Money for Nothing, That Ain't Working

Last Updated Oct 31, 2011 7:18 PM EDT

Why is the world economy is such dire straits? Because too many people, for too long, have assumed that if they have the cash, they can get more money, for nothing.
Back in 1994, 20 percent of the population had an average disposable income exceeding $1,600 per week, at today's value. That was $1,270 more than those on the lowest quintile. If those at the top spent the differential entirely on the share market, that would be $66,000 (at 2010 prices) to pump into speculative investments. Adding that money each year would mean that, by 2007, those investors would have made $1.4 million. They might have worked hard to earn that money, but the real hard work was being done by the money itself.

At the same time, those people on the lowest quintile, will have seen their disposal income drop from $332 to $323 each week (both at 2010 prices). That money, of course, will go on food, clothes, utilities and the like --- with little scope for the accumulative benefits of investments.


This is why, as I described in Revive Eighties Capitalism, the divide in wealth is growing at a far greater rate than the divide in income. Those with money built wealth just because they had the cash to invest in the first place. It's money for nothing. And because unfettered capital accumulates, the more you have, the more you can invest, the more money you make.

It doesn't really seem fair does it? Yet, perhaps, the market has a way of correcting the inequality. Did share prices rise through the early part of this century because the companies involved suddenly became more productive? No. Instead, wasn't it because more people were investing and the demand pushed prices up?
This only applies to a point, of course. When share prices got too far out of kilter with the value of the companies invested in, the index come crashing down. If the investor kept adding $66,000 per year beyond 2007, the $1.4 million nest egg would have fallen by $400,000, even though $264,000 more had been spent on the portfolio. This came as a double whammy for people in the bottom quintile, who saw their superannuation funds fall, whilst their disposable income also continued to slide.

How do you fix the inequality? As we discussed last week, the answer surely has to be higher taxation for high income earners. There would be less cash to invest in the stock market, instead seeing that cash working on public services and infrastructure. Even if you are skeptical about the efficiency of money spent in the public sector, it would have to be a more productive use than funding speculative trading that bears little relation to the values of listed entities, but lines the pockets of those in the finance industry --- the experts at creating money from nothing.
Read more By The Numbers articles by Phil Dobbie here.
Follow Phil Dobbie and BNET Australia on Twitter.
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