Income inequality…

Weakness Begets More Weakness – (hat tip to Zero hedge) this missive with valuable data and analysis from Sprott Global is a worthwhile read. 

And some quick thoughts from myself……

Wealth and income in a low return high risk, structurally imbalanced, economy does not get redistributed, it gets wasted!

The top of the economic pyramid is too heavy and the bottom too weak to support the structure: before we can get back to balanced growth there will need to be a readjustment of global wealth and income. 

High levels of income inequality imply excess returns to human capital that have not been competitively priced in the market place for one reason or another (barriers to entry, asymmetric information, inefficient market clearing etc).

Income inequality feeds directly into wealth and the compound effects of wealth and income redistribute spending power, and hence alter the dynamics of GDP growth.  Growth depends on balance between all the component factors.   Income and wealth inequality is just as much a bubble in terms of its consequence on stable growth as a debt financed housing bubble.

The adjustments to income and wealth are likely to be initiated via a) lower returns and high levels of risk to returns on risky assets and b) lower employment and salaries from financial transaction focussed industries such as banking and financial services and c) lower total remuneration packages for managerial positions in most other industries impacted by lower returns on capital.   The initial adjustment will negatively impact GDP and the overall adjustment mechanism is more complex than this.

Wealth and income in a low return high risk, structurally imbalanced, economy does not get redistributed, it gets wasted! 

Rather than turn our backs on capitalism, we need to look at ways we can make our economies more open, more competitive and less likely to be exposed to the development of significant structural imbalances, of which wealth and income inequality is one.   In truth, there are 100s, if not 1,000s of people who could do a particular job as well another, yet applicant selection appears for some reason or other to be limited to a couple of shoe ins which disable the market pricing mechanism.  

I have considered income inequality, not for egalitarian reasons, to be a significant structural economic weakness for some time – note my Capitalism in Crisis reports as well as a number of blog posts.   

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