The Top 1 Per Cent


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.

Greg Canavan
for The Daily Reckoning Australia

Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.


  1. What exactly was wrong with what Albrechtsen wrote?

    The quotation seems perfectly reasonable in itself, although I am assuming that it was not written within a context of justifying banker bailouts.

    The OWS demand for bailouts is fundamentally the same as the banker bailouts, at least in philosophy if not in magnitude (yet).

    The lack of personal responsibility, the demand for government assistance, the entitlement mentality, and the desire to live at somebody else’s expense while making little or no contribution themselves has always been characteristic of the leftist OWS types.

    The real problems started when the right wing and business started to develop the same mentality themselves, although they only wanted to socialise their losses and not their profits, whereas the OWS never created any profits in the first place.

  2. i wonder why we dont get explained that banks are are directly benefected by this reckless bubble policies.
    these protestors seem to function like a bombs,they are non-exact just approximate in their aim but wait until their find their proper target.banks

    anita sebok
    October 20, 2011
  3. Quality article, once again. Particularly like your comment on capitalism not being the probably, being a right wing oriented student who invest/trades it’s near impossible telling my seemingly leftist classmates who oddly study a commerce degree, that yes, capitalism is not the problem, socialism isn’t the answer. the whole system is flawed and I personally hope it unravels so I can make a tidy sum trading the market as it falls.

    I’ve recently been researching and updating my knowledge on central banking. Clearly the system in the US is flawed, in that the Fed prints money, not the treasury, and also delves its hands in the IRA. More or less the web of shareholders are interconnected, so I’ve been told.

    Is our system here much the same? In that, how much control does the RBA have on printing money from the mint? Are their shareholders in the RBA much like the Fed, and how could Australia every break itself free from the problem of always relying of bigger and wealthier people to invest in our nation…to make us bigger and wealthier. We rely too much on others.

  4. Jordan: “…yes, capitalism is not the problem, socialism isn’t the answer. the whole system is flawed and I personally hope it unravels so I can make a tidy sum trading the market as it falls.”

    Noble sentiments. That outcome is just what the Australian economy needs! ;)

  5. In Athens it’s like Weimar Berlin, the communists are going after the anarchists in pitch battles on the streets.

    Except these days anarchists do government work and are usually found to be funded by big money foundations. Sometimes, as in the Canadian antiglobalisation protests, details emerge after examing the work of photojournalists. In Canada the violent ones were all wearing the same style of brand new military issue boots.

  6. Great article, Greg. It’s a pity that western world leaders do not have common-sense in figuring out big picture. How can these leaders assume that poisoning other side of the waterhole will not affect them. These corrupt leaders both in politics and corporate world are a disgrace to democracy and capitalism.

  7. Those in charge around the World should be taken to a boot camp and taught for a few weeks the basics of Household economic management.
    On conclusion of their conscripted education they will fully appreciate that the principle of “you can’t have what you can’t afford and everything you can afford has to be paid for” will prevail and a long drawn out correction of fiscal responsibility will follow.

    Old timer told me once when I was younger a Universal Truth, namely: “Take any politician of any political persuation from any nation on this planet and give him a dollar. He or she is guaranteed to spend a dollar and ten cents”.

    This is where inflation originates because they pander to the public who are not prepared to pay for what they crave.

    The problems are not economic, or capitalist, but fully political. Only when politicians the World over decide enmass to ‘balance the f.cking books’ will the system begin to turn.

  8. Read this today (being posted on Telegraph comments and has been described as deserving to go viral) and thought it would be an appropriate follow up to my last post.

    United States Tax revenue: $2,170,000,000,000
    Fed budget: $3,820,000,000,000*
    New debt: $ 1,650,000,000,000*
    National debt: $14,271,000,000,000
    Recent budget cut: $ 38,500,000,000

    Now, remove 8 zeros and pretend it’s a household budget.

    Annual family income: $21,700
    Money the family spent: $38,200
    New debt on the credit card: $16,500
    Outstanding balance on credit card: $142,710
    Total budget cuts: $385

    Makes a compelling point. Even if the $142,710 were the mortgage on the family home, at $21,700 with 3 times earnings (the long term normal income to loan ratio for home buying) you can see that they are way over mortgaged, and have no way of paying off the credit card whilst keeping their house.

  9. So many people say that they don’t really understand what the OWS protesters’ objectives are, but I think that “having an objective” is over complicating their thought processes.

    To understand them better, people need to get in tune with their actual thought processes, as detailed in the attached article. Read it, and all will become clear.

  10. Biker: “Noble sentiments. That outcome is just what the Australian economy needs! ;)”

    You of all people shouldn’t be talking about the needs of the Australian economy Biker.

    Your statement is very hypocritical.

  11. I see sarcasm is still wasted on you, Pete. :D

    I’ve enjoyed reading back through your predictions of the last few years, recently. Your statements about Australian property’s imminent collapse are even more humorous now, than when you posted them years ago… ;)

  12. Biker..You canny market trader you.

    Joe. 22/10, You have written in words and figures what I said in other comments, about Mr Macawber and annual income versus annual expenditure.

    Your version is visually more expressive.I shall make a copy; with your permission of course.

    October 26, 2011
  13. shortchanged,

    by all means I am (as stated in my post) a plagarist myself.


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