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Raging Inequality May Cause Unrest and Violence In America and the Rest of Western World

Preface: While conservatives are against redistribution of wealth and liberals want to tax the affluent, conservatives and liberals, the affluent and the less well-heeled should all agree that we have to stop the surge in inequality from rising further:

• As Robert Shiller said in 2009:
  

  And it’s not like we want to level income. I’m not saying spread the wealth around, which got Obama in trouble. But I think, I would hope that this would be a time for a national consideration about policies that would focus on restraining any possible further increases in inequality.

• The father of modern economics – Adam Smith – didn’t believe that inequality should be a taboo subject

• Warren Buffet, one of America’s most successful capitalists and defenders of capitalism, points out, “There’s class warfare, all right, but it’s my class, the rich class, that’s making war ….”

• Conservatives – as well as liberals – are against rampant inequality. But all Americans underestimate the amount of inequality in our country

And while I am not calling for violence, I wonder if this is like South Africa at the end of the Apartheid era, where those in power had to hand over the reins to the majority to prevent violence.

And even if there is not a revolt, we are already seeing increased crime and the breakdown of society. See this and this.

Raging inequality was largely responsible for the Great Depression and for the current financial crisis.

I noted in January:

Egyptian, Tunisian and Yemeni protesters all say that inequality is one of the main reasons they’re protesting.

However, the U.S. actually has much greater inequality than in any of those countries.

Is there any way that the growing inequality could cause unrest in America or the rest of the Western world?

Initially, the Greek and Spanish riots have grown out of bailouts and other windfalls for the big banks and hedge funds (see this, this and this), and austerity for the working stiff. So in a sense, they are about inequality.

Moreover, I pointed out in February:

Agence France-Press reports today:

The International Monetary Fund stands ready to help riot-torn Egypt rebuild its economy, the IMF chief said Tuesday as he warned governments to tackle unemployment and income inequality or risk war.

Forbes reported in February:

Harvard economist Kenneth Rogoff, co-author of a best-selling book on financial crises, “This Time It’s Different,” told Forbes today in an exclusive interview, that the high unemployment rate and high levels of debt in the U.S. will sooner or later trigger serious “social unrest from the income disparities in the U.S.”

The Obama administration has “no clue,” he told me what do about this terrible disparity in the economy that is bound to erupt sooner or later, he feels.

“I don’t understand why people don’t wake up to the crisis they are creating,” he said to me just minutes after appearing at a Council on Foreign Relations round-table on “Currency Wars.”

And I wrote in June:

CNN’s Jack Cafferty notes that a number of voices are saying that – if our economy continues to deteriorate (which it very well might) – we are likely headed for violence, and civil unrest is a growing certainty.Watch the must-see CNN viewer comments on this issue:

Newsweek wrote two weeks ago:

Reality is beginning to break through. Gas and grocery prices are on the rise, home values are down, and vast majorities think the country is on the wrong track. The result is sadness and frustration, but also an inchoate rage more profound than the sign-waving political fury documented during the elections last fall.

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In search of the earthly toll of this outrage, NEWSWEEK conducted a poll of 600 people, finding vastly more unquiet minds than not. Three out of four people believe the economy is stagnant or getting worse. One in three is uneasy about getting married, starting a family, or being able to buy a home. Most say their relationships have been damaged by economic woes or, perhaps more accurately, the dread and nervousness that accompany them.

Could these emotions escalate into revolt?

Why Are People So Angry?

Why are people so angry?

Well, as the Newsweek article points out:

Corporate earnings have soared to an all-time high. Wall Street is gaudy and confident again. But the heyday hasn’t come for millions of Americans. Unemployment hovers near 9 percent, and the only jobs that truly abound, according to Labor Department data, come with name tags, hairnets, and funny hats (rather than high wages, great benefits, and long-term security). The American Dream is about having the means to build a better life for the next generation. But as President Obama acknowledged at a town-hall meeting in May, “a lot of folks aren’t feeling that [possibility] anymore.”

By way of background, America – like most nations around the world – decided to bail out their big banks instead of taking the necessary steps to stabilize their economies (see this, this and this). As such, they all transferred massive debts (from fraudulent and stupid gambling activities) from the balance sheets of the banks to the balance sheets of the country.

The nations have then run their printing presses nonstop in an effort to inflate their way out of their debt crises, even though that effort is doomed to failure from the get-go.

Quantitative easing by the Federal Reserve is obviously causing food prices to skyrocket worldwide (and see this, this and this).

But the fact is that every country in the world that can print money – i.e. which is not locked into a multi-country currency agreement like the Euro – has been printing massive quantities of money. See these charts.

Moreover, the austerity measures which governments worldwide are imposing to try to plug their gaping deficits (created by throwing trillions at their banks) are causing people world-wide to push back.

As I warned in February 2009 and again in December of that year:

Numerous high-level officials and experts warn that the economic crisis could lead to unrest world-wide – even in developed countries:

• Today, Moody’s warned that future tax rises and spending cuts could trigger social unrest in a range of countries from the developing to the developed world, that in the coming years, evidence of social unrest and public tension may become just as important signs of whether a country will be able to adapt as traditional economic metrics, that a fiscal crisis remains a possibility for a leading economy, and that 2010 would be a “tumultuous year for sovereign debt issuers”.

• The U.S. Army War College warned in 2008 November warned in a monograph [click on Policypointers’ pdf link to see the report] titled “Known Unknowns: Unconventional ‘Strategic Shocks’ in Defense Strategy Development” of crash-induced unrest:
  

  The military must be prepared, the document warned, for a “violent, strategic dislocation inside the United States,” which could be provoked by “unforeseen economic collapse,” “purposeful domestic resistance,” “pervasive public health emergencies” or “loss of functioning political and legal order.” The “widespread civil violence,” the document said, “would force the defense establishment to reorient priorities in extremis to defend basic domestic order and human security.” “An American government and defense establishment lulled into complacency by a long-secure domestic order would be forced to rapidly divest some or most external security commitments in order to address rapidly expanding human insecurity at home,” it went on. “Under the most extreme circumstances, this might include use of military force against hostile groups inside the United States. Further, DoD [the Department of Defense] would be, by necessity, an essential enabling hub for the continuity of political authority in a multi-state or nationwide civil conflict or disturbance,” the document read.

• Director of National Intelligence Dennis C. Blair said:
  

  “The global economic crisis … already looms as the most serious one in decades, if not in centuries … Economic crises increase the risk of regime-threatening instability if they are prolonged for a one- or two-year period,” said Blair. “And instability can loosen the fragile hold that many developing countries have on law and order, which can spill out in dangerous ways into the international community.”***

  “Statistical modeling shows that economic crises increase the risk of regime-threatening instability if they persist over a one-to-two-year period.”***

  “The crisis has been ongoing for over a year, and economists are divided over whether and when we could hit bottom. Some even fear that the recession could further deepen and reach the level of the Great Depression. Of course, all of us recall the dramatic political consequences wrought by the economic turmoil of the 1920s and 1930s in Europe, the instability, and high levels of violent extremism.”

  Blair made it clear that – while unrest was currently only happening in Europe – he was worried this could happen within the United States.

  [See also this].

• Former national security director Zbigniew Brzezinski warned “there’s going to be growing conflict between the classes and if people are unemployed and really hurting, hell, there could be even riots.”

• The chairman of the Joint Chiefs of Staff warned the the financial crisis is the highest national security concern for the U.S., and warned that the fallout from the crisis could lead to of “greater instability”.

Others warning of crash-induced unrest include:

• The head of the World Trade Organization

• The head of the International Monetary Fund (and see this)

• The head of the World Bank

• Senator Christopher Dodd

• Congressman Ron Paul (radio interview on March 6, 2009)

• Britian’s MI5 security agency

• Leading economic historian Niall Ferguson

• Leading economist Marc Faber and billionaire investor Jim Rogers

• Leading economist Nouriel Roubini

• Leading economist John Williams

• Top trend researcher Gerald Calente

• European think tank Leap2020

Unemployment is soaring globally – especially among youth.

And the sense of outrage at the injustice of the rich getting richer while the poor get poorer is also a growing global trend.

Countries worldwide told their people that bailout out the giant banks was necessary to save the economy. But they haven’t delivered, and the “Main Streets” of the world have suffered.

As former American senator (and consummate insider) Chris Dodd said in 2008:

If it turns out that [the banks] are hoarding, you’ll have a revolution on your hands. People will be so livid and furious that their tax money is going to line their pockets instead of doing the right thing. There will be hell to pay.

Of course, the big banks are hoarding, and refusing to lend to Main Street. In fact, they admitted back in 2008 that they would. And the same is playing out globally.

As I noted in February:

***No wonder former U.S. National Security Adviser Zbigniew Brzezinski … warned the Council on Foreign Relations that:

For the first time in human history almost all of humanity is politically activated, politically conscious and politically interactive. There are only a few pockets of humanity left in the remotest corners of the world that are not politically alert and engaged with the political turmoil and stirrings that are so widespread today around the world.

***

America needs to face squarely a centrally important new global reality: that the world’s population is experiencing a political awakening unprecedented in scope and intensity, with the result that the politics of populism are transforming the politics of power. The need to respond to that massive phenomenon poses to the uniquely sovereign America an historic dilemma: What should be the central definition of America’s global role?

[T]he central challenge of our time is posed not by global terrorism, but rather by the intensifying turbulence caused by the phenomenon of global political awakening. That awakening is socially massive and politically radicalizing.

It is no overstatement to assert that now in the 21st century the population of much of the developing world is politically stirring and in many places seething with unrest. It is a population acutely conscious of social injustice to an unprecedented degree, and often resentful of its perceived lack of political dignity. The nearly universal access to radio, television and increasingly the Internet is creating a community of shared perceptions and envy that can be galvanized and channeled by demagogic political or religious passions. These energies transcend sovereign borders and pose a challenge both to existing states as well as to the existing global hierarchy, on top of which America still perches.

***
That turmoil is the product of the political awakening, the fact that today vast masses of the world are not politically neutered, as they have been throughout history. They have political consciousness.

***

Politically awakened mankind craves political dignity, which democracy can enhance, but political dignity also encompasses ethnic or national self-determination, religious self-definition, and human and social rights, all in a world now acutely aware of economic, racial and ethnic inequities. The quest for political dignity, especially through national self-determination and social transformation, is part of the pulse of self-assertion by the world’s underprivileged

***

We live in an age in which mankind writ large is becoming politically conscious and politically activated to an unprecedented degree, and it is this condition which is producing a great deal of international turmoil.

That turmoil is the product of the political awakening, the fact that today vast masses of the world are not politically neutered, as they have been throughout history. They have political consciousness.

Watch an excerpt:

Our quote of the day comes from Bloomberg’s Jonathan Weil, who keenly notes that:

At $9.85 a share, down 26 percent this year, Bank of America finished yesterday with a market capitalization of $99.8 billion. That’s an astonishingly low 49 percent of the company’s $205.6 billion book value, or common shareholder equity, as of June 30. As far as the market is concerned, more than half of the company’s book value is bogus, due to overstated assets, understated liabilities, or some combination of the two. (emphasis added)

Discuss . . .

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Source:
Curse the Geniuses Who Gave Us Bank of America
Jonathan Weil
Bloomberg Jul 20, 2011 8:00 PM ET
http://www.bloomberg.com/news/2011-07-21/curse-the-geniuses-who-gave-us-bank-of-america-jonathan-weil.html

From Jesse’s Café Américain:

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Although the nominal US corporate tax rate of 35% seems high, and especially so given all the corporate funded propaganda promoting more tax cuts and givebacks, in fact the realized corporate rates are relatively low both in terms of historical experience and other countries. This is because of the many loopholes, subsidies, and accounting gimmicks available to its corporate citizens from the corporate friendly government.

One could make the case that the tax burden is falling disproportionately on smaller businesses and individuals that do not have the infrastructure and latitude to take advantage of the loopholes available to the bigger business lobby companies.

State and local taxes appear to be regressive. The top echelons of corporations and private individuals seem to be doing rather well for themselves.

You Want to Fix the U.S. Economy? Here’s a Start
Charles Smith
July 19, 2011

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Charles Hugh Smith publishes Foreclosure Crisis Weekly, dedicated to documenting the often-amazing foreclosure crisis.

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A simple 8-point plan would restore both the banking and the real estate sectors, and end the political dominance of the parasitic “too big to fail” banks.

Craven politicos and clueless Federal Reserve economists are always bleating about how they want to fix the U.S. economy and restore “aggregate demand.” OK, here’s how to start:

1. Force all banks to mark all their assets to market at the end of each trading day, including all derivatives of all types, including over-the-counter instruments.

2. Allow citizens to discharge all mortgage and student loan debt in bankruptcy court, just like any other debt.

3. Banks must mark all their real estate to market weekly as defined by “last sales of nearby properties” adjusted for square footage and other quantifiable measures (i.e. like Zillow.com).

4. Require mortgage servicers and all owners of mortgage-backed securities to mark every asset within each pool to market weekly.

5. Any mortgage, loan or note which was fraudulently originated, packaged and sold, including the misrepresentation of risk, the manipulation of risk ratings, fraudulent documentation by any party, etc., will be discharged as uncollectable and the full value wiped off the books and title records without recourse by any of the parties.

If a bank fraudulently originated a mortgage and the buyer misrepresented material facts on the mortgage documents, then both parties lose all claim to the note and the underlying asset, the house, which reverts to the FDIC for liquidation, with the proceeds going towards creditors’ claims against the bank.

6. Any bank which misrepresents marked-to-market asset values will be fined $10 million per incident.

7. Any bank which is insolvent at the end of a trading day will be closed and taken over by the FDIC the following day, and liquidated in an orderly manner via open-market auctions of all assets, including REO (real estate owned).

8. All derivative positions held by the insolvent bank will be unwound immediately, and counterparties who fail to make good on their claims will also be closed, given to the FDIC and liquidated.

You know what this is, of course: a return to trustworthy, transparent accounting. And you know what the consequences would be, too: all five “too big to fail” banks would instantly be declared insolvent, and most of the other top-25 big banks would also be closed and liquidated.

At least $3 trillion in impaired residential mortgage debt would be written off, maybe more, and $1 trillion in impaired commercial real estate would also be written down. Derivative losses are unknown, but let’s estimate it’s at least $1 trillion and maybe much more.

If $5.8 trillion of fantasy “value” is wiped off the nation’s books, that’s only a 10% reduction in net household and non-profit assets, which total $58 trillion. Even an $11 trillion hit would only knock off 20%. If that’s reality, if that’s what the assets are really worth in the real world, then let’s get it over with. Once we’ve restored truthful accounting and stopped living a grand series of debilitating lies, then the path will finally be clear for renewed growth.

The net result would be the destruction of the political power of the “too big to fail” banks, the clearing of the nation’s bloated, diseased real estate market, and the restoration of trust in institutions which have been completely discredited.

Bank credit would flow again, and we could insist on a healthy competitive system of 250 small banks instead of a corrupting system of 5 insolvent parasitic monsters and 20 other bloated but equally insolvent financial parasites.

Those who lied would finally get fried. At long last, those who misprepresented income, risk, etc. would actually pay some price for their malfeasance. Criminal proceedings would be a nice icing on the cake, but simply ending the pretence of solvency would go a long way to restoring banking and real estate and ending regulatory capture by TBTF banks.

What’s the downside to such a simple action plan? Oh boo-hoo, the craven politicos would lose their key campaign contributors. On the plus side, the politicos could finally wipe that brown stuff off their noses.



So I get this very earnest email asking me why 1. I am such a bear on Housing and b) I am cherry picking only negative housing data . “I see you mentioned (cherry picked) EHS data today, but you failed to mention the big improvement in Housing Starts.”

Fair questions both:

I tweeted, but did not blog Housing Starts, as I find its far less important than EHS:

“Oh goody, more supply! Should be great for prices (not) Building permits up 2.5% to 624K.”

Second, I have discussed many times that Starts and New Home Sales are an erratic data series, subject to weather, contractor reportage, etc.

Last, and most important, the Permits chart looks awful. If this were a stock, would you buy it?

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Housing Starts

Source: Asha Bangalore, Northern Trust

The former hedge-fund manager who predicted the housing market’s plunge. He forecast that the bubble would burst as early as 2007, and he acted on his conviction by betting against subprime mortgages. The former head of Scion Capital LLC was profiled in Bloomberg columnist and bestselling author Michael Lewis’ book “The Big Short”.

July 20 (Bloomberg)

In a measure of how the spring selling season has gone, June Existing Home Sales, a measure of contracts likely signed in March and April, totaled 4.77mm annualized, 130k below forecasts. It is the slowest since Nov. The drop in sales from May was all in the condos/co-ops category as single family sales were unchanged. Although unchanged in sales, single family months supply rose to 9.4 from 8.9, the highest since Nov as the absolute number of homes for sale rose. Months supply for condos/co-ops fell to a still elevated 10.2 from 10.9. The median home price rose .8%. The NAR chief economist said there was “an unusual spike in contract cancellations in the past month,” likely due to tough lending standards and appraisals below the agreed upon price. Also, the oncoming lower mortgage loan limits that FNM and FRE will be participating in are having an impact as some lenders are now only lending on the lessened amount, leaving a jumbo mortgage the only other option for some buyers, which is higher cost. The NAR said 16% of contracts were canceled in June, up from just 4% in May. Distressed sales made up 30% of all sales vs 31% in May. Bottom line, we all know the bottom line with housing as it has remained the same for a while with no signs yet of that changing.