God help the one percent

Everybody wants to crucify the rich. But what did they ever do wrong, asks Bill Bonner.

Gold down below $1,600! Is the bull market in gold finally over? Nah, let's change the subject.

Today, our hearts go out to the poor 1%. Yes, dear reader, they're blamed for the crisis. They're reviled, calumnied, and criticized; they're hunted by the taxmen; and now they are being shunned by the very institutions they most wanted to get to know. Bloomberg:

US millionaires told go away as tax evasion rule looms

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That's what some of the world's largest wealth-management firms are saying ahead of Washington's implementation of the Foreign Account Tax Compliance Act, known as Fatca, which seeks to prevent tax evasion by Americans with offshore accounts. HSBC Holdings Plc (HSBA), Deutsche Bank AG, Bank of Singapore Ltd and DBS Group Holdings Ltd (DBS) all say they have turned away business.

Renato de Guzman, chief executive officer of Bank of Singapore Ltd, said in industry meetings of private bankers he attends in Singapore, not accepting US clients is "quite a prevailing sentiment".

"I don't open US accounts, period," said Su Shan Tan, head of private banking at Singapore-based DBS, Southeast Asia's largest lender, who described regulatory attitudes toward US clients as "Draconian."

The 2010 law, to be phased in starting Jan 1, 2013, requires financial institutions based outside the US to obtain and report information about income and interest payments accrued to the accounts of American clients. It means additional compliance costs for banks and fewer investment options and advisers for all US citizens living abroad, which could affect their ability to generate returns.

Most offshore hedge funds will no longer take US clients. Overseas banks don't want their money either.

Why? Because there are over 400 pages of new regulations in the Fatca legislation. Way too much for a sane person.

Everybody wants to tax the rich, investigate them, crucify them.

But what did they do wrong?

In 1970, the top 10% of California's taxpayers paid 28.2% of all the personal income tax in the state. Who complained? They were pulling their weight. Paying their fair share.

Now, 78% of all California's personal income tax comes from these 'rich' people.

But what, exactly, happened between 1970 and 2010 that shifted so much wealth and so much tax burden to the top earners? As you can see, it wasn't just cutting their taxes they're paying more now than ever.

So what happened?

The whole system changed. Richard Nixon cut the dollar loose from gold. He may not have upset the world, but he changed the US economy. Instead of being an economy based on real money where real savings and real production increased real wages and profits, it became a smoke and mirrors economy, with money that you couldn't trust, GDP growth that was largely phony, and zero real growth in wages.

From the 70s to 2012, US stocks measured by the Dow rose more than 13 times, from under 1,000 to over 13,000. Here's a question: how could America's companies be so much more valuable, when their customers hadn't gotten a penny richer?

Follow the money. From 1970 to 2008, the US money supply (M-2) grew from $624 billion to $8.2 trillion. Guess how much that is. It's 1,314% almost the same as the Dow.

And more thoughts

"The only real force that ultimately makes the stock market or any market rise (and to a large extent, fall) over the longer term," writes analyst Kel Kelly, "is simply changes in the quantity of money and the volume of spending in the economy. Stocks rise when there is inflation of the money supply (ie more money in the economy and in the markets).

You'll recall, Dear Reader, that we are getting suspicious of GDP. As we said yesterday, it measures how fast the wheels are spinning; it doesn't tell you if you are getting anywhere.

What happened over the last 30 years in the US? Money - funny money from the feds - was causing the wheels to spin faster and faster. But the economy got nowhere, except deeper in debt.

Yes, the phony money caused people (many of them in Japan and China) to produce more stuff.

And, oh yes, it shifted money from the middle classes to the rich, by increasing the relative value of their investments 13 times... while simultaneously holding real wages flat.

Ken Gerbino explains it in another way:

It is the paper money created out of thin air that creates the unfair distribution of wealth that is making the middle class fall more behind and the poor more poor. Newly created money and credit in a paper money system benefits those that can access the money first and buy capital goods and real property ... before the new money circulates and makes all prices go up. Wages also do not keep up with the inflation and that creates another squeeze on the middle class... the bottom 90% of our citizens went from owning a big piece of the income gains (65%) in the 1960s to being squashed in the 2002-2007 period to 11%.

Now, the feds have the voters where they want them: 46 million on food stamps, and millions more dependent on federal handouts. Most people can't afford to oppose the government: they need it to eat. The Week reports:

"Over the last three decades, annual spending on the top federal programs for the poor and near-poor - such as Medicaid, food stamps and Pell grants - soared from $126 billion (in inflation adjusted 2011 dollars) to $625 billion. Today, the average poor person receives $13,000 in federal aid, up from $4,300 in 1980. Programs that transfer wealth to the middle classes are even more massive, with Social Security consuming $725 billion last year and Medicare $560 billion. All told, the US spends nearly $2.1 trillion on social programs, 60% of all federal spending."

The feds have the rich where they want them too. They're now pariahs all over the world. Nobody wants them. Nobody likes them. Banks won't touch their money.

Now, the feds can squeeze them for campaign contributions and tax money as hard as they want.

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