitators as "middle class" in hindsight (they're our heroes, and the U.S. associates "middle class" reflexively with virtue) but these people did, in fact, come overwhelmingly from the richest ~5 percent. The American "Founding Fathers" were downright rich. Revolutionary agitation usually comes when hard-working, intelligent, and previously fortunate people become out of power and hit a ceiling, either because society is deeply stagnant or because they're actively being deprived of autonomy. Eventually, conflict between the small, closed, social-network-based "upper" elite and the larger, fluid, merit-based "upper-middle" elite reaches a boiling point. It was this way at the end of the 18th century in America and France, and it will very likely be this way in the major conflict of the first third of the 21st century. The danger is that the conservative American has been misled into believing that the more noble elite ("elitist liberal intellectuals") is the oppressor while the truly damaging elite is held up as the good one, as if there were any similarity between a $20m/year, fifth-generation-wealthy banker and "Joe the Plumber". There's not. But conservative Americans have been led to believe that bankers are hard-working people just like them while "intellectuals" are an elitist enemy oppressor. Culture is, in the U.S., slowly replacing race as the elite's favorite divide-and-conquer mechanism. American conservatism is a machine for driving a wedge between the people who are trying to save this society ("liberal intellectuals", although neither word should be pejorative) and the common people of the country they are trying to save. No news in the OP. The world is run by a morally debased and increasingly incompetent oligarchy, heavily intertwined with the banking system and with about 40% of its membership in the U.S. upper class. That was only news in 2008 to people who weren't paying attention.

kds 15y ago

"Give me control of a nation's money supply, and I care not who makes its laws." -- Mayer Amschel Rothschild (1744 - 1812), a popularly-alleged quote

ch 15y ago

"Ordinary citizens in the bottom 99.9% are largely not aware of these systems, do not understand how they work, are unlikely to participate in them, and have little likelihood of entering the top 0.5%, much less the top 0.1%." So how does an ordinary citizen become aware of 'these systems' and begin to participate in 'them'?

shapoopy 15y ago

While I appreciate the effort to bring attention to the serious differences between the simply well-off and the astonishingly-rich-and-powerful, I'm having trouble wrapping my head around some of this: "While income and lifestyle are all relative, an after-tax income between $6.6k and $8.3k per month today will hardly buy the fantasy lifestyles that Americans see on TV and would consider 'rich.' In many areas in California or the East Coast, this positions one squarely in the hard working upper-middle class, and strict budgeting will be essential. An income of $190k post tax or $15.8k per month will certainly buy a nice lifestyle but is far from rich." What in the hell? Where I come from, six figures is rich, period. I grew up in a household whose yearly income was a bit over $100,000 (pre-tax), and had no delusions about my place in the economy. Sure, weren't "free from financial worry," but we nonetheless could afford the occasional vacation and a new or semi-new car when we needed it. My significant other comes from a place where $50,000 each year (pre-tax) is considered rich (and this in the apparently-mythical California, no less). She grew up with a pre-tax annual income of less than $10,000. While it's inaccurate an potentially damaging to misrepresent the degree to which it truly is the super-rich that benefit most dramatically from our economy, it also seems just as potentially damaging to write as though we really are all in the middle-class. This article seems to utterly silence the existence of poverty and the working class in order to make its point. Maybe I just come from one of those strange parts of the country where we still have backwards things like "industry" and a "proletariat." I suspect, however, there's a lot more folks from places like where I'm from than places like the strange utopia this guy lives in. Uh, </end_rant>?

irisdai 15y ago

Koch Brother-backed tea party is a dangerous sign of this claim, if the law and public allow top 0.?1% to control the psychopath of US. So-called "small government" is just an excuse of going down to dictatorship by the rich few.