Thursday, September 1, 2011

Seeds of a revolution

I have written extensively about the widening income gap between the rich and poor in America. For examples, see:
  1. Which is more elitist? France or America?
  2. It's a Class War, Stupid!
  3. The Fed's (inadvertent) role in the class war
A number of mainstream figures have jumped on that bandwagon. Consider this article from the Washington Post from June that decried the filthy rich:
It was the 1970s, and the chief executive of a leading U.S. dairy company, Kenneth J. Douglas, lived the good life. He earned the equivalent of about $1 million today. He and his family moved from a three-bedroom home to a four-bedroom home, about a half-mile away, in River Forest, Ill., an upscale Chicago suburb. He joined a country club. The company gave him a Cadillac. The money was good enough, in fact, that he sometimes turned down raises. He said making too much was bad for morale.

Forty years later, the trappings at the top of Dean Foods, as at most U.S. big companies, are more lavish. The current chief executive, Gregg L. Engles, averages 10 times as much in compensation as Douglas did, or about $10 million in a typical year. He owns a $6 million home in an elite suburb of Dallas and 64 acres near Vail, Colo., an area he frequently visits. He belongs to as many as four golf clubs at a time — two in Texas and two in Colorado. While Douglas’s office sat on the second floor of a milk distribution center, Engles’s stylish new headquarters occupies the top nine floors of a 41-story Dallas office tower. When Engles leaves town, he takes the company’s $10 million Challenger 604 jet, which is largely dedicated to his needs, both business and personal.
Henry Blodgett recently wrote Remember "The American Dream?" What A Bunch Of Crap where he decried the lack of opportunity in America by pointing to the correlation of intergenerational earnings, which is a point that I made some time ago by referencing an OECD study that came to the same conclusion.

Now Bill Gross, who can hardly be characterized as a pinko commie, lamented the death of the American Dream in his latest missive [emphasis added]:
This impending divorce in America is not about sex or sleeping around, but more about romancing the now stone-cold notion that anyone could be a millionaire in the good old U.S. of A. if only they worked hard enough. Our Statue of Liberty proclaimed “give us your tired, your poor…” and sent many of them West to build a little house on the prairie or strike it rich in the goldfields of Sacramento, California or Skagway, Alaska. Many of them did and a century later, the option-laden fields of Silicon Valley provided modern-day examples of rags to riches fairytales come true. But this odd couple marriage of rich (and poor hoping to be rich), now seems on rather shaky ground. Instead of boundless opportunity, the nursery rhyme describing Jack Sprat – who could eat no fat – and his wife – who could eat no lean – appears to be the starker of the two realities. There are the poor and there are the very rich, with the shrinking middle class resembling Mr. Sprat rather than his wife.
How Wall Street owns America
The truth is that the top 0.1% really controls most of the wealth in American and even the merely affluent are just making do. Consider this commentary from an experienced wealth management professional. Here is his characterization of the bottom of the top 1% in America today - these are your Horatio Alger stories:
The 99th to 99.5th percentiles largely include physicians, attorneys, upper middle management, and small business people who have done well.
Those in the bottom half of the top 1% are actually rather insecure and not exactly living the life of the rich and famous [emphasis added]:
I’ve had many discussions in the last few years with clients with “only” $5M or under in assets, those in the 99th to 99.9th percentiles, as to whether they have enough money to retire or stay retired. That may sound strange to the 99% not in this group but generally accepted “safe” retirement distribution rates for a 30 year period are in the 3-5% range with 4% as the current industry standard. Assuming that the lower end of the top 1% has, say, $1.2M in investment assets, their retirement income will be about $50k per year plus maybe $30k-$40k from Social Security, so let’s say $90k per year pre-tax and $75-$80k post-tax if they wish to plan for 30 years of withdrawals. For those with $1.8M in retirement assets, that rises to around $120-150k pretax per year and around $100k after tax. If someone retires with $5M today, roughly the beginning rung for entry into the top 0.1%, they can reasonably expect an income of $240k pretax and around $190k post tax, including Social Security.

While income and lifestyle are all relative, an after-tax income between $6.6k and $8.3k per month today will hardly buy the fantasy lifestyles that Americans see on TV and would consider “rich”. In many areas in California or the East Coast, this positions one squarely in the hard working upper-middle class, and strict budgeting will be essential. An income of $190k post tax or $15.8k per month will certainly buy a nice lifestyle but is far from rich. And, for those folks who made enough to accumulate this much wealth during their working years, the reduction in income and lifestyle during retirement can be stressful. Plus, watching retirement accounts deplete over time isn’t fun, not to mention the ever-fluctuating value of these accounts and the desire of many to leave a substantial inheritance. Our poor lower half of the top 1% lives well but has some financial worries.
People who are in the top 0.1% or 0.5% generally got their wealth from finance [emphasis added]:
Folks in the top 0.1% come from many backgrounds but it’s infrequent to meet one whose wealth wasn’t acquired through direct or indirect participation in the financial and banking industries. One of our clients, net worth in the $60M range, built a small company and was acquired with stock from a multi-national. Stock is often called a “paper” asset. Another client, CEO of a medium-cap tech company, retired with a net worth in the $70M range. The bulk of any CEO’s wealth comes from stock, not income, and incomes are also very high. Last year, the average S&P 500 CEO made $9M in all forms of compensation. One client runs a division of a major international investment bank, net worth in the $30M range and most of the profits from his division flow directly or indirectly from the public sector, the taxpayer. Another client with a net worth in the $10M range is the ex-wife of a managing director of a major investment bank, while another was able to amass $12M after taxes by her early thirties from stock options as a high level programmer in a successful IT company. The picture is clear; entry into the top 0.5% and, particularly, the top 0.1% is usually the result of some association with the financial industry and its creations. I find it questionable as to whether the majority in this group actually adds value or simply diverts value from the US economy and business into its pockets and the pockets of the uber-wealthy who hire them. They are, of course, doing nothing illegal.

You need intellectuals and leaders for a revolution
History is filled with peasant revolutions that fizzled and never went anywhere. The ones that are really dangerous to the Ruling Powers are the movements that have 1) leadership; 2) followers; and 3) an intellectual foundation. It may be easy to dismiss the likes of left leaning DailyKos account of Iceland's ongoing revolution, which is the modern equivalent of peasants gathering with pitchforks. It's more difficult when establishment figures like Bill Gross and Warren Buffett stands up for the cause.
In addition, we also have George Magnus, of UBS, who has writing an editorial in that pinko website Bloomberg entitled Give Karl Marx a chance to save the world economy. The likes of Gross, Buffett, Magnus et al represent the leadership in this movement to save capitalism from itself. If they aren't careful, they may spark a revolution that goes in an unintended direction. (For example, remember Gorbachev? Where is he now?)
What about the intellectual foundation for a revolution? I found an intriguing and disturbing interview with David Graeber, a social anthropologist, who has a new theory of money - that the use of debt and credit is a way to creating a class of debt slaves. He explains that credit came first before currency as a medium of exchange:
So really, rather than the standard story – first there’s barter, then money, then finally credit comes out of that – if anything its precisely the other way around. Credit and debt comes first, then coinage emerges thousands of years later and then, when you do find “I’ll give you twenty chickens for that cow” type of barter systems, it’s usually when there used to be cash markets, but for some reason – as in Russia, for example, in 1998 – the currency collapses or disappears.
Even in ancient Mesopotamia, there were debt slaves [emphasis added]:
This was the great social evil of antiquity – families would have to start pawning off their flocks, fields and before long, their wives and children would be taken off into debt peonage. Often people would start abandoning the cities entirely, joining semi-nomadic bands, threatening to come back in force and overturn the existing order entirely. Rulers would regularly conclude the only way to prevent complete social breakdown was to declare a clean slate or ‘washing of the tablets,’ they’d cancel all consumer debt and just start over. In fact, the first recorded word for ‘freedom’ in any human language is the Sumerian amargi, a word for debt-freedom, and by extension freedom more generally, which literally means ‘return to mother,’ since when they declared a clean slate, all the debt peons would get to go home.
Graeber said that the idea of debt is deeply embedded in the language of ancient cultures and religions:
In Sanskrit, Hebrew, Aramaic, ‘debt,’ ‘guilt,’ and ‘sin’ are actually the same word. Much of the language of the great religious movements – reckoning, redemption, karmic accounting and the like – are drawn from the language of ancient finance.
Throughout history, we have seen shifts between a credit based economy and commodity/barter based economies, but those shifts are highly disruptive and can cause the fall of civilizations:
Since antiquity the worst-case scenario that everyone felt would lead to total social breakdown was a major debt crisis; ordinary people would become so indebted to the top one or two percent of the population that they would start selling family members into slavery, or eventually, even themselves.
Top one or two percent? Sound familiar? He went on to talk about how the financial institutions are now perpetuating the status quo [emphasis added]:

Well, what happened this time around? Instead of creating some sort of overarching institution to protect debtors, they create these grandiose, world-scale institutions like the IMF or S&P to protect creditors. They essentially declare (in defiance of all traditional economic logic) that no debtor should ever be allowed to default. Needless to say the result is catastrophic. We are experiencing something that to me, at least, looks exactly like what the ancients were most afraid of: a population of debtors skating at the edge of disaster.
And, I might add, if Aristotle were around today, I very much doubt he would think that the distinction between renting yourself or members of your family out to work and selling yourself or members of your family to work was more than a legal nicety. He’d probably conclude that most Americans were, for all intents and purposes, slaves.
Remember that quote, "[Aristotle] would probably conclude that most Americans were, for all intents and purposes, slaves."

The American Revolution was sparked by the theory of natural rights, as espoused by thinkers such as John Locke. Today, Graeber may fill the role of Locke. We have all the ingredients for a revolutions: the intellectual foundation (a new theory of money that concludes that Americans are debt slaves), a leadership cadre (Buffett, Gross, Magnus et al) and dissatisfied peasants with pitchforks.

America needs to be careful. Down that road is Robespierre, Hitler and the disintegration of a civilization.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.


Breck Carter said...

Gosh! Common sense! If you don't change your tune, folks will confuse you with Glenn Beck :)

David Graeber said...

Actually, I was rather hoping someone would inform Glenn Beck of the threat I pose to Western Civilization. An on-air denunciation would be just the thing for my book! Does anyone know someone on his show?

Breck Carter said...

@David Graeber: That's funny! ...pretending not to know anything about Glenn Beck, pretending to believe only what other people say about him. He's not likely to denounce your book (at least not from what Cam Hui has quoted), more likely to promote it and then it would rise to number one on Amazon, worst case he would find it uninteresting. There's no harm in trying, just send him a copy with a printout of Cam Hui's comments attached. To not try is to fail.