Rich Get Richer, Poor Get Poorer

The rich get richer and the poor get poorer. Yeah, yeah, we’ve heard it all before. But you know what? You’re right. The rich live by another set of rules, they play a different game, and you and I aren’t invited. We’re not even allowed to sit on the bench.

I know a guy who says he’s going to write a book about the people who have almost made it to the level of professional sports but had their candle snuffed out at the last moment. He thought it would be an interesting book about how people deal with almost being a star, a contender.

I read an article by a guy who was in a similar position in the high-stakes game of finance. He received an MBA from Stanford in the late 90s but didn’t go the high-powered route of fortune seekers on Wall Street. He did, though, have a college friend who took that route, who is now surfing the huge tsunami of investment capital inundating the world, fueled by the historically unprecedented creation of money out of thin air by the central banks of the world. Since 2008 the amount of money has tripled. Where has it gone? Where is that $13 TRILLION today?

The simple answer is, it goes first to the bank accounts and lifestyles of those closest to its origin and those who direct its flow. They buy up the relatively cheap assets with the new money, then as it filters through the world economy prices ratchet up to accommodate all that cash and as we at the bottom finally see part of it it barely suffices for the price increases caused by the inflation in the money supply.

Here’s the basic formula for those who are able to get in on the tsunami:

  • Go to an A-list university, get an MBA or Master’s degree in finance and got to work for an asset management firm, hedge fund, or similar Wall Street business.
  • Build your network of friends at other fund managers by investing part of your portfolio in their offerings (be part of the club).
  • After building your network, create your own fund, which your friends will invest in (quid pro quo and all that…)
  • Collect an annual salary of 2% of the assets under management and 20% of any gains.

The author of the article said his friend followed this path and after about ten years was earning a base salary of $20 million plus a hefty commission on a positive performance of his fund. Is your son who earned an MBA from the University of South Dakota at Hoople going to get a job at a Wall Street hedge fund and build a clientele of wealthy asset management execs and come out smelling like a rose any time soon? There’s two chances of that—fat and slim.

The Federal Reserve and other world central banks have created money out of thin air that their cronies can manipulate to their hearts’ content and make billions.

Since forming this fund nearly ten years ago, the financial markets have been on a historic bull run, with hardly any corrections along the way. This is primarily due to the trillions in new money provided by the world’s central banks mentioned above. So, the fund of this guy’s former classmate now stands at over $1.1 billion in assets under management.

He gets a $20 million annual management fee plus 20% on hundreds of millions in gains each year fueled by his cronies at the Fed. The rest of us aren’t allowed in the game. We get the scraps while inflation caused by the tremendous increase in cash throughout the world eats up our savings and raises prices faster than increases in wages can keep up. The price of that money, the interest rates, have to be kept low so all the guys in the game can borrow on the cheap and earn returns on basically free money. The historical standard for the price of money with virtually no risk of loss has been between 3 and 5 percent all through recorded history. Add to that a premium for expected inflation and risk of loss and the real interest rate anyone should be paying to borrow money is at least 5% even given the vastly and purposefully under-reported rate of inflation. Instead, the privileged are borrowing money at less than 2% and some banks are paying less than 0% on deposits. Those with the means and access to borrow at these unprecedented rates have been able to get virtually free money, while savers and those dependent on a fixed income have been starved of any yield while prices continue to rise. The global financial stimulus of central banks plus the low cost of borrowing has driven capital into nearly every asset market, rocketing prices higher. Holders of those assets have become much richer, while those who have not have become increasingly priced out of financial markets.

So let’s look at the real rate of inflation. I like to keep things simple. Looking at the Burrito Index, we see that prices since 2001 have increased by 160%. Ah, but the government says the offsetting price of commodities such as computers and televisions have decreased over that time, taking into account similar computing power and functionality. But that disregards that we have to eat multiple times per day, while we only buy a new computer or television every few years, if that.

At the same time, wages have stagnated or even decreased. Real, inflation-adjusted wages are now 7% lower than they were in 1973 even according to government figures. With the real rate of inflation, we’re worse off than we were in in 1970. Savings are down. Over 72% of those between 18 and 34 years of age have less than $10,000 in retirement savings. Twenty-eight percent of seniors have absolutely no savings.

The solution? If you don’t see entry to Harvard or the Yale Skull and Bones Society in your future, wise management of whatever wealth you have and creative ways to make the most of recent technology to increase your income are crucial factors in your future financial well being.

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