From Whence Cometh the Gap?

Often, of late, we've heard our two socialist candidates, Bernie Sanders and Bill Clinton's criminal wife, speak of the growing gap between the rich and middle class. They don't even say "rich and poor" anymore.

The fact is there is a growing gap in wealth between the two cohorts. But not for the reasons these two dishonest people will tell you. (I'll go out on a limb and say that Bernie may not be dishonest, just ignorant of economic realities.) They will say it is because the government doesn't have enough control over the free market and people have made other people poor out of greed. The oil companies for example will charge what the market will allow and sell you your gas, thereby making you poor while they reap - gasp - a profit!

This, and all other examples of free market activity, are not the reason for the growing disparity in our wealth. All market activity, when you subtract damage done by government interference, is good for both parties and contributes to the wealth of both participants.

Just look at my fuel example. The left is forever talking about the greed of the oil industry. But while the companies make about 2% on a gallon of gas, our bloated government (state and federal,sometimes local) takes 15%. While I am sure greed is a personal attribute most human beings share, if the oil companies acted on that greed, they'd shut the tax man out of the equation.

So what has caused the growing gap in wealth we see today?

I could answer that question and have several times, here and in my book, 16 20 24. But I have answered as a common sense commentator. I will let Kyle Bass of Hayman Wealth Management answer that for you. Best you hear it from an expert this time. Somehow, common sense becomes "more true" when conveyed by an "expert".

In an appearance on Wall Street Week today, 17 April 16, Bass pointed out the artificiality of the "strong" market is caused by cheap or free money made available to Wall Street banks, who then pump it into the stock market, maintaining artificially high prices. It goes without saying that being the ones who set market trends they are the ones who see a healthy return on their "investment", made sweeter by the fact the government supplied the investment money.

This is not to say that the companies selling the stock are bad companies. But their fundamentals vs the capacity for risk on the part of the big investors don't reflect real market reality. In other words, if a bank was playing with money they didn't get from the government at, say 1%, they'd be much more cautious about what they invested in and would have to know they would make a much higher return to make the buy worthwhile.

Don't believe me, look at the volatility we see these days. Do you think it is because all CEOs are manic/depressive? No! It is a result of big buys with free money causing the price of a stock to start to rise. Smaller investors and computer buy signals initiate a migration to the stock. The big, government backed, first buyer then sells after a healthy (sometimes considerable) return and the price falls. Woe betide those late to the game; they lose again!

But more interesting is the future we see with past as prologue.

Back in 2006, this very same Kyle Bass, stood in the board room of Bear Sterns, the second major company to be crushed by the 2008 crash, and basically predicted their demise from said crash. Over 90 minutes he outlined their risk and exposure to unsecured credit default swaps and derivatives. A friend and former colleague at BS told him his presentation was fascinating and that he prayed to god he was wrong. We now know, Bass wasn't wrong.

As we would see, the real estate market was floating on a sea of worthless paper created by the government's interference in the sale of homes. When banks, insurance companies and investment houses could no longer carry the risk of this paper (despite the fact that the government was buying it from everybody to keep the game going) the gravy train rolled to a stop and those exposed took a pounding.

The government's response to a crash of its own making? Why, make the banks whole again. To accomplish this, they did two things. The first was to steal $800,000,000,000 from the American taxpayers and handed it to the banks. This was the greatest swindle in all of history. The second step was to replace the phony government money pouring into the mortgage industry with phony government money pouring into the equities markets. They called it Quatitative Easing (QE). After what they called QE3, they stopped using the name and continued to print funny money and giving it to Wall Street.

Companies no longer need to invest cash holdings. They can use the near zero government money. If they lose, so what, borrow more and play the market again. If they just made three percent on a deal, that was more than double the interest rate they were paying their co-conspirators in the government. Borrow again and play again.

This is what causes the illogical volatility we see in the market. Investment XYZ takes funny money created by the Fed. It makes a huge buy on Company ABC. This could be a very good company or just the healthiest horse in a glue factory. It doesn't matter much. The big buy is read by computers programmed to react to such moves. This triggers automatic buys across the market. The stock starts to climb. At a prearranged point, or when the stock starts to look wobbly Investment bank XYZ begins to divest itself of the stock, taking profits with it. Company ABC's stock settles back toward it's previous market value.

We now have 8 years of people playing the market this way (not investing based on fundamentals and real risk). Entire business models are now built on this unethical bond between investor and the state. Traders are losing the expertise needed to trade legitimately. That is why every time the Fed hints at pulling the banks from the tit, the markets take a shit.

What all this amount to is the rich get richer from the availability of corrupt cash from the government and an endless string of short term byuing and selling of stocks. Meanwhile, the poor get poorer due to the lack of productive activity in the larger economy.

The economy is not healthy. And a busy stock market doesn't make it so. The stock market, as it would be running right now, if cut off from the near-free funny money, would be a reflection of the real conditions of the economy. It would be in collapse and chaos.

You should fervently hope you won't experience that chaos and collapse soon. At least not before we get rid of all the corrupt, job-killing politicians we have inside the beltway. So long as they survive, we move closer to the next one or two gigantic bubbles [1. I haven't mentioned the student loan bubble.] bursting with no safety net.

Matt Jordan is a travel writer, political commentator and author of 16 20 24. Get your SIGNED copy here!

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