Occupy Wall Street (OWS) has gone global. Thousands are out on the streets in major financial centres, protesting against... something. That's not meant to denigrate the movement.
The protesters are mostly (but not exclusively) young and disillusioned. They know something is up. They feel something is terribly wrong with the way the world operates. But through their youth and ignorance they can't put their finger on it.
So the protests are incoherent. Not surprisingly, young people who have been educated in left-leaning universities and brought up to think the world owes them something want to blame 'Wall Street' and the 'rich'. They want wealth distributed and the world to be more 'fair'.
There are two ways of looking at the OWS movement. One, like conservative commentator Janet Albrechtsen, is to dismiss the movement as belonging to left-wing crazies who just want stuff without working for it. Her column in yesterday's Australian was as ignorant about the real causes of OWS as the protesters are. Talk about irony. This is her take on it:
'If the populist "we want stuff" message from the OWS protesters finds its way into the White House and Congress, then the US economy is in for an even tougher time than at present. With spending at record levels since World War II, a $US4 trillion federal budget and a $US$1.65 trillion deficit, the path to economic growth is surely not pandering to a group of city campers who want stuff because, well, that's just what they want...'
Perhaps she doesn't realise that the source of these demands lies in the fact that bankers got money without working for it. High unemployment and a mal-adjusted economic structure lead to everyone wanting a bailout.
The other way of looking at the OWS movement is to see it as an accompaniment to the breakdown of the current financial system. It's societal upheaval joining in with financial upheaval. As they've done throughout history, the two go hand in hand.
The global system of finance is broke, both actually and figuratively. It's riddled with corruption. Built on a brittle foundation of unsound money, the termites (politicians and bankers) have gorged themselves and riddled the structure.
Writing in Vanity Fair earlier this year, economist Joseph Stiglitz produced some data that readily explains why people are hitting the streets, even if their demands are confused.
He pointed out that the top 1 per cent of Americans (by wealth) takes in nearly 25 per cent of the country's income. They control a whopping 40 per cent of America's wealth. That compares to 25 years ago, Stiglitz says, when the top 12 per cent controlled 33 per cent of the country's wealth.
There's more. The top 1 per cent has enjoyed an 18 per cent increase in real incomes over the past decade while the middle class have actually seen their incomes fall.
This goes to the heart of the matter. America's middle class has seen a long-term decline in their living standards while life for the top 1 per cent just gets better and better. But Stiglitz can't find the source of the problem.
You know our take on it. The source of the problem is the Federal Reserve. It should be no surprise that the 'top 1 per cent' mostly come from the finance industry. If you remember our previous rants on the Fed, you'll know that when the Fed lowers interest rates it does so by creating money and depositing it in the commercial banking system.
This new money sits as reserves in the banking system. Through fractional reserve banking, the banks then multiply this money (which takes the form of credit, or debt growth). Like a pond with a rock thrown in it, the money then ripples through the economy.
The rock is the central bank dumping money in the banks' reserve accounts. Those closest to the impact (the banks and initial borrowers of the money) benefit first. Soon, the additional credit in the economy translates into higher prices. By the time the diminished funds wash through the middle and lower classes, they have already been hit by price increases.
This policy of 'inflationism', perpetuated by the Fed, is what concentrates the wealth in the top 1 per cent and lowers the living standards of nearly everyone else via inflation. If capitalism was the problem, the 'top 1' per cent would be dominated by capitalists - or industrialists - and not by bankers who rely on money printing and government subsidies.
While his left-leaning tendencies probably stop him from seeing the world through the prism of Austrian economics (and therefore the corruption of the 'system' through unsound money) Stiglitz still does a good job in explaining why US (and global) citizens are getting angry.
'Virtually all US senators, and most of the representatives of the house, are members of the top 1 per cent when they arrive, are kept in office by money from the top 1 per cent, and know that if they serve the top 1 per cent well they will be rewarded by the top 1 per cent when they leave office.'
And this. Keep in mind Stiglitz wrote this in May this year, well before OWS become an acronym:
'Of all the costs imposed on our society by the top 1 per cent, perhaps the greatest is this: the erosion of our sense of identity, in which fair play, equality of opportunity, and a sense of community are so important.
The top 1 per cent 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 per cent live. Throughout history, this is something that the top 1 per cent eventually do learn. Too late.'
You may think this is a uniquely US problem that has nothing to do with Australia. That would be naïve. It's the beginning, or continuation if you count the protests against austerity in Europe, of a societal reaction against the corrupt nature and flawed structure of the global financial system.
And it's a system Australia is inextricably bound up in. Our economy may not be travelling as bad as other Western economies. But as a net capital importer, we still rely heavily on Western capital to maintain our standard of living.
What happens over there will impact sentiment and stock prices here.
You have a ringside seat to an unfolding financial revolution. You may as well enjoy it.
for The Daily Reckoning Australia