This is the State of the Union:
The poorest fifth of households had total income of $383.4 billion in 2005, while just the increase in income for the top 1 percent came to $524.8 billion, a figure 37 percent higher.
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Earlier reports, based on tax returns, showed that in 2005 the top 10 percent, top 1 percent and fractions of the top 1 percent enjoyed their greatest share of income since 1928 and 1929.
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On average, incomes for the top 1 percent of households rose by $465,700 each, or 42.6 percent after adjusting for inflation. The incomes of the poorest fifth rose by $200, or 1.3 percent, and the middle fifth increased by $2,400 or 4.3 percent.
The consequences:
The 1920s "boom" enriched only a fraction of the American people. Earnings for farmers and industrial workers stagnated or fell. While this represented lower production costs for companies, it also precluded growth in consumer demand. Thus, by the mid 1920s the ability of most Americans to purchase new automobiles, new houses and other durable goods was beginning to weaken.
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This weakening demand was masked, however, by the "great bull market" in stocks on the New York Stock Exchange. The ever-growing price for stocks was, in part, the result of greater wealth concentration within the investor class. Eventually the Wall Street stock exchange began to take on a dangerous aura of invincibility, leading investors to ignore less optimistic indicators in the economy. Over-investment and speculating (gambling) in stocks further inflated their prices, contributing to the illusion of a robust economy.
The crucial point came in the 1920s when banks began to loan money to stock-buyers since stocks were the hottest commodity in the marketplace. Banks allowed Wall Street investors to use the stocks themselves as collateral. If the stocks dropped in value, and investors could not repay the banks, the banks would be left holding near-worthless collateral. Banks would then go broke, pulling productive businesses down with them as they called in loans and foreclosed mortgages in a desperate attempt to stay afloat.
The replay of the 1920s stock market delusion in 2000/2001 was staved off by Alan Greenspan’s rate cuts. These allowed the economic illnesses to fester.
Much too low Fed interest rates induced a housing and mortgage bubble, camouflaging the drop in income that happened all the while with home equity withdrawals.
Now that bubble bursted too. The value of homes will sink by 30 or so percent, putting millions into a situation that makes it preferable to send in the keys and just leave the house to the mortgage owner, whoever may be that (you may want to ask your pension fund about its MBS investment?)
We therefore have to modify the last quoted paragraph:
Banks allowed housing investors to use the houses themselves as collateral. If the houses dropped in value, and investors could not repay the banks, the banks would be left holding near-worthless collateral. Banks would then go broke, pulling productive businesses down with them …
Lack of demand – who will go out to buy a car or eat out if there’s no money – and lack of credit even for decent businesses … that’s where we are again.
The top 1.1 million households will not eat more or drive more cars, no matter how much their income increases. The mass of people will have to lower their consumption as they make less and can’t borrow anymore. This is the recipe for another depression.
You want to to avoid this?
Tax the top 1% of households income with 80%, the top 2-10% of households at 60+%. Invest that government money gain in infrastructure, especially for energy independence, through small companies’ contracts. Keep out of wars.
There you are.