DeLong list 17 reasons, and his number one reason is “High income inequality, which boosts savings too much because the rich can’t think of other things they’d rather do with their money.”
Pin the Tail on the Donkey
At no point does either DeLong or Summers pin the tail on this donkey. Neither can, because income inequality is a symptom of the problem.
That problem started the moment Nixon closed the gold window. The event is now described as “Nixon Shock”.
Indeed it was. Unencumbered by a need to redeem gold, credit exploded.
Credit Market Before and After Gold Window Closed
Gold Window Synopsis
Total credit exploded from $1.7 trillion to $63.5 trillion at the end of 2015.
To service that growing pile of debt, the Fed had to keep slashing interest rates.
Instead of allowing consumers to benefit from technological advances that are inherently price deflationary, the Fed sought to increase inflation. This is to the benefit of the banks and already wealthy.
A policy of 2% inflation coupled with no restraints on trade deficits (thanks to removal of the gold window), encouraged the outsourcing of jobs.
After the dot-com bubble burst in 2001, the Greenspan Fed stepped on gas blowing the biggest housing bubble on record. Then the Fed bailed out the banks, the asset holders and the wealthy. This chain of events left the median person being worse off than before.
Given that executive pay is based on performance, rising share prices further benefited the top 1%.
Fed policy itself, coupled with rampant expansion of credit thanks to Nixon closing the gold window is totally responsible for the rising income inequality from 1971-present.
Instead of attacking the symptoms of the problem, as Summers and DeLong do, let’s be honest about the real problem. Let’s also be honest about the alleged scourge of deflation.
The final irony in this ridiculous mix is central bank policies stimulate massive wealth inequality fueled by soaring stock prices.
Grasping Reality With Both Hands
Delong’s blog is entitled “Grasping Reality With Both Hands“. It would behoove, Delong, Summers, and Ben Bernanke to do just that.
A good starting point is “why” income inequality is rising as opposed to investigating ridiculous wealth-transfer schemes and government stimulus projects in a fool’s mission to fix a problem that Summers, DeLong, Bernanke, and Krugman all fail to understand.
Brad DeLong, Larry Summers, Ben Bernanke, Paul Krugman, Steve Keen, Michael Pettis, and anyone else, have at it. Where am I wrong?