December 12, 2013
- The “new rich” — in the politicians’ cross hairs
- The real deal on “income inequality,” revisited
- A close call from April 2001 that presages all-out war in the Pacific
- Canada’s amazing melting currency… now in England too!
- Gold exhaustion… readers join the inflation-or-deflation debate… the ultimate Obamacare loophole… and more!
“Between rent, schooling and everything — it comes in and goes out.”
You’ll have to excuse us, dear reader, but we’re still pondering the life experience of Miami resident Deborah Sponder. As noted on Tuesday, she owns an art gallery in a tony district — squeezed between Emilio Pucci and Cartier stores. At age 57, she pulls down about $250,000 a year. Sponder does not consider herself upper class; a healthy chunk of her income is devoted to college tuition for her three children.
But according to researcher Mark Rank at Washington University in St. Louis, she falls squarely into the category of the “new rich” — people who make $250,000 or more at some point in their working lives and who generally maintain an income of at least $100,000.
Professor Rank believes they make up one out of every five U.S. adults.
What’s more, “this little-known group may pose the biggest barrier to reducing the nation’s income inequality,” claims The Associated Press.
Yes, there’s an ugly political dimension to the story, one we couldn’t squeeze into our 5 Mins. the other day. As you might be aware, the president gave a speech last week in which he called income inequality “the defining challenge of our time.”
The “new rich” might want to be wary. Recall we said Tuesday they’re keenly aware of their “economic fragility” — a $250k income one year could be cut in half the next, but no matter the figure, “it comes in and goes out.”
Cue the AP: “That makes them much more fiscally conservative than other Americans, polling suggests, and less likely to support public programs, such as food stamps or early public education, to help the disadvantaged.”
Why, those selfish ingrates!
This isn’t to deny “income inequality” is growing. It absolutely is… and has been for nearly 40 years.
Consider the first three decades after World War II: Family income adjusted for inflation nearly doubled among the top 5% of income earners (the light blue bar)… and among the bottom 20% of income earners (the dark blue bar)… and among everyone in between too.
After 1975, the gains were fewer, and they accrued largely to those who already had the highest incomes. The bottom 20% gained almost no ground at all.
Here’s another chart, one we brought you when it was making the Internet rounds last May Day. It shows U.S. workers becoming steadily more productive, only to see their pay fail to keep pace in more recent decades…
Once again, there’s an equilibrium in the immediate postwar years that completely breaks down starting in the early to mid-’70s.
“The August 1971 separation of the dollar from gold set in motion the unchecked growth of government and banking, aided by a supportive Federal Reserve,” our Dan Amoss wrote back in May. “The Fed prevents the lower prices brought about by productivity from improving living standards. In this inflation-targeting Bernanke regime, laborers and those on fixed income are victims.”
And the “new rich” struggle to build up any savings; the money comes in and it goes out.
[Ed. Note: The notion of “political solutions” to this problem is even scarier than the problem itself. As always, our guidance is that politicians will do whatever it is politicians do, and you’re best off worrying about things actually under your own control.
With that in mind, there’s still time to sign up for a FREE live event next week in which you can learn about a surefire way to goose your income. Our publisher Joe Schriefer will demonstrate how to make as much as $455 cash in only five minutes. Then you’ll learn how to put this strategy to work for yourself. Participation is absolutely free; you can assure yourself of access to this event next Monday by signing up here.]
The sectors that led the market down yesterday are holding their own today.
Small caps and the Nasdaq took it hardest in yesterday’s trading; but today, they’re slightly in the green. The Nasdaq is at 4,009 as we write.
In contrast, the slide in blue chips continues, with the Dow down more than a third of a percent, to 15,781. The S&P has lost a couple of points, to 1,780.
Gold’s pop past $1,260 on Tuesday didn’t have much staying power. Heavy selling got underway shortly after trading opened in London, and this morning the bid is down to $1,230.
Silver’s down more than 3.5%, and the $20 level is once again a memory.
“The clock starts ticking for the next crisis” in the East China Sea, writes Zheng Wang, a professor of international diplomacy at Seton Hall.
Wang is nervously eyeing the standoff over the Senkaku Islands, controlled by Japan but claimed by China. When last we left the saga, China had declared an Air Defense Identification Zone (ADIZ) well beyond its borders, to include the islands. Aircraft flying over the region are to inform Beijing of their purpose and flight plans unless they want to face “defensive emergency measures.”
“A small accident between China and Japan,” the professor warns, “could immediately escalate into a major crisis and even military conflict.” He draws on recent history to illustrate: “Just like the EP-3 collision incident between the U.S. and China in 2001, if states continue to play this game of chicken, then an accident is inevitable.”
“A U.S. Navy reconnaissance aircraft,” chimes in our Byron King with the background, “was performing routine intelligence gathering off the coast of southern China. The Navy airplane was flying over international waters.
“A Chinese fighter jet intercepted the Navy EP-3 and began aggressive intercepts. At one point, the Chinese jet pulled underneath the Navy airplane and then quickly popped up. The idea was that the Chinese jet would leave turbulent jet engine exhaust directly in front of the American aircraft and give the plane a ‘bump’ — to use a technical term.
“Instead, the Chinese jet collided with the U.S. surveillance plane. The Chinese aircraft plummeted into the sea, killing the pilot. The Navy EP-3 almost crashed too, but after some heroic piloting made an emergency landing on Chinese territory at Hainan island. There, the 24-member Navy crew was held for 11 days.
“As you can imagine, U.S.-China relations were severely strained. Eventually, the Chinese returned the U.S. aircraft to the Navy… in mostly small pieces.
“That EP-3 incident was 12 years ago. China was just starting out on its decade-long economic rise, and its military was still relatively modest. The next time Chinese airplanes buzz U.S. aircraft in some newly established ADIZ? Considering developments of the past 10 years, all future bets are off.”
Who says central bankers can’t learn from the past? Mark Carney has learned one lesson very, very well.
Carney ran the Bank of Canada when it issued 175 million C$50 bank notes with a snazzy new embedded polymer. Alas, the plastic sometimes caused the bills to melt together — “like chocolate bars in your back pocket” as a bank teller described it at the time in our virtual pages.
To this day, the Bank of Canada insists the Currency that Destroys Itself is an “urban myth.” But Carney appears to feel otherwise now that he’s running the Bank of England.
No, he hasn’t given up on the polymer bank notes; the Bank of England has begun issuing millions of them. But not before running an exhaustive battery of endurance tests. They even tried putting them in a microwave oven, but gave up after 12 seconds; the notes have a metallic element, and they were starting to shoot off sparks.
The tests were hush-hush, until Huffington Post U.K. filed a Freedom of Information Request. The documents reveal no effort was spared in testing the bank notes’ durability. Here’s just one table revealing the results of tests using a toaster oven…
The broad takeaway? The notes hold up better in a washing machine than the traditional paper variety, but they do indeed “begin to shrink and melt at temperatures above 120 C, so they can be damaged by an iron, for example.”
Gee, this science stuff is nearly as much fun as manipulating a nation’s currency!
“If you define inflation wrong, you will get into trouble trying to understand it,” a reader writes.
We knew we’d get at least one email like this after yesterday’s account of the knock-down, drag-out debate between Peter Schiff and Harry Dent over inflation versus deflation. We took pains to point out we were using the popular definition — rising prices — for purposes of that day’s discussion only.
But we’ll allow the reader to indulge: “‘Inflation’ is the one-word shorthand term for ‘inflation of the money supply.'” All that business of price increases, wage claims, spiraling up — is just consequences. We do not see these, because the banks are sitting on the money, or rather leaving it on deposit at the Fed. So it isn’t being lent out and entering the market. So prices rise only a bit, and people spend less and everyone gets poorer.
“But you cannot (must not) evaluate a process (like QE) while it is as yet unfinished: Right now, it is continuing; people lap it up. The banks are happy. The bubble has not yet burst. When it does, then see if there is inflation or not.”
“I couldn’t care less what theories and conclusions anyone makes of a ‘debate’ about inflation versus deflation,” writes another reader.
“This is a fact: I live alone and I go grocery shopping about once every three weeks. My eating habits haven’t changed over the past five years (roughly). I shop at Fry’s and nowhere else. My grocery bill has increased at least 250% in that time. In other words, what used to cost me $100 now costs me $250. Correct me if I’m wrong, but I tend to believe this is a sign of inflation.”
“What the true rate of inflation has been for the last five years is hard to quantify in just one or two items,” writes a third. “Prices for food have certainly gone up, while other household items have remained somewhat flat.
“But what about real estate itself? Since hitting a bottom sometime in 2010, most areas have seen a comeback in the neighborhood of 20%, and some places even more. And what about the stock market? The S&P, from its low of 734 in February 2009, is now up a little under 150%. If you look at just these two items alone, I don’t know how anyone can say we have not had inflation.
“As to where some of that money being printed has gone, just look at the bank reserves parked at the Federal Reserve which total something close to $2.4 trillion. We can still get deflation, sure, but it would require the Fed to stop printing and the government to balance its budget. I think D.C. will shovel snow in July before that happens.”
“Isn’t it getting pretty clear,” writes our final correspondent, echoing debate moderator Chris Mayer, “that both are probably right — deflation certainly, inflation later?
“Also,” the reader wishes to beat a dead horse, “no one managed to distinguish between price inflation (the immediate image that comes to mind) and monetary inflation (how many dollars are ‘out there’ after the multipliers are factored in. If the banks aren’t lending, the Fed isn’t able to keep up, no matter what. At that point, the dollar will start losing value, and price inflation will really take off.”
The 5: Yep. As Currency Wars author Jim Rickards told us last summer, the Fed is “desperate” to goose the official inflation rate — currently 1.2% — closer to 4%. But as he’s fond of saying, once that target is achieved, 4% can turn into 9% in an instant.
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. “Thanks to a change from the Affordable Care Act,” says a MarketWatch story, “some consumers may be spending more on braces, expensive eyewear and other medical supplies.”
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