Soak the Rich
There is one essential step that must be taken if this nation is to see lasting economic recovery. The rich must never again be allowed to have too much money.
Lest you think that I am not serious in this suggestion, let me explain.
When poor people have extra money, they spend it. When rich people have extra money, they invest it.
Now, let's talk about stocks, commodities, real estate, whatever these people invest in. What are these things worth?
Traditional, simplistic free market economic theory suggests that the price of, say a share of stock, is based on public assessment of its earning potential. Thus, that share would sell for some reasonable multiple of its yearly earnings- its price-earning ratio- adjusted for public perception of its risk.
What happens, however, when there is more money to invest than there are reasonable investment opportunities? Now, the price of these things, stocks, real estate, etc, become detached from their earning potential. The great law of free markets, supply and demand, takes over. Their prices rises due to the competition among investors, and ceases to have any connection to their earning potential. Thus, back in the sixties, people looked for price-earning ratios around maybe 15 or so. We saw stocks during the tech boom selling for price-earning ratios of 100 or 200 or more. No one could believe that taking 100 or 200 years to recoup their investment made sense. In fact, these people speculated based on their confidence that there was always a bigger sucker than themselves who will materialize in a year or two.
When commodity prices are no longer determined by their earning potential, but rather by an imbalance of
supply and demand, you have a bubble. This is what a bubble is, whether in real estate in 1927 or 2007, stocks in 1929 or 2008, or tulips in 1637. It is an unsustainable condition which must end in collapse.
In the 1920's Republican economic policies- tax cuts for the rich, deregulation of markets- resulted in the greatest disparity between rich and poor in our country's history. The result was inevitable. The depression cut this imbalance, and it remained tolerable until Republican policies starting with Ronald Reagan again tilted the playing field in favor of the rich, resulting in the last few years seeing the greatest imbalance between rich and poor since- you guessed it, 1929. And here we are again.
The few New Deal regulations left ungutted by Republican rule have probably protected us from something as all encompassing as the Depression, but we must not be fooled. Allowing the rich to bloat themselves on our national wealth will inevitably create this kind of crisis over and over again.
Lest you think that I am not serious in this suggestion, let me explain.
When poor people have extra money, they spend it. When rich people have extra money, they invest it.
Now, let's talk about stocks, commodities, real estate, whatever these people invest in. What are these things worth?
Traditional, simplistic free market economic theory suggests that the price of, say a share of stock, is based on public assessment of its earning potential. Thus, that share would sell for some reasonable multiple of its yearly earnings- its price-earning ratio- adjusted for public perception of its risk.
What happens, however, when there is more money to invest than there are reasonable investment opportunities? Now, the price of these things, stocks, real estate, etc, become detached from their earning potential. The great law of free markets, supply and demand, takes over. Their prices rises due to the competition among investors, and ceases to have any connection to their earning potential. Thus, back in the sixties, people looked for price-earning ratios around maybe 15 or so. We saw stocks during the tech boom selling for price-earning ratios of 100 or 200 or more. No one could believe that taking 100 or 200 years to recoup their investment made sense. In fact, these people speculated based on their confidence that there was always a bigger sucker than themselves who will materialize in a year or two.
When commodity prices are no longer determined by their earning potential, but rather by an imbalance of
supply and demand, you have a bubble. This is what a bubble is, whether in real estate in 1927 or 2007, stocks in 1929 or 2008, or tulips in 1637. It is an unsustainable condition which must end in collapse.
In the 1920's Republican economic policies- tax cuts for the rich, deregulation of markets- resulted in the greatest disparity between rich and poor in our country's history. The result was inevitable. The depression cut this imbalance, and it remained tolerable until Republican policies starting with Ronald Reagan again tilted the playing field in favor of the rich, resulting in the last few years seeing the greatest imbalance between rich and poor since- you guessed it, 1929. And here we are again.
The few New Deal regulations left ungutted by Republican rule have probably protected us from something as all encompassing as the Depression, but we must not be fooled. Allowing the rich to bloat themselves on our national wealth will inevitably create this kind of crisis over and over again.
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