Thursday, June 12, 2014

Sorry, You're Not Allowed: Capital Segregation and Rising Inequality

If capital is not treated equally, political equality is an illusion.

In a fully financialized economy, capital grows faster than earned income. We can quibble about the various rates of growth and measures of wealth, but none of this cross-talk/noise changes the fundamentals of a financialized economy: the ability to leverage relatively modest sums of real capital (i.e. cash and cash equivalents) into enormous financial positions that control the income and gains from vast amounts of rentier assets generates wealth for the few granted this privilege.

Earned income from wages has little leverage in such an economy, and wage-earners have little leverage in an economy in which low-interest, highly leveraged borrowed capital can buy labor around the planet at competitive prices.

This is capital segregation writ large: the few with access to the unlimited credit spigot of the Federal Reserve can accumulate assets, rentier income streams and political power that is unavailable to the lower social orders.

Those with access to the near-zero-interest credit spigot of the Federal Reserve have become what I call the New Nobility in a fiercely feudal division of privileges based entirely on capital rather than ethnicity, religion, etc.

The fish tank analogy I've been using this week helps us understand capital segregation. The middle class and lower classes are only allowed to swim in the financial tank where the pellets of gain/yield are scarce and quickly snapped up by those few who are first to the opportunity.

One Overlooked Reason Why the Middle Class Is in Decline

The Stock Market Is Like a Fish Tank

Once the gains have been reaped, all that's left for the majority are toxic risk and losses.

The New Nobility don't swim in that carefully limited pool: they control the distribution of food pellets (gain and yield in our analogy) to the masses thrashing about in the main tank. Regardless of who wins and loses the struggle for the few pellets tossed in the tank, the few who control the pellets profit.

The majority swimming fruitlessly around the barren main tank are unaware of the tanks and wild river beyond. Special tanks--dark pools and similar reserved havens for the wealthy--are off-limits to the middle class in the main tank. In these "New Nobility only" pools, risk is low and gains are plentiful.

The mass of those hungry for any kind of yield on their capital are unaware of the dark pools and the wild river beyond the tank--the untamed market that isn't controlled by the New Nobility and the central bank. Their world is a carefully controlled tank where risk is high and gains are meager and fleeting.

This blatant capital segregation is invisible to the masses starved for yield and gain. The majority are unaware of the pools and rivers they are not allowed to enter. This is part of the control mechanism: you can't question or resist what you don't even see.

If capital is not treated equally, political equality is an illusion, for capital buys political influence and power. Capital that can buy political power gains political protection of its extraordinary privileges to control rentier income streams, income which furthers its political power.

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go to Kindle editionAre you like me? Ever since my first summer job decades ago, I've been chasing financial security. Not win-the-lottery, Bill Gates riches (although it would be nice!), but simply a feeling of financial control. I want my financial worries to if not disappear at least be manageable and comprehensible.

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Laura Y. 

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