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There's a widening wealth gap in America. It took a generation, but the middle class in this country has been hollowed out.
Most people agree on that.
But they don't really know how it happened or who's really to blame - it's been obscured with false narratives, covered with "fake news."
The thing is, the truth's in front of us. We're living it in real time. It's just never discussed openly - for a reason.
The people who are behind this catastrophic American collapse have fooled folks into thinking this is all normal.
Well, it's anything but that...
Who to Blame for the Disappearing Middle Class
Republicans aren't to blame: Their old-school platform of a smaller federal government, fiscal conservatism, more power to the states, and belief that a lightly regulated path to working hard and standing on your own two feet is what made America the global bastion of entrepreneurship and helped create a middle class that is laudable and fair.
Democrats aren't to blame: Their old-school platform of a larger, more interventionist federal government, spending on social programs, supporting and safeguarding workers, all kinds of civil rights, protections for the environment, and their belief that government should stand behind those not able to stand on their own two feet, or who have been trampled by runaway businesses, helped create a middle class that is equally laudable and fair.
The two parties, with their visions and flaws balanced by democracy, made America great... once.
What happened is greedy, neo-con, profiteering Republican crony capitalists hijacked their party, while greedy, limousine liberal, profiteering Democrat crony capitalists hijacked their party. Together, as a new class of elites joined the Masters of the Universe, they began manipulating state apparatuses and banking for fun and profit...
A lot of profit.
The crony capitalists' principal enrichment tools are "financialization" and, as we'll see a little later this week, its manservant, "globalization."
Financialization is the retooling of the economy's production and distribution assets, consisting of made-in-America goods and services, into credit-driven banking and financial services products.
At its core, financialization is the transfer of low-risk, low-profit debt into high-risk, high-profit products.
The net result of the mass commodification of debt-based financial instruments and leveraged debt (grossly under-collateralized by low-risk debt) is rampant speculation.
This heavy betting, however, isn't undertaken just for the sake of pyramiding risks for speculative gains. These so-called "products" are now integral and necessary investment tools because traditional, safe investments don't yield adequate returns in the world of financialization.
According to the U.S. Bureau of Economic Analysis (BEA), in 1980, financial services contributed 4.9% to the country's GDP. At its peak in 2006, that contribution had almost doubled to 8.3%.
More to the point, in terms of profitability, James Kwak, law professor at the University of Connecticut, calculated in 1980 the financial industry's profits as a share of total U.S. business profits was 7.5%. That share of all business profits in corporate America jumped to more than 41% by the mid-2000s.
U.S. GDP in 2016 was $18.56 trillion, according to the BEA. In full view of financial services' share of GDP (which is rising again) and its share of corporate profits (also on the march to new highs), it's impossible not to see the financialization of the U.S. economy.
Worse, it's actually become the beating black heart of the economy. It's happening that way by design...
How the Financialization Scam Became Settled Public Policy
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.
Mr. Gilani,
You have walked straight into the trap of blaming "greed" for the crimes which are caused by the morality of altruism and the politics of welfare statism. The problem is not that people are "selfish". The problem is that they are *un*selfish! For they hurt themselves as well when they try to benefit themselves by means of hurting others. Ayn Rand saw what was coming already in the 1950s, when she wrote that prophetic novel of ideas – Atlas Shrugged.
Mr. Gilani,
I think you are spot on w/ this article. It is a crying shame that more public discussion is not taking place to help inform citizens of these issues. The lack of a list of policy changes needed by Congress to re-right the financial boat is not being pounded into Congress or the public's head. I say "pounded" because the current state of the USA news cycles leaves everyone ignorant & w/o critical info.
Best of Regards.
Shah, you're on the money!
Your definition of 'financialization' should find its place in Finance text books. It produces no hard goods & yet is responsible for 23% of GDP.
As regards 'fake news', the biggest bull is the 2.2% inflation rate – no one believes it, yet its the cornerstone of Fed policy.
You tell us how horrible things are, but you don't provide a solution.
What is the answer?
Great article well worth the read!
Shah, you're on the money!
Your definition of financialization (8.3% of GDP) should find its place in Finance text books.
And no one I know who pays rent, utilities, groceries believes the official 2.2% inflation number.
Thanks,
AR
So what are the solutions??? I’m listening!!
The Kennedy administration in the 60’s signed passage to lower top individual rates from 90 – 70 per cent.
The Reagan administration signed passage lowering the top individual rate to below 40% – but increased the payroll deduction tax by a couple of percentage points –blunting the reductions for those under approximately $100, 000 but counted that as revenue. “Drill baby drill” still says “look how the tax revenues increased when Reagan lowered the top rate.”.
Bush 41 administration tweaked top rates up but lost re-election because “read my Lips” got in the way.
The Clinton administration also increased the top rate . First surplus in years, glory be: but it was due to dot. Com and other exogenous happenings not increase in the top rates , according to “lower the top rate to increase tax revenuers – see how it produced under Reagan”.
Bush 43 administration – with the blessing of the maestro – gave that surplus back to the mainly top earners as well as repatriated capital from overseas at a low tax rate which corporations used to give additional dividends to the investor class and buy back their own stock. Not to goose the economy.
How about in addition to plugging loop holes moving corporate health care costs off of the expense side of the corporate ledger. Presto earnings increase. Recipients of corporate health care receive it as taxable revenue. Prices can be lowered to meet foreign competition Top corporate rates and top individual rates are placed on par and a new corporate rate is set for small business owners – maybe 10. After all small businesses are the prime creators of jobs.
Also put the death tax at a reasonable rate. Those who argue that money has already been taxed know that argument doesn’t hold that a large share of that money did not come from earnings but from asset inflation.
Mr. Gilani,
I’ve always respected you immensely, and this article continues to prove my esteem is not misplaced. As usual, you hit the nail right on the head.
But as someone I know understands how the Federal Reserve works, and who read “The Creature from Jekyll Island” not that long ago, you fail to mention the fundamental enabler of financialization. You also don't go back to 1929, which was other time that financial services contributed a disproportionate amount to GDP.
During the run-up to the stock market crash of 1929, two significant things were done: 1) devaluation of the dollar to bail out the Bank of England and 2) abnormally low interest rates. Correlation doesn’t prove causation, but the following things also happened leading up to the October crash: 1) the Gini coefficient reached an all-time high and 2) financial services as a percentage of GDP reached a new record.
Fast forward to today. Prior to the financial crisis of 2008, the Federal Reserve had been increasing interest rates from their previous all-time low reached after the dotcom bust of 2000. Those artificially low interest rates spawned the housing bubble that was pricked by rising rates.
What else happened as we reached a zenith in 2008?
Coincidentally, by 2008, the Gini coefficient again reached a new high, equal to what it was in 1929. But instead of allowing us to go through a crash worse than what led to the Great Depression, the Federal Reserve once again intervened in the economy with “emergency financialization.” This led to a worsening of the Gini and a financial sector that continues to gobble up ever-larger chunks of overall GDP.
The fundamental and basic reason for everything you cite above is artificially low interest rates. Interest rates reflect the true cost of capital. As long as interest rates are bogus, there cannot be an honestly healthy economy.
Everyone who understands capitalism knows that the price discovery system of free markets is fundamental to a strong structure. Yet, when those same people talk about interest rates, which is the price discovery system of capital, no one calls out the Federal Reserve and the fact that the fake interest rates of our current paradigm are the fuel of the fire of financialization.
The real core problem and solution is the grossly privileged and insulated from reality CONGRESS of the U.S A. !!!???..an honest congress person can't be honest as a congress person and survive as a congress person…sort of rhymes..
subject: HOW YOU FIX CONGRESS..as in correct .Not business as usual..please see below
This deserves our support – pass it on and let's see if these idiots understand what people pressure is all about.
Salary of retired US Presidents .. . . . .. . . . . .. . $180,000 FOR LIFE
Salary of House/Senate members .. . . . .. . . . $174,000 FOR LIFE — This is stupid
Salary of Speaker of the House .. . . . .. . . . . $223,500 FOR LIFE — This is really stupid
Salary of Majority/Minority Leaders . . .. . . . . $193,400 FOR LIFE — Ditto last line
Average Salary of a teacher . . .. . . . .. . . . . .. .. $40,065
Average Salary of a deployed Soldier . . .. . . .. $38,000
I think we found where the cuts should be made! If you agree pass it on, as I just did.
Warren Buffett, in a recent interview with CNBC, offers one of the best quotes about the debt ceiling:
"I could end the deficit in five minutes," he told CNBC. "You just pass a law that says that anytime there is a deficit of more than 3% of GDP, all sitting members of Congress are ineligible for re-election".
The 26th Amendment (granting the right to vote for 18 year-olds) took only three months and eight days to be ratified! Why? Simple! The people demanded it. That was in 1971 – before computers, e-mail, cell phones, etc.
Of the 27 amendments to the Constitution, seven (7) took one (1) year or less to become the law of the land – all because of public pressure.
Congressional Reform Act of 2015
1. No Tenure / No Pension. A Congressman/woman collects a salary while in office and receives no pay when they're out of office.
2. Congress (past, present, & future) participates in Social Security.
All funds in the Congressional retirement fund move to the Social Security system immediately. All future funds flow into the Social Security system, and Congress participates with the American people. It may not be used for any other purpose.
3. Congressmen/women can purchase their own retirement plan, just as all Americans do.
4. Congress will no longer vote themselves a pay raise. Congressional pay will rise by the lower of CPI or 3%.
5. Congress loses their current health care system and participates in the same health care system as the American people.
6. Congress must equally abide by all laws they impose on the American people.
7. All contracts with past and present Congressmen/women are void effective 12/1/16. The American people did not make this contract with Congressmen/women.
Congress made all these contracts for themselves. Serving in Congress is an honor, not a career. The Founding Fathers envisioned citizen legislators, so ours should serve their term(s), then go home and go back to work.
If each person contacts a minimum of twenty people, then it will only take three days for most people (in the U.S.) to receive the message. Don't you think it's time?
THIS IS HOW YOU FIX CONGRESS!
If you agree, pass it on. If not, delete.
Agreed. How to make this a movement.?
I disagree it is short sighted and ignores the real problem. Campaign funding.
Yes,the beginnings start with the need to raise huge sums of money. That makes prospective politicians more susceptible to influence of corporations and big donors. They do not give candidates money for no payback.
One way is to fund campaigns by state funds. Only registered voters in the state and the state campaign fund can give money to candidates. The state campaign fund is taxpayer money which must be at least 30-50% of total. It is divided among the candidates equally. In this manner all outside money is forbidden.
I seriously believe that you have let the Democrat Party of the hook for the damage to this countries US Constitutional definition. Edwin Witte was the "sermonizer" for FDR's request to write the Old Age Insurance Bill and a Bill to copy Kaiser Wilhelm's 1880 nationalization of German Healthcare. When the two Bills were presented to FDR's Democrat controlled Congressional and Senatorial leaders they responded that the people are ready for Social Security, but if we start the discussion on Government Healthcare it will be revealed to them that we are Socialists. The problem with that admission is that in 1919 the reorganization of Socialism determined that the major obstruction to World Socialism was the US Constitution and that it must be destroyed. There initial effort during the 1920 was directed at teacher education that resulted in focusing education away from the basic concept of individual value creating society and transferring that power to groups, classes and races as defining societal values. This then opened the door for class warfare leading to societal conflict and self-destruction to be replaced by a non-Constitution Socialist single party government. This is how the Liberals of Germany created the NAZI Dictatorship. This is also why the Demonicrat-(Progressives founded in Wisconsin by Edwin Witte in 1911) and (admitted to being in the 2016 campaign by Hillary Clinton) are so upset about losing the Presidential domination; Hillary had her heart set on celebrating the centennial of the formation of the Socialist States of America and the modified Constitution supporting Socialist single party government – possibly with a return of 'Bill' to run it with her. Edwin Witte addressed my U Wisconsin '53 MD class to define the future of Healthcare's future with, " We will own you" Delfin J Beltran, MD ( in '53, God and the Dean willing)
The fall of the middle class began in the mid-70's. Though there are many reasons, including your argument, it has been ongoing for 40 years.
In my opinion, it is the stupidity of union leadership that has killed the middle class. The arrogance and winner take all attitude caused people not to trust union leaders.
I have been anti-union most of my life, but have not been able to give a good reason. The more I learn about how important they were from the 1920's to the 1960's at lifting the common man's income and fighting for their rights in the workplace, the more I realize what a positive influence they were at one time.
You are right about the limousine liberals who run the colleges and are at the highest levels of the media where they hire 20-somethings from liberal arts schools whose teachers have infected students with Utopian (or rather Dystopian) ideals.
You are right about the neo-cons who have infiltrated government via K St as early as the 50's and have encouraged the war machine.
If Trump had kept his word and "drained the swamp" we would all be better off.
If unions and business were to work together instead of being antagonistic, I believe every working man and woman in America would be winners.
Thank you Shah for saying what is never said about the economy! Many great, edifying comments also… But there is more. Automation and computers have displaced vast armies of workers. Employment is the basis of prosperity not anything else. And yes unions are very important to a good economy and the decline of unions is a decline of the economy. This is caused by the political corruption of anti union measures like Taft-Hartley and "right to work" laws. Free trade is impoverishing the world. America became rich under tariff protection but is losing prosperity to free trade. Government and media are increasingly lying about inflation and unemployment. Can we trust their figures on GDP or trade deficits or anything else?
This is late and probably won't be read, but the reason for the rise in student debt is linked to the same impulse/conspiracy/whatever that has had legislatures systematically reducing state support for higher education, forcing universities to raise tuition rates to astronomic levels, while the banks and Congress jumped in with the sugar-coated offer of loans to students so they could get an education. At the current rates of tuition at most public universities, I could never have afforded to go to college, let alone get a PhD. This sickening spiral will destroy American public higher education — long the envy of the world — and destroy the opportunity of all but the wealthy to gain a college education (primarily from private universities). Unless this spiral is reversed, we have only to look at the 10%/90% divide in Latin America to see the future of American society.
–Rudy
An interesting take on the subject is presented here:
https://www.youtube.com/watch?v=RrFSO62p0jk
a TED-type talk contrasting the late-80s market downturn with the 2008 version based on the different reactions of the Federal Reserve in each case. In the 80s, the banks didn't collapse.
I agree with you, Shah and suggest you keep an eye out for a UK-produced, short series of documentaries in 2016 called "The Super-Rich and Us". One episode describes in detail how 'inequality was pinpointed as a business opportunity'. The system hasn't changed a bit