Joseph E. Stiglitz, Nobel Prize winner in Economics, had some dire warnings in 2011 for those who fail to address income inequality. Its an interesting read in light of the events we see going on today, especially concerning Election 2016:
Americans have been watching protests against oppressive regimes that concentrate massive wealth in the hands of an elite few. Yet in our own democracy, 1 percent of the people take nearly a quarter of the nation’s income—an inequality even the wealthy will come to regret.
Of course, that was 2011. Today it is now 1% of that 1%. It is a phenomenal difference and yet, the subject barely registers on the public radar. Ironic, given that this problem should really be considered a threat to national security. Stiglitz, of course, gets to that exact point by mentioning the ‘Arab Spring’.
In recent weeks we have watched people taking to the streets by the millions to protest political, economic, and social conditions in the oppressive societies they inhabit. Governments have been toppled in Egypt and Tunisia. Protests have erupted in Libya, Yemen, and Bahrain. The ruling families elsewhere in the region look on nervously from their air-conditioned penthouses—will they be next? They are right to worry. These are societies where a minuscule fraction of the population—less than 1 percent—controls the lion’s share of the wealth; where wealth is a main determinant of power; where entrenched corruption of one sort or another is a way of life; and where the wealthiest often stand actively in the way of policies that would improve life for people in general.
Sound familiar? Stiglitz gets to that:
As we gaze out at the popular fervor in the streets, one question to ask ourselves is this: When will it come to America? In important ways, our own country has become like one of these distant, troubled places.
The contentious election of 2016 marks the beginning of troubled times for the US, and though the election is mired in issues of sex, race and corruption, the reality is that all this is very much a problem of income inequality:
The top 1 percent have the best houses, the best educations, the best doctors, and the best lifestyles, but there is one thing that money doesn’t seem to have bought: an understanding that their fate is bound up with how the other 99 percent live. Throughout history, this is something that the top 1 percent eventually do learn. Too late.
Today, however, the social fabric that bound us together in good times and bad is unraveling. Over the last generation, we have witnessed a massive transfer of economic risks from broad structures of insurance, including those sponsored by the corporate structure as well as by government, unto the fragile balance sheets of American families. This transformation is what I call the “Great Risk Shift,” is a defining feature of the contemporary American economy- as important as the shift from agriculture to industry a century ago.
If you think you are free of this sort of nonsense because you don’t live in America, I have news for you, the picture is bleak everywhere else. For those who have bothered to follow the financial world lately, you know that financial corporations have been quite busy doing what they call “derisking”. Let’s take a look at what that has done:
Essentially, the financial sector has shifted enormous risk to real sector corporations in emerging markets. This sector was one of the great buffers during the 2008 crises. It is unrealistic to expect they will be able to repeat that trick in the future. We have reached peak risk shift. We are at the point where any further shifting will cause massive problems.
The IMF has estimated that planet earth is now at 225% of global debt to global GDP. Imagine going to a bank and saying you would like a loan, but that you owe 225% of what you will earn? You would find the distance between you and the exit reduced quickly. Still, that doesn’t account for what one can expect from trying to service this debt. To pay that debt, growth has to magically keep pace, but the IMF expects lower growth precisely because of the the high debt to GDP level.
Worse, we haven’t yet considered the multipliers that results from this sort of leverage. What is a multiplier? Simply put, it is the magnified expense associated with the burdens of servicing the debt. If a hospital goes out of business in a small town, it isn’t just the employees who suffer. The businesses in the town suffer too. Property prices can go down and so much more. Typically, economist like to quantify multipliers in pretty little numbers, but perhaps a graphic illustration would be better. For example, the pressure to keep pace with the debt, forces corporations into growth that is often needless. With pressures on the environment being as heavy as they are, here is a direct example of peak risk shift:
With peak financial risk shifting, we see volatilities like this:
With income inequality we see even worse volatilities:
Amazing loss of wealth on a global scale in both cases. The kinds of things that lead to this:
Is he praying or exhausted? Not hard to imagine both.
When Ethereum decided to hard fork itself out of the DAO debacle, the Author objected heavily. This was because the fork was a risk shift that violated the consensus and placed the burden on investors. Ethereum and Bitcoin are risk sharing modalities. They started that way and should remain that way.
Many in the industry emphasize consensus algorithms like proof of stake and proof of work, but the truth is both consensus algorithms are actually proof of risk. This proof of risk extends not only to miners and stake holders, but to investors and retailers etc… In short, all users must demonstrate proof of risk in order to utilize the software. Blockchains like Ethereum and Bitcoin are risk sharing cooperatives. The consensus is sacrosanct.
We are already seeing risk sharing cooperatives like Bitcoin addressing things like income inequality for its users. It is no coincidence that Bitcoin began in 2008, during the peak of the financial crises. By applying the simple process of decentralized networking, it has created over a ten billion dollar market cap from out of nothing. It had no help from traditional financial mechanisms either.
Most financial strategies are risk shifting modalities. It is past time to start letting those who take risks, earn or lose from those risks. Lets be honest, nothing is going to stop the current legacy financial institutions from the next crises. Lets just hope the cryptocurrency industry will be strong enough to buffer the inevitable crises. The Author thinks this may already be happening.
The Author owns Bitcoin in his portfolio. Nothing he writes should be considered financial or legal advice.
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