Thursday 16 March 2017

The Correlation between Income Inequality, Debt and Credit

Income Inequality

Income Inequality, commonly refereed as the Wealth Gap is the uneven distribution of income and wealth.


Debt and Credit

Debt is an obligation owed by a debtor to a creditor, created when the creditor loans assets(provides credit) to the debtor. When this credit is spent, the debtor's future consumption is leveraged which bloats the current economy at the expense of the future economy. This leveraged consumption inflates the current market values of assets and services.


Economic Trends
  • The debt levels in western economies have grown significantly since the early 1970s.
  • The degree of income inequality in western economies has grown significantly since the early 1970s.
There have been numerous credit cycles since the early 1970s and regardless of the de-leveraging stage of each credit cycle, every credit cycle always ends with a higher per capita debt level (private and public combined, inflation adjusted) than the previous credit cycle. Correspondingly, the degree of income inequality is greater at the end of every credit cycle than it was in the previous credit cycle. Greater and greater debt levels correlate to greater and greater income equality. 


Why is there a Correlation between Income Inequality, Debt and Credit?

During the beginning of a credit cycle, credit expansion inflate asset values which predominantly benefit the wealthy. During the end of a credit cycle, central banks intervene to buffer economic contraction by bailing out financial institutions and insolvent 'too big to fail' companies which predominantly benefit the wealthy. The conversion of private debt to public debt disproportionately benefit the wealthy. 


Income Inequality and Asset Values

In 2007, the wealthiest 10% owned over 80% of all the stock market wealth. Government bailouts and ongoing government stimulus predominantly benefit the wealthy and grow income inequality. Concurrently, the bloated stock values and the subsequent market caps of their public companies are funding the disingenuous greedy compensation and stock packages of their board members and founders as well as the tens of thousands of their upper-level managers.





Credit Market Debt Bubble

Ever since the Global Financial Crisis of 2007-2008 decimated world economies, world economies have required monetary stimulus / credit expansion to grow and sustain their economies.

The chart below shows the total amount of credit market debt owed in the US. Total credit surged to a record high of US$54.6 trillion (in the first quarter of 2012), from close to zero when records began in the early 1950s. Initially credit growth remained subdued. But during the 1970s it picked up…and never looked back.

 

Synopsis of the growing Income Inequality

An August 2014 analysis by Standard & Poor noted the growing Income Inequality was predominately due to the greater reliance on equity options in executive compensation, the rise of the super managers in both the financial and nonfinancial sectors and the superstar compensation of entertainment and sports celebrities aided by technological innovation that broadened their reach across global markets. But in reality, the growing Credit Market Debt Bubble overblown by government monetary stimulus has inflated asset values and subsequently bloated the compensation of company executives. super managers and the superstar entertainment and sports celebrities.

According to the same 2014 analysis by Standard & Poor, as the income gap has widened, it has created an undercurrent of social unrest that, should the trend continue, will worsen, possibly spurring widespread civil unrest.




Standard & Poor Analysis
https://www.globalcreditportal.com/ratingsdirect/renderArticle.do?articleId=1351366&SctArtId=255732&from=CM&nsl_code=LIME&sourceObjectId=8741033&sourceRevId=1&fee_ind=N&exp_date=20240804-19:41:13


Saturday 5 January 2013

THE ECONOMY


OXFORD ENGLISH DICTIONARY DEFINITION: The state of a country or region in terms of the production and consumption of goods and services and the supply of money OR The careful management of available resource.

WIKIPEDIA DEFINITION: An economy consists of the economic system of a country or other area, the labor, capital and land resources, and the economic agents that socially participate in the production, exchange, distribution, and consumption of goods and services of that area.


The above definitions are extraneous. The goal of this article is to define the economy and outline it's structure in basic terms.

BASIC DEFINITION: The production, consumption, and distribution of goods and services of a region. 

Simply stated:
  • the production is the output* or the value added to the economy
  • the consumption is the intake of production or the cost to the economy
  • the distribution is the outflow of production or the allocation of output* to citizens of the economy.
*In theory, each unit of output corresponds to a unit of income.


To outline it's structure, we need to quantify the economy's Production and Consumption by determining each of it's citizens consumer/producer status and social demographic and grouping them accordingly as
  • Children/Students net consumers
  • Public Service Sector
  • Private Service Sector
  • Construction net producers
  • Manufacturing net producers
  • Agriculture net producers
  • Cash Economy
  • Unemployed with benefits net consumers
  • Unemployed no benefits net consumers
  • Social Assistance net consumers
  • Retired Pension Plans net consumers
  • Retired Social Assistance net consumers

Note that the groups above not defined as net producers or net consumers can vary between net producers or net consumers group type   Group types are defined as
  • net producers produce more than they consume
  • net consumers consume more than they produce

The Service Sectors groups can be classified as net producers only if the services of the group provide sufficient efficiency savings to the UN-leveraged values of all their related products and/or services. During the last 50 years, the Services Sector proportional share size of GDP of most developed democracies increased dramatically. Subsequently, they increased the leveraging levels of products and services in their economies. Deservedly, their economy's Services Sectors are net consumers.

Below is the revised grouping for these democracies
  • Children/Students net consumers
  • Public Service Sector net consumers
  • Private Service Sector net consumers
  • Construction net producers
  • Manufacturing net producers
  • Agriculture net producers
  • Cash Economy
  • Unemployed with benefits net consumers
  • Unemployed no benefits net consumers
  • Social Assistance net consumers
  • Retired Pension Plans net consumers
  • Retired Social Assistance net consumers

SUMMATION: In-order to mitigate outflows of capital and the loss of jobs in manufacturing, the economies of most developed democracies became more serviced based and credit dependent. As outsourcing and advances in manufacturing technologies exasperated the losses of jobs, governments stimulated sectors of their economies and expanded their size. As a result, these democracies are subsidizing their economies and indebting their future generations.



CANADIAN PERSPECTIVE - The decline of net producers and rise of net consumers 


The Services Sector as a percentage of GDP has increased from about 50% in 1960 to about 70% today.and now employs over 75% of workers. Meanwhile, the share of Manufacturing as a percentage of the Canadian GDP has been declining since the early 1940's.



The Canadian economy has undergone a broad structural shift.  To illustrate this, the Village of Canada Microcosms below quantifies the decline of net producers and rise of net consumers in Canada.


Village of Canada

The population of Canada was approximately 18,500,000 in 1962, 25,000,000 in 1982 and 35,000,000 in 2012. Listed below are the 1962, 1982 and 2012 village representations of a 100 person Canada. Each person listed in the 1962, 1982 and 2012 village columns is the equivalent of 185,000 (1962) or 250,000 (1982) or 350,000 (2012) Canadians with similar social demographic.


1962 1982 2012

Children/Students

Public Service Sector
Private Service Sector
Construction
Manufacturing
Agriculture

Cash Economy

Unemployed with benefits
Unemployed no benefits
Social Assistance

Retired Pension Plans

Retired Social Assistance


Net Consumers   Net Producers
 
23

5
14
0
0
0

2

2
2
1

13
4


66
 
0

2
5
5
17
4

1

0
0
0

0
0


34

21

7
17
0
0
0

2

2
2
1

14
4


70

0

2
5
5
14
3

1

0
0
0

0
0


30

21

10
21
0
0
0

3

3
2
2

14
4


80

0

2
5
5
6
1

1

0
0
0

0
0


20



SYNOPSIS


The citizens of the Village of Canada are citizens of the Village of the Damned.



HIERARCHY OF THE ECONOMY

When thinking of the economic distress afflicting major democracies, 'house of cards' may come to mind.  But, if you think in terms of hierarchy of economies, 'thick stone mansions with thin wood foundations' is more applicable. This analogy will make sense after reading below to the end.

What is the hierarchy of the economy?   Essentially, it's the evolutionary order of economic activities determined by the needs of early humans and/or human communities.
  • food, water
  • shelter
  • clothing
  • manufacturing
  • education
  • transportation
  • banking
  • retail
'Food, water, shelter, clothing, manufacturing' are productive activities whereas 'education, transportation, banking, retail' are service activities.  In essence, 'production' activities trump 'service' activities.  The core value of an economy comes from 'Production' whereas 'Services' leverage the value of Production. The most common example of this leverage is when a retailer sells a product at a price above the wholesale price. Even a financial service offered to consumers is subordinate to the production of something. 

'Every service owes it's existence to production. There are no exceptions.'

The level of wealth generated in an economy are dependent on 2 factors.
  • efficiency
  • credit
Efficiencies from automation, economies of scale and cheap labor improve production of goods and some services whereas credit (money supply) boost predominantly the services sector of the economy  Inherently, the excessive debt obligations from excessive credit can impede the economy.

The growth of the service sector industries of major economies are attributed to credit expansion policies of their central banks. Subsequently, their services sector industries have over leveraged the wealth from their production sector industries. They are too big to sustain.

Production is the foundation of an economy.  Services are the walls and roof of an economy.  Most major economies are like 'thick stone mansions with thin wood foundations'.






Research sources
http://en.wikipedia.org/wiki/Economy
http://www.claimingourfuture.ie/wp-content/uploads/What-is-the-Economy-COF.pdf
https://www.cia.gov/library/publications/the-world-factbook/geos/ca.html
http://www.statcan.gc.ca/daily-quotidien/120907/dq120907a-eng.htm
http://www.servicecanada.gc.ca/eng/qc/job_futures/statistics/8431.shtml
http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/govt62a-eng.htm
http://www.canadianservicescoalition.com/CanadianServicesSectorANewSuccessStory.pdf
http://www.statcan.gc.ca/about-apercu/plan2010-2013/demograph-eng.htm
http://en.wikipedia.org/wiki/Population_of_Canada_by_year 
http://www.international.gc.ca/trade-agreements-accords-commerciaux/services/canada-ts.aspx?view=d



The views and opinions expressed in this article are strictly those of the author.

Monday 12 December 2011

China... Bubble of all bubbles

China's economic growth has been unprecedented. Many economists forecast that within 1 decade, their GDP will eclipse the GDP of the United States. But these forecasters overlook the Chinese policies that created the biggest economic bubble in history and the likelihood that this bubble will either deflate slowly or burst. Regardless of the degree of bursting, as a consequence, many global economies will inevitably collapse.

The biggest component of their economic bubble is construction and building, principally Real Estate.  It's crashing would play out worse than the 1989 Real Estate crash in Japan. Before their bubble was started, Japan's economy was robust and balanced. When their Real Estate bubble started growing, a significant percentage of their population were able to buy into the early stages of their Real Estate bubble and economically prosper. In China, a much smaller percentage of their population, the connected and early adopters of Chinese economic reforms, benefited and prospered from the rise of Chinese Real Estate. Even though the rising values of Chinese Real Estate were not predicated by a credit bubble, the rate of speculation quickly drove up prices way beyond what the majority of the growing middle class could afford. Combined with the systemic corruption of local government officials, a Chinese Real Estate crash could be socially explosive.

It may be that Beijing has lost control of their economy and is implementing measures to delay and deal with the coming crash and social unrest. It may also be that other countries are implementing measures to delay and deal with the coming crash and social unrest their countries.

Thursday 8 December 2011

Sustained Economics 101

Markets, which are fair and free, eliminate unsustainable products and services. The problem for the world's economy is that the world's markets are far from fair and free.

Just as evolution's natural selection eliminates unsustainable biological traits, economies need to purge themselves of uneconomical activities. At present, economic policies and subsidies reward failures and punish successes. They limit the natural free flow of capital that would go to profitable products and services. Economies need to eliminate these policies and subsidies and allow economic natural selections to occur.

Economies also must be balanced and policed. Regulations and oversight that deter predatory competition and greed need to be enhanced and aggressively enforced. If governments worldwide co-operate and implement these measures and other measures that address the world's social and political disparities and environmental limits, a balanced sustainable prosperous worldwide economy could come to fruition.

Unfortunately, the past 30 years have seen developed, democratic economies relying more and more on deficit spending and credit creation to offset economic losses to new emerging economies. They have subsidized their economic growth by stealing from future generations. They have mortgaged their children!

The economic crisis cannot be solved with more bailouts, subsidies and quantitative easing. Real change is needed.

Sustainable Economics Manifesto

Objective: Establish a worldwide, fair and free sustainable economic model that rewards innovation, success and hard work and reduces social and economic disparities.

Core Systemic Issues / Solutions, Possible Methods & Ramifications

  • Increasing amounts of consumer credit
    create asset bubbles, unsustainable demand and production inefficiencies. When credit is added, new products and services appear and/or the prices of products and services go up because there are more dollars chasing each product or service. When credit is serviced, capital is diverted from the economy. If the diversion of capital exceeds new capital inflows, then prices go down and/or products and services disappear. Predominately, most consumer credit is for consumption purposes. The resulting consumer debt is a tax on future economic activity.

    The central banks of the world must gradually increase interest rates. Asset prices will generally go down and products and services will disappear. This will trigger recessions that may last a couple of years in most developed countries. If interest rates are not gradually raised, deeper recessions or depressions lasting much longer will occur.
  • Government subsidies including bailouts and tax incentives for any product or service create pricing bubbles, disenfranchise unsubsidized enterprises and sectors and hinder productive capital investments. For example, the housing sector benefits from government tax incentives.
    Government must eliminate all types of subsidies. This will trigger failures of some financial institutions, manufacturers, builders, farmers and other private enterprises that benefit directly or indirectly from any government subsidies. Some failures will re-structure and re-emerge as profitable operations and others will have their assets bought by solvent private enterprises.
  • Government deficit spending subsidizes wasteful spending, entitlements and the wages and benefits of public sector workers that are substantially higher than the wages and benefits of private sector workers. (Read more)
    Enacting balance budget amendments will force prioritized reduced funding for only necessary services and programs. Public sector labor unions have to be disbanded and the wages and benefits for all government employees have to be reduced to private sector levels.
  • Labor Unions are Labor Monopolies. Monopolies can inflate their prices because they have no competition. (Read more)
    Disband all labor unions and strictly enforce enhanced labor laws. This will enable previously unionized employers to more quickly innovate and adapt to their evolving markets, resulting in improved productivity. Wage and benefit contracts could be adjusted yearly based on the companies overall profit and inflation. Additionally, companies could offer profit sharing to their employees. Any disputes between employees and employers would go to arbitration. There would be no strikes or work to rule slowdowns.
  • Income disparity. The gap between society's richest and poorest is increasing. In the 1950s, the bottom 90% of Americans had 68% of the nation’s wealth. In 2009, the top 10% of Americans had 50% of the nation’s wealth. The top 0.1% of Americans had an astounding 10% of the nation’s wealth. The gap is increasing predominantly at the top because of the rise in earnings of celebrities attained from lucrative endorsement & performance contracts and the rise of earnings of the owners, founders and executives of financial institutions and publicly traded companies attained from stocks, salaries and bonuses.
    Taxation and/or enacting regulations that reduce earnings of the top income earners. For instance, a regulation that requires the executive compensation package of a public company be approved by a majority of individual shareholders. Another regulation could require yearly bonuses be paid based on the performance of the previous 5 years. This would discount or eliminate bonuses accrued in good years if any bad performance years occurred. Ideally, if distribution of wealth was similar to the 1950's, there would be substantially less poverty.













This manifesto is incomplete.  Please post your recommendations, comments and criticisms.