A lot of people are awake to the notion that the United States currently has a high degree of inequality. However, I think a lot of people would be surprised to know that the last time our country witnessed inequality of the current magnitude was at the emergence of the Great Depression. This was brought to my attention by a National Bureau of Economic Research working paper titled Wealth Inequality in the United States Since 1913: Evidence From Capitalized Income Tax Data. In the paper, Emmanuel Saez and Gabriel Zucman combined income tax return data with the Federal Reserve’s Flow of Funds data to estimate the distribution of income and wealth across households. Below I will share some of the paper’s charts that surprised me the most:
I begin with the above chart which depicts a pretty remarkable story in my opinion. Notice the y-axis reflects the percentage of total household wealth controlled. So if we examine the black line we see that heading into the Great Depression the top 1% of households controlled roughly 45% to 52% of all household wealth in America. Then as we began to emerge from the depression and as WW2 commenced a major wealth shift occurred. Throughout the 50s, 60s, and 70s the top 1% of households held “just” 30% or less of total household wealth. This was the period in time when the middle class flourished and the “American Dream” was a reality for a great number of people. However, another major shift began to take place in the late 80s. The lower 90% of households gradually began to lose their share of the pie as the rich began to gobble up more and more of it. Skip ahead to where this data ends in 2012 and we see that the top 1% of households have once again hoarded north of 40% of the country’s household wealth. To wit, I imagine this percentage has risen even more in the nearly 3.5 years since the time this data ended.
Furthermore, we should also notice the divergence between the top 1% of households and the top 10% to 1% of households. The top 1% of households once again have a larger share of household wealth than the next 9% top households. This hasn’t happened since the Great Depression! This accumulation of wealth at the top becomes even more clear in a similar chart below:
This chart makes a similar comparison as the first except the two lines of data now represent the top 1% to 0.1% and the top 0.1% of households respectively. The super-wealthy top 0.1% of households controlled 22% of household wealth in 2012. Although that figure is likely larger here in 2016. Once again, this parallels the beginning of the Great Depression. But wait it gets worse:
The ultra-wealthy top 0.01% of households now control 11.2% of all household wealth (2012), a share greater than prior to the Great Depression! We can therefore see that the accumulation of wealth at the top tiers is super attributable to the monster share of wealth that the ultra-wealthy have accumulated over the past 30ish years. This certainly paints a sad picture for ordinary Americans that have seen the middle class dwindle down in size:
The bottom 90% of households in America now control less than 25% of all household wealth. Notice in the post-2008 era that housing wealth is now at an all-time low since buying homes has all but disappeared for ordinary Americans. We can also see that the business assets share has gone kaput (Good-bye small businesses). Also, look back through the charts and notice just how badly ordinary Americans were hurt in the mortgage mess of 2008, yet the wealthy keep chugging along fine hoarding a greater and greater share of the wealth. But remember it was the super-wealthy of Wall Street that dreamed up the whole ridiculous scheme and then were bailed out and never punished except for a few drop-in-the-ocean fines. Nobody went to jail and the madness for the most-part has been allowed to continue to this day, albeit in different schemes this time around. If this doesn’t make you angry I don’t know what does. It’s no wonder why so many Americans support the non-establishment candidates Trump and Sanders. Americans are tired of being kicked around.
I believe we are at or very near a major inflection point in American history. Whether we stand to live through the next Great Depression remains to be seen. But let’s be clear, that is a real possibility. Our financial markets and economy in general are so distorted right now. Here are a few of the distortions: debt to GDP ratios are sky-high, we have another stock market bubble, bonds are in a massive bubble, real-estate is back in a bubble in many areas. The banks haven’t truly been reformed and continue to manipulate markets. In fact, just last week the courts somehow got Deutsche Bank to admit that it has been manipulating gold and silver prices over the past 15 years. They even are going to provide documents to implicate several of the other major banks. But this doesn’t even come close to telling the full story. Those super-wealthy banksters surely manipulate many other facets of the global financial markets. And all the while our government lets it happen because everything is so gosh darn political. The Federal Reserve will not admit we are back in recession because doing so would go against the story that Obama is trying to tell about how great our economy is doing. He of course wants Hilary Clinton to win, and so an admission by the Fed or anyone else in government that things are not well would have dire consequences to her campaign. However, politics aside the Federal Reserve still can’t do much to the freight train that is coming because they are essentially out of tools. Sure they could try another round of Quantitative Easing but that hardly has any real benefits to growth in the economy. All that will do is inflate risk-assets to an even frothier level.
Our can has been kicked down the road so many times that we’ve just about ran out of road. At some point we’ll have to face these massive distortions and problems. Whether that moment comes over a long period of time or suddenly due to some exogenous shock no one knows. However, it is best to be informed and to protect yourself. To my friends and family, I want to urge you to keep your savings out of the banks and to hold gold and silver instead because when the next crisis arrives you want to be able to control your situation. Put simply, depending on your electronic money is risky because there are a multitude of reasons not to trust the banks or the government.