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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

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.
- jonnathanson 15y ago
  This, more or less. Most of the profit in the banking industry comes from being able to take on massive risk, while simultaneously being cushioned from that risk by the government. Risky positions and derivatives are extremely profitable, but for most people -- those without guaranteed bailouts, or cushy borrowing rates -- the risk is too great. For investment banks, as we've seen, the risk is minimal to nonexistant (or at least the banks seem to function as though it is). Traditionally, the role of the financial industry was to "provide access to capital," primarily by underwriting, facilitating, and assisting in the execution of large transactions and deals for corporate clients. This role is, ostensibly at least, productive to the overall ("real") economy. Over the last 30-odd years, and especially over the last decade, the center of profit for the financial industry has shifted away from its traditional role (transactional facilitation), and toward the taking of proprietary positions in various capital markets. It's simply too tempting not to -- as Uncle Sam will lend you your leverage virtually free of charge, and he'll also be there to mop up your mess if you make one. Imagine being able to gamble at a roulette table with free money, and being given more chips every time your bet busts.
  - djm 15y ago
    I'd like to add that responsibility for banks providing loans backed by the taxpayer ultimately falls on voters. This is what fannie mae/sallie mae etc are all about. Disconnecting access to credit from the ability to repay it inevitably results in loans that will default. Politicians sold people stuff like fannie mae and people voted for it by electing them. And I guess voting in favour of such things is inevitable when not all voters are taxpayers. An extreme solution might be limiting votes to people who are paying taxes. This seems logical but is obviously politically impossible.
    - jonnathanson 15y ago
      "...I guess voting in favour of such things is inevitable when not all voters are taxpayers." I get the premise of this logic, i.e., that poor people don't pay taxes and therefore don't care about spending taxpayer dollars. I've seen it presented hundreds of times. But I think, in all honesty, that such a theory is giving the poor too much credit. It assumes that the poor are making conscious decisions based on rational evaluations of their economic incentives. I'm not convinced they think that way. Furthermore, I'm not convinced that they're even informed enough to know what they're doing when they vote on such things. Some of the blame lies on the voters for voting without understanding, sure. But the politicians -- many of whom are paid for by lobbies -- bear greater responsibility for selling bullshit to underinformed voters, and for coucing the bullshit in emotionally manipulative ways.
djm 15y ago
I understand the reasoning that the fed & equivalents in other countries are supposed to manage the money supply as a smoothing function in booms and busts. I have never managed to accept though that the decision making of a committee can outperform the decision making of the market itself.
- Goladus 15y ago
  The problem is that market performance is never pure, and even when it is, the performance can be so volatile that side-effects permanently harm communities and subsequently offset the market performance. And of course performance isn't everything. The 1-person committee in charge of driving a tractor trailer, for example, will deliberately choose sub-optimal performance when driving down a steep grade, because optimal short-term performance would result in a crash and complete long-term failure.
chopsueyar 15y ago
You say "in direct contradiction to the last 80 years of economic thought", but we have not been off of gold and on fiat for that long, more like 40 years IIRC. Even the swiss franc was pegged to gold until 2000. The Fed is getting pretty limited to what it can do by lowering rates. With only 6% more unemployment, we would be at 1870s levels (completely unmanageable)? Calling it counterfeiting is a bit extreme, though.
- econgeeker 15y ago
  Gold was criminalized for use in transactions in 1933 by executive order. I think that's a fair point to mark the end of the "gold standard" and the beginning of the fiat era. It is true the US government would redeem dollars for gold for foreign countries up to 1970 or so, under Nixon... but indie the USA, it was a crime to use gold as money. (Though jewelry was allowed) up until the 1970s. He's using the term "counterfeiting" in the economic sense. One of the things that makes something money in economics is that it is difficult to duplicate, so you can't just make more of it for yourself. Fiat currency doesn't have that restraint. So, we can say it is not money, or we can say that it is being counterfeited. This is not a word chosen for its alarm value, though it should make you alarmed.
  - chopsueyar 15y ago
    Money is a medium of exchange, unit of account, and store of value. Those are the only requirements for money.
    - perfunctory 15y ago
      > Those are the only requirements for money. Obviously they are not. The requirement that it should be difficult to duplicate is essential.
      - snth 15y ago
        Well, maybe that falls out from money being a "store of value".
stonemetal 15y ago
Newb question: If new money only gets in the system by loans how do we not run out of money? If I lend you 100 bucks you have to pay back 105 that is great and all. If I loan you every dollar in existence and you have to pay back every dollar in existence plus 5% then there is a problem.
- kruhft 15y ago
  This fact is part of the money system. When a loan is taken out from a bank, the principal of the loan is created, but the interest is not. This creates a competition in the economy to get the money that is not created to pay back the interest on the loans where some people can and some people cannot. Defaults are inherent to the monetary system as it is currently implemented. See "The Money Fix" (documentary) for the best explanation of this process that I have seen.
- cx01 15y ago
  If there is only $100 in the economy, I can still owe you $105. To pay it back, I could start working for you and be paid $1 per hour. Now everytime you pay me $1, I would pay you back this dollar until my debt is zero. In the real-world, with more than two persons, it would look more like this: I pay you back some amount of the debt, you spend this money and it propagates through the economy, until some part of it reaches me (in the form of a wage), so that I can use it to pay back more of the debt.
  - stonemetal 15y ago
    So you are saying the money pool expands at the rate in which the Federal Reserve spends money, and contracts at the rate it loans money?
    - cx01 15y ago
      No, I wanted to point out that the total amount of debt can be larger than the total amount of (physical) money.
      - 15y ago
onemoreact 15y ago
If I could get 0-1% APR loans then I could make money buying US treasuries. This while technically different from being handed money that you get to keep it is still functionally identical. As to comparing unemployment rates, if you compare identical numbers we have a higher unemployment rate now than during the great depression. PS: A close friend of mine overheard a conversation that was basically "My husband only made 80 million last year, what happens if my social circle finds out?". Her friend actually understood how terrible this was, why her friend was sobbing, and was vary sympathetic. When you are close enough to overhear those in power but don't the goodies there is a lot of pressure to seek it out. However, a family of 4 living off of 42k/year without heath insurance can feel the same way to a 250k combined income. Which IMO muddles the debate.

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.

jonnathanson 15y ago
This, more or less. Most of the profit in the banking industry comes from being able to take on massive risk, while simultaneously being cushioned from that risk by the government. Risky positions and derivatives are extremely profitable, but for most people -- those without guaranteed bailouts, or cushy borrowing rates -- the risk is too great. For investment banks, as we've seen, the risk is minimal to nonexistant (or at least the banks seem to function as though it is). Traditionally, the role of the financial industry was to "provide access to capital," primarily by underwriting, facilitating, and assisting in the execution of large transactions and deals for corporate clients. This role is, ostensibly at least, productive to the overall ("real") economy. Over the last 30-odd years, and especially over the last decade, the center of profit for the financial industry has shifted away from its traditional role (transactional facilitation), and toward the taking of proprietary positions in various capital markets. It's simply too tempting not to -- as Uncle Sam will lend you your leverage virtually free of charge, and he'll also be there to mop up your mess if you make one. Imagine being able to gamble at a roulette table with free money, and being given more chips every time your bet busts.
- djm 15y ago
  I'd like to add that responsibility for banks providing loans backed by the taxpayer ultimately falls on voters. This is what fannie mae/sallie mae etc are all about. Disconnecting access to credit from the ability to repay it inevitably results in loans that will default. Politicians sold people stuff like fannie mae and people voted for it by electing them. And I guess voting in favour of such things is inevitable when not all voters are taxpayers. An extreme solution might be limiting votes to people who are paying taxes. This seems logical but is obviously politically impossible.
  - jonnathanson 15y ago
    "...I guess voting in favour of such things is inevitable when not all voters are taxpayers." I get the premise of this logic, i.e., that poor people don't pay taxes and therefore don't care about spending taxpayer dollars. I've seen it presented hundreds of times. But I think, in all honesty, that such a theory is giving the poor too much credit. It assumes that the poor are making conscious decisions based on rational evaluations of their economic incentives. I'm not convinced they think that way. Furthermore, I'm not convinced that they're even informed enough to know what they're doing when they vote on such things. Some of the blame lies on the voters for voting without understanding, sure. But the politicians -- many of whom are paid for by lobbies -- bear greater responsibility for selling bullshit to underinformed voters, and for coucing the bullshit in emotionally manipulative ways.

djm 15y ago

I understand the reasoning that the fed & equivalents in other countries are supposed to manage the money supply as a smoothing function in booms and busts. I have never managed to accept though that the decision making of a committee can outperform the decision making of the market itself.

Goladus 15y ago
The problem is that market performance is never pure, and even when it is, the performance can be so volatile that side-effects permanently harm communities and subsequently offset the market performance. And of course performance isn't everything. The 1-person committee in charge of driving a tractor trailer, for example, will deliberately choose sub-optimal performance when driving down a steep grade, because optimal short-term performance would result in a crash and complete long-term failure.

chopsueyar 15y ago

You say "in direct contradiction to the last 80 years of economic thought", but we have not been off of gold and on fiat for that long, more like 40 years IIRC. Even the swiss franc was pegged to gold until 2000. The Fed is getting pretty limited to what it can do by lowering rates. With only 6% more unemployment, we would be at 1870s levels (completely unmanageable)? Calling it counterfeiting is a bit extreme, though.

econgeeker 15y ago
Gold was criminalized for use in transactions in 1933 by executive order. I think that's a fair point to mark the end of the "gold standard" and the beginning of the fiat era. It is true the US government would redeem dollars for gold for foreign countries up to 1970 or so, under Nixon... but indie the USA, it was a crime to use gold as money. (Though jewelry was allowed) up until the 1970s. He's using the term "counterfeiting" in the economic sense. One of the things that makes something money in economics is that it is difficult to duplicate, so you can't just make more of it for yourself. Fiat currency doesn't have that restraint. So, we can say it is not money, or we can say that it is being counterfeited. This is not a word chosen for its alarm value, though it should make you alarmed.
- chopsueyar 15y ago
  Money is a medium of exchange, unit of account, and store of value. Those are the only requirements for money.
  - perfunctory 15y ago
    > Those are the only requirements for money. Obviously they are not. The requirement that it should be difficult to duplicate is essential.
    - snth 15y ago
      Well, maybe that falls out from money being a "store of value".

stonemetal 15y ago

Newb question: If new money only gets in the system by loans how do we not run out of money? If I lend you 100 bucks you have to pay back 105 that is great and all. If I loan you every dollar in existence and you have to pay back every dollar in existence plus 5% then there is a problem.

kruhft 15y ago
This fact is part of the money system. When a loan is taken out from a bank, the principal of the loan is created, but the interest is not. This creates a competition in the economy to get the money that is not created to pay back the interest on the loans where some people can and some people cannot. Defaults are inherent to the monetary system as it is currently implemented. See "The Money Fix" (documentary) for the best explanation of this process that I have seen.
cx01 15y ago
If there is only $100 in the economy, I can still owe you $105. To pay it back, I could start working for you and be paid $1 per hour. Now everytime you pay me $1, I would pay you back this dollar until my debt is zero. In the real-world, with more than two persons, it would look more like this: I pay you back some amount of the debt, you spend this money and it propagates through the economy, until some part of it reaches me (in the form of a wage), so that I can use it to pay back more of the debt.
- stonemetal 15y ago
  So you are saying the money pool expands at the rate in which the Federal Reserve spends money, and contracts at the rate it loans money?
  - cx01 15y ago
    No, I wanted to point out that the total amount of debt can be larger than the total amount of (physical) money.
    - 15y ago

onemoreact 15y ago

If I could get 0-1% APR loans then I could make money buying US treasuries. This while technically different from being handed money that you get to keep it is still functionally identical. As to comparing unemployment rates, if you compare identical numbers we have a higher unemployment rate now than during the great depression. PS: A close friend of mine overheard a conversation that was basically "My husband only made 80 million last year, what happens if my social circle finds out?". Her friend actually understood how terrible this was, why her friend was sobbing, and was vary sympathetic. When you are close enough to overhear those in power but don't the goodies there is a lot of pressure to seek it out. However, a family of 4 living off of 42k/year without heath insurance can feel the same way to a 250k combined income. Which IMO muddles the debate.